News just in: “It will come as a shock to many to hear that Humpty Dumpty (also known as the traditional law firm business model) has taken a tumble. Worse still, all the king’s horses and all the king’s men couldn’t put Humpty together again. Yes, it’s true: however you look at it, Humpty is well and truly scrambled.
How could this happen? Well, sources close to the wall from which Humpty fell, say that although he was close enough to the wall to see the writing, he hadn’t actually read it.”
In many ways, the traditional law firm business model has been an accident waiting to happen. For me, a business model is a statement about how the firm coordinates four elements to structure the business and deliver its strategy. They are (a) creating value for clients; (b) resourcing the firm to create that value; (c) financing the firm to secure those resources; and (d) producing and distributing returns on the investment to make it all worthwhile. (For more, see Mayson (2010) Business models in legal services or visit the Downloads section.)
In terms of these four elements, the traditional law firm business model can be expressed in summary as: (a) using a cost-plus, time-based, lawyer-focused charging structure (which often bears no relation to value to the client; (b) a lawyer-driven human leverage model with as many resources as possible internalised within the firm; (c) finance provided by internal equity (partners) and external debt (banks and asset finance) – though much of the internal equity is often also the result of bank lending – and all managed within a partnership structure and culture characterised by confused roles, disdain for professional (that is, effective) management, and inefficient decision-making; and (d) returns created by growing turnover (rather than managing for profit) with rewards extracted entirely as income, usually within 12 months of earning them.
The message that Humpty missed was that, on all four elements, the traditional law firm business model is broken. So to those who say, “If it ain’t broke, don’t fix it”, I say: it is broke, so get on with fixing it as quickly as you can.
On the first element, creating value for clients can’t be done on a cost-plus model, time-based pricing, or where creating value is confused with adding value (most clients really don’t care about legal updates). But negotiate a better deal or outcome for them, or make their personal or business lives easier, and then you’re on track. Understand where the firm sits in the supply and value chain, and who else is claiming part of the value paid by way of fees for legal services, and then work out where the real value lies to the client and deliver it.
For the second element, neither employing lots of qualified lawyers to do things lawyers don’t have to do, nor using people to produce bespoke outcomes when technology or processes could give more consistent, reliable or cheaper results, represents a sensible route to 21st century resourcing for productivity and cost-efficiency. Nor does insisting on doing everything inside the firm when outsourcing or joint venturing are viable alternatives.
The third element relates to finding feasible sources of investment. When firms have been removing under-performing equity partners (who want their capital back) and postponing promotions (and so not admitting new sources of capital), internal equity capital is in shorter supply and debt capacity is constrained by the reduction of people to back the borrowing. Although banks have not stopped lending to law firms, debt is not so easily available and now tends to come with stricter terms and covenants than it used to. Alternative financing (including external public debt as well as public and private equity) should not be lightly dismissed with a wave of the hand and “we don’t need it and we don’t want it”. Maybe firms don’t want it; that doesn’t mean they won’t need it. And it doesn’t mean they’re fit for investment when they do decide they need and want it.
Law firm governance and structure also need reworking to provide better decision-making processes, more disciplined businesses with skilled and effective managers (I don’t much mind whether they are lawyers or not so long as they can do the job), and more attractive vehicles for investment, recruitment and retention. The professional partnership is an increasingly inappropriate vehicle for this. In business terms, professional partnerships are really not that special, and maybe it’s time we stopped exempting them from the requirement to incorporate when they have more than 20 partners (though in Humpty’s case, it will need more than a shell company to fix the problem!).
Finally, the returns need improving and re-thinking. Any business that takes its entire returns as current income is completely missing the point of being in business. Effective business models will differentiate income and capital returns, short-term and long-term rewards, and salaries, bonuses and dividends (whatever labels are applied to them).
And so the breaking news story concluded: “It is remarkable that Humpty Dumpty was able to stay on the wall for so long, and his downfall certainly represents the end of an era. We can’t say that he wasn’t warned. The writing is still on the wall, and it’s not too late to avoid falling off and creating a mess. But then you know what they say about needing to crack a few eggs to make an omelette. The future certainly needs a new recipe.”
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This is an excellent piece Stephen – all the more so when you factor in the other factors; demographics (too many lawyers) lack of investment in IT, and, sadly, too many partners/directors who fail to understand the difference between governance and management.
An excellent post Stephen, agree on all points. Regarding governance and bearing in mind the huge disparity between the big firms and the vast majority of small firms now struggling for survival, is there an argument for small firm regulation to be relaxed by offering the individual client who doesn’t have a big budget for advice the choice between a service backed by PI insurance or not. Recognise this would be difficult and controversial but these kinds of overheads are killing small firms and clients don’t appreciate these kinds of overheads make up a big part of their expensive hourly fees.
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Really interesting stuff. Having worked at some of the biggest law firms in Canada and the UK, I have really felt over the past few years more than ever that the model is broken – hence I’ve jumped ship to start my own practice – this post has definitely provided food for thought and your emphasis on creating value for clients and remembering that this is, after all, a service industry, is really what I’m trying to focus on. Thanks.
Great thoughtful post Stephen!
Having worked in User Experience for aaaaages I see *such* potential for law firms becoming truly client-centric. I’d like to redesign the law firm business model around the client (‘Service Design’). As a consultant myself, clients and client relationships are the core of my business model; how different really is ‘legal’ advice than other forms of ‘trusted advisor’ work? There’s room for such innovation in the law firm model if we could just get partners to see the opportunities rather than clinging helplessly to the rubble of the traditional approach. But maybe if they don’t see it, there’s a whole raft of associates (junior through to senior) that can see the possibilities rather than the threats to a certain way of life.
I guess I’ll just continue to cling on in my business looking for those innovative (and bored) young(er) lawyers willing to break out of the mold/mould and truly rethink their business model to reflect the more creative and design-led world we live in?
Such an inspiring post – thanks (and btw love the design of your UI too ;))
Thanks Kate. Hang on in there: the tanker is beginning to move and will need a lot of help with navigation!
The new model is perhaps more egalitarian and engenders a new perspective into how ‘the firm’ should be facilitating the end-user. After all, whatever business model we apply to the notional law firm, ultimately, it is a facilitator or service provider. That the service provider is perhaps more emphatically regulated by a body called the Law Society does not suddenly turn the firm into the customer services helpline of Santander or Virgin Media. However, those engaged in the business of law need to understand that the market has greatly expanded in its potential.
The second element mentioned in your blog could usher in a new era of cooperation between different service providers to make a better value (your first element) to the end user. This could give rise to more super-firms and legal entrepreneurs making the market more challenging for the freshly graduand lawyer. The recent Law Gazette article on the need for the solicitors to understand the basics of how other professionals work (the article over used the word forensic in accentuating the CSI edge!), in particular forensic accounting, highlights how interesting the coming October would be to the legal profession.
I believe that we are in for an exciting time!
I don’t think many partners are going to kill the goose that has laid them golden eggs for the altruistic purpose of making their firms bigger and stronger in the future. Nor are they going to be so keen to change to a model which would take many of them away from lucratively doing what they are worst at (anything other than fee-earning – there are exceptions but I’ve met few top end partners in firms who could walk out and take a similar level business management role in any other sort of organisation) and put that power in the hands of specialists whose ranks they would in reality be unlikely to be able to join.
Thanks for your comment. My point is that these partners ARE killing the goose! They might not realise it, and many of them certainly don’t want to change. But the idea that the buyers of legal services are going to sustain the busted model in an era of greater transparency, client bargaining power, and alternative providers, is difficult to see – except in the rarefied world of the City (see my repy to Kevin Wheeler).
As always you write an awful lot of common sense stuff. However, The Lawyer reported yesterday that more than 1,000 partners at the Top 100 firms are now taking home more than £1million a year, and some substantially more than this. For a ‘busted’ business model, these guys are doing very nicely! Why should they change and why should they listen to the likes of you and me saying it’s imperative to survive? With bulging bank balances they just laugh us out of the room.
Good point, Kevin. In a way, though, that’s part of the message: they’re busy busting the model by not realising that this ‘extraction’ model is choking the future. Making hay while the sun shines is all very well when the sun is shining. 1,000 people making £1 million or more is no mean achievement (doffs cap): I don’t think the clients are liking it! There are a handful of lawyers worth this (and more); but move outside the always rarefied confines of top City or New York law firms and these rewards are only being made, and rightly so, by lawyers and firms operating a new model.
As ever, a thought provoking and entertaining post Stephen. Great stuff… tnx for sharing!
This post reminds of the fab piece about the 4 pillars that you wrote about in your book ‘Law Firm Strategy’, in particular your comment about social capital and human capital being a vital part of the law firm make-up.
The Values Based Model embraced by Chris Marston of Exemplar Law (Boston, USA) is real-time practical proof that your view (and Richard Susskind’s – epitomised in his teachings for the past twenty years) stacks up – the traditional law firm model has been broken for some time. Sadly, it’s taken a global economic nose-dive off a cliff and smart legal reforms in the form of LSA and ABS to prompt law firms to start writing new messages on Humpty’s wall.
I met Chris a few years ago and we shared knowledge and ideas about the business of law. There’s an excellent write up in Simon Tupman’s ‘Legal Eagles’ book in relation to Chris’s views and his successful working model. In it he states that the “profession of law is a product of flawed economic theory, which is why lawyers are myopic not holistic”.
IMHO we lawyers have long since needed to be more human, value based and values driven in our approach to our clients.
Wouldn’t it be nice if we all had our eggs sunnyside up?
Best intentions as ever, and tnx again!
The Entrepreneur Lawyer
(of the naked kind)
Thanks Chrissie – I like the idea of ‘sunny-side up’! If there were more clients and lawyers feeling happier about the business of delivering effective legal services (by which I don’t just mean profitable to the lawyers), then maybe would be in a better place.
Totally agree Stephen. But this requires a paradigm shift and a SUUUCKS attitude lobotomy (The Naked Lawyer revision). I feel like shouting from the top of Humpty’s wall “Don’t wait for the light to appear at the end of the tunnel…go down there and light the bloody thing yourself”! (Cameron de Bough – Australian Paralympian) 🙂
Stephen an excellent post.
I think Humpty will need more than the Kings Horses to sort out this un-Holy mess.
My concern, and one that I continually explore in my blog, is the fact that so few partners care that the model is broken. Even the ones who are not in a position to imminently hand over the baton take their cue from their legacy partners. “If s/he had it why shouldn’t I have a bit of that too.” It is almost as if the journey to partnership – for some more horrific than others – gives them the right to behave in a certain way (mind you some directors are not much better). If they could only see that by putting the client more first more than anything else, then they could build a winning business around a commodity, which if done exceptionally, will be perceived to be done better by them than anyone else. If they simply play copycat with Big Brands then they will lose. They don’t have the street smart skills to compete. Tesco hasn’t become so bloody enormous by accident.
Notwithstanding this gloomy picture, I still believe that there are people who care enough to not let the profession be completely wiped out but they are far more likely to ply their trade in a niche, vertical market where they can play to Brand You.
The next 18 months will see some further casualties in the market and I suspect consolidation of firms. I just don’t believe that you can have so many of them all doing the same thing (poorly in most cases) and stay profitable. And they will need more a few more Band Aids to get through this period.
I totally agree. Seems like Humpty needs Band Aid and Brand Aid!