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Following the Same Tack to Mediocrity

by: Noah Waisberg | April 27, 2013
9 min read
The fleet of International America&rsquo;s Cup Class boats sailed exhibition races in San Diego Bay to highlight the 1995 America&rsquo;s Cup event held offshore of Point Loma in the Pacific Ocean.

The 2013 Am Law 100 revenue report is out, and it shows some firms doing well, others not. Profits per partner for the top 50 firms rose 8%. PPP fell by 3.3% for firms ranked 51–100. Some individual firms may have dropped because of practice area off-years, adding partners while keeping revenue constant, or other idiosyncratic factors. But many are down for more systematic reasons—they are consistently unable to convince clients to use or pay them. Interestingly, nearly all large firms follow the same strategy: attempting to provide high quality (though inefficiently delivered) bespoke services on an hourly rate basis. It is only working well for some.

Law schools display a similar pattern. Law schools generally exist to prepare their graduates to practice; graduate employment statistics are (imperfect) indicators of their success. Some law schools do very well at getting their graduates into high paying or otherwise desirable jobs. While they may be costly schools, graduates get jobs that allow them to repay their debts (or loan repayment assistance if they choose lower paying public service jobs). However, there aren't many schools succeeding here. More typical are the horde of almost-equally-expensive schools with poor employed-at-graduation rates. Yet most law schools cost nearly the same, and teach the same material the same way. Here, again, what is working well for some schools is not working well for most.

Why are most non-leading law firms and law schools following the same tack to mediocrity? Is what's right for the best firms and law schools right for others? In a less busy time in my life, I did a lot of sailboat racing. One popular strategy was to closely match, tack for tack, the leader in a race. This generally made sense for boats that were close to the leader. The close followers could all increase the likelihood of finishing near the top by matching moves. And, through better execution or a lucky break, perhaps win. But following the moves of other boats can be a non-winning strategy, especially for those not near the very front of the pack. Non-leaders sometimes need to try different things and take risks to have a chance of pulling ahead. To the extent non-leaders are systematically behind, they may not be suited to beating the leaders at their own game. That's okay: underdogs often win. Just not by trying to do the same thing as favorites.

Law Firms

Nearly all Biglaw firms have essentially the same business model. A number appear to be not thriving—maybe doing fine, but not great. Apart from sector-specific (e.g., energy, patent litigation) and merger-driven gains, they are generally not growing. And they are all generally doing the same thing.* In contrast to the low growth general legal sector, Axiom and LPOs seem to be growing rapidly and thriving (though see Liam Brown's persuasive post saying that not all LPOs are thriving). As Indiana Law's Bill Henderson points out, LPOs are moving past being a labor market arbitrage play—they are actively trying to deliver better quality legal services more efficiently, including through well thought through processes, appropriate technology, and labor cost arbitrage.

Wachtell, Cravath, S&C, and a number of others manage to stay the course and do fine. There will always be a good market for exceptionally high quality, high priced legal advice.** But how many firms will get to continue to work in a price-insensitive way? Applying a top ten firm strategy at a top thirty firm is a recipe for pain.

Why are few, if any, of the Am Law 200 wholly devoted to delivering high value, lower cost legal services? Sure, there are firms who care about efficiency, that have strong knowledge management teams or others focussing on process improvement. And we know a number of individual law firm partners who really seem to care about efficiency. But it's hard to find large firms working towards efficiency like many companies in other industries do. It's hardly worth asking whether a car, plane, soap, food, computer, or wind turbine manufacturer cares about making their product more efficiently—of course they do. What about law firms? How many have this as a top priority? Axiom and other LPOs' success and growth shows that there is large demand at a lower price point. By embracing process improvement, efficiency tools, cost arbitrage and more, firms can provide better quality services than they now do at lower prices, probably without even having to try very hard. Why aren't many really trying this? I have a friend at a good quality and amazingly cheap (hourly rates range from $250–550) Am Law 200 firm. While they sell partly on price and seem generally pro-efficiency, I do not see them hammering this advantage, pushing all they can at efficiency, and trying to drive their value up even further. I don't get it.

Law Schools

There have been a lot of recent articles on how many US law schools are in trouble: leaving students with high debt burdens and few employment prospects. Here's an example from the New York Times:

Faced with profound and seemingly irreversible shifts, the legal profession is contemplating radical changes to its educational system, including cutting the curriculum, requiring far more on-the-ground training and licensing technicians who are not full lawyers.

The proposals are a result of numerous factors, including a sharp drop in law school applications, the outsourcing of research over the Internet, a glut of underemployed and indebted law school graduates and a high percentage of the legal needs of Americans going unmet.

Why does virtually every law school have the same strategy of teaching the same subjects the same way,*** for ever increasing costs? I get why it is sensible for my alma mater NYU Law to have raised its yearly tuition from $38,255 when I graduated in 2006 to $50,336 today (though these numbers still stun me). How many other law schools does this make sense for? Might it be possible to provide a good legal education for $25,000 per year? Couldn't there be enough fat to cut to hit this price while still providing a high quality education? Doesn't it seem like schools that accomplished this this might have a very appealing pitch to applicants? How many private law schools are trying?****

There is good news for law schools and law firms: since they have been run for so long without an eye to efficiency, there's lots of room for improvement. And putting in the effort now may yield big gains down the road, especially against currently-thriving incumbents who aren't under pressure to change. There appears to be vast demand for lower cost, high value legal services and legal education. Sellers of both would do well to try to meet it.

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* Note that many UK firms appear to be trying different things, such as DLA's UK operation launching Riverview Law, and some US firms are trying innovative moves such as opening insourcing facilities in low cost locales or are otherwise trying different things (e.g., these).

** Putting aside for this post the question of whether the current typical Biglaw service delivery model gives the higest quality work product. Technology and/or outsourcing, for example, may give higher quality results on many junior Biglaw tasks. And incorporating expert systems should improve appropriate more complex work.

*** Will also exclude from this post the "teaching the same subjects the same way" part of the story—there are a number of law schools attempting interesting changes here, though they appear to be the exceptions.

**** Our suggestions are for schools that see their goal as being the best school they can be, or providing graduates with the best legal education possible (e.g., "to maintain its position in the very first rank of American legal education" (from a leading school)). Law schools that aim to maxamize revenues or profits, raising tuition to the maximum possible level is probably the right medium-term strategy, as long as they have enough applicants willing to pay. We also recognize that most law schools heavily discount their tuition for significant numbers of applicants.

(photo: http://www.flickr.com)

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