Your margin is my opportunity
Biglaw raises its rates, creating room for low cost providers to succeed
Today, I’ll attempt to combine a few seemingly unrelated developments in the legal industry to make the argument that Biglaw’s focus on profitability is creating a unique opportunity right now for what I call “low cost providers.” I’ll also share a few takeaways for lawyers who want to position themselves strategically for these coming changes. This article is going to be a bit longer than usual, and will include a lot of ideas that I’m still processing right now. I’ve also included a poll at the end to find out what you all would like to hear about next.
Today I’m going to make the case that Biglaw’s excessive focus on profits per equity partner (PPEP) will create a big opportunity for low cost providers in the near future. My thoughts were inspired by comments from Orrick’s former CEO, which I shared on Twitter here. Let me break down how I’m thinking about all this:
Profitability matters. A lot.
It’s not just about how much money the partners earn. Large firms are essentially ranked on PPEP, which means it impacts how a firm is perceived. Which has downstream impacts on reputation, because it enables firms to recruit “better” associates. For high stakes legal matters it can be hard to measure the actual impact of a firm, so all of these proxies and signals for quality matter more.
Personally, I think this is kind of crazy. I mean, I get that PPEP is a standard metric that’s used to compare different firms. I also get that profitability is generally associated with a stronger underlying business. But the problem is that it’s a metric that every firm plays games with. From Roy Strom of Bloomberg Law, in Big Law Mistakenly Shrinks Partner Ranks to Look More Profitable:
The shrinkage is a continuation of a long-term trend. Firms have been pulling up the ladder, limiting the number of lawyers who receive the bulk of their compensation through owning shares in the operation.
By shrinking their most lucrative positions, many firms are making themselves look more profitable. This is because of the industry’s use of a popular—and controversial—metric, profits per equity partner.
Look I’m not saying PPEP is completely useless. But it has way too much of an outsized influence.
Having said all that—PPEP is, and remains, a hugely important metric for firm reputation. Seems like Biglaw accepts it as a useful way to further their brand. I would not be surprised if equity partners obsess over it. Given that, let’s talk about how perceived profitability affects whether a firm will raise its hourly rates.1
Firms raise hourly rates to prop up PPEP
Demand for high end work seems to have stagnated. We’re in a recession (or a fake recession, I don’t know) but whatever you wanna call it—it’s clear things have slowed down. And yet firms keep raising rates. Why? And if they do that, what impact does it have on the rest of the legal ecosystem?
My suspicion is that Biglaw is raising rates to maintain this illusion of having a stable or growing PPEP. When you increase prices, you can grow revenue without having to acquire new clients or new matters. And when you combine that with capping the number of equity partners, well, PPEP looks amazing!
The problem though, is that when you raise prices, demand goes down. Because not everyone wants to pay more! They’ll either find another firm, or look for another way to get things done.
“Another way to get things done” includes a range of options. Regional firms. Alternative legal services providers. Contract attorneys. Legal technology. Basically anyone that promises to do some part of the complicated and expensive legal work traditionally handled by Biglaw. Let’s call them “low cost providers” (LCPs) for the purposes of this article, even though it’s terrible branding and sounds like a pejorative lol.
LCPs rush in to fill the void
Right now LCPs are feeling the “pull” of the market. Off the record, I have spoken to so many of them who are going gangbusters right now. And it’s not just legal tech. It’s also regional firms. Or small firms with ex-Biglaw attorneys. Or contract attorneys who have exactly the expertise clients need. Or alternative legal services providers who connect attorneys with clients.
Legal operations is leading the way here. Most people in the law firm world don’t know much about them, but anyone who’s in house, especially in the tech world does. Legal ops focuses on process issues so in house lawyers can focus on what they do best. That means advising on change management, updating processes, implementing technology, or finding new ways to get work done. They’re uniquely positioned because they can take a bird’s eye view of how legal work is done, and bring a more neutral view on risk and change.2
When you look at legal ops’ flagship conference—CLOC—you’ll find an interesting mix of sponsors and attendees. There are very few law firms. They are overwhelmingly LCPs: technology companies, alternative legal services providers, etc.3 These are the folks who are going to be best positioned to take advantage of the coming change. If you ever have a chance to go to this conference, or one of the many legal ops events that take place throughout the year—you’ll get a sense of what I’m talking about.
AI is accelerating these trends
Over the past few months we’ve seen an explosion of AI in the legal industry, and it’s showing no signs of stopping. So far, most of the discussion has been around how AI will impact law firm work. But if you really want to stay ahead of the curve, it’s important to move upstream, and pay close attention to how corporate clients are thinking about AI and what it can do.
The use cases are completely different. I’m going to generalize a bit here but: Law firms are focused on providing bespoke solutions for their clients. Corporate legal is focused on getting lots of repetitive things done quickly. So the types of technology each segment values is going to be somewhat different.4
Where exactly does AI fit into corporate legal’s work? I’m honestly trying to figure that out too. I know, for example, that it can definitely help with commercial contracts work. But it fits into other places too, like discovery workflows or legal spend management. A bunch of these “niche” use cases will have downstream impacts on the demand for law firms. I don’t think it’ll affect high end work, like bet the company litigation, or high stakes M&A. But for everything else—who knows?
What does this mean for you?
If you’re in house, lean into all of this change. You don’t have to be a tech expert, but you should have a basic understanding of what you can get done with LCPs. Develop next level skills like internal selling, change management, and vetting / selecting vendors. Legal ops should be your new best friend.
If you’re at a law firm, you've got to make sure that you either (1) bring in revenue or (2) have highly differentiated, unique expertise. (1) is self explanatory, and something I’ve spent a lot of time writing about on this newsletter.5 But for (2) it’s a bit more complicated. What exactly does differentiated, unique expertise mean?
It can be a lot of things. Maybe expertise in privacy or navigating regulations in an emerging industry, like fintech or crypto. I don’t know. I’ve written about unicorn jobs before, and it’s kind of related. My rule of thumb is that if you have this unique, differentiated expertise, the firm can’t just replace you by hiring someone else with a lower salary. If they can—they definitely will, eventually.
If you suspect that you might be replaceable, watch out. You’ll be viewed as a replaceable conduit for converting market demand into billable hours. I mean, that’s what’s been driving all these layoffs during this recent downturn. When demand disappears, so will your value to your employer.
So don’t just listen to the higher ups and do what you’re told. Don’t just “put your head down and do good work.” Learn to think for yourself and pay attention to what’s happening in the market. You don’t have to make any sudden moves, or quit your job. Just remember to stay up to date with what’s happening and make adjustments along the way.
Interesting times are just up ahead. Good luck, my friends.
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Also, having a high PPEP suggests that the firm isn’t a great place to get substantive work or training. Because it’s likely operating with high leverage: very few partners coupled with a ton of associates. Which means there’s likely not very much “real work” to go around. I’m also skeptical that high PPEP is useful for new clients to gauge how good a firm is, because it’s often more of a sign of institutional relationships (how else do they get all those M&A deals and bet-the-company matters) rather than capability. But I’m not entirely sure about that—still noodling on it.
One thing that lawyers have struggled with is this constant vigilance against risk. It’s great to help identify problem areas for clients, but it’s counterproductive when you need to find a better way to do things. A lawyer is better than most at imagining how something will go wrong, so they end up keeping the status quo.
Contract attorney marketplaces and ALSPs are at a unique inflection moment right now. In the past, they were used for low value work because you couldn’t guarantee a certain level of quality. However, a few things have changed. First, there are far more high quality attorneys on these platforms today than there ever were—partly because post-pandemic, lawyers have really embraced alternative careers and remote work. Second, and relatedly, Biglaw raising rates and capping partners means that there’s an entire generation of talented lawyers who are “blocked” out of that platform—so they flock to these marketplaces / ALSPs. In doing so, this cohort elevates the caliber and quality of these platforms.
That’s also why I’m skeptical of all the legal AI startups coming out and saying that they can serve law firms AND corporate legal. My suspicion is that this plays very well with the investors who don’t understand the nuances of the legal industry, because to them, selling to both increases market size. In my view, the winner of these “legal AI wars” will be whoever nails a narrow use case first and importantly, waits for some type of small-scale monopoly in that segment first before expanding to new markets.
This is why I write so much about business development and sales. Historically client facing work was limited to “the rich white men going golfing with the GC” but if you look at today, the demographics of the client base looks so different. They’re far more diverse than the firms that serve them. The growth in popularity of social media platforms like LinkedIn means that diverse law firm lawyers are connecting with diverse GCs. The future model of the successful rainmaker is changing, and has already started to expand beyond the typical “rich white dude who goes golfing.”