March 22, 2010 7:55 PM

The Change Agenda: Is Mega Law a Dead Man Walking?

Posted by Aric Press

That was the subject of several sessions Monday at the Georgetown law school conference on law firm evolution. It speaks to the urgency of the matter, that an institution that thrives on the continuing health of big law firms to hire their deeply in debt graduating students would countenance the question.

The answers from the day: dead, dying, and changing.

For Larry Ribstein, a University of Illinois law school professor, the answer was clear. "My hypothesis is that for the big law firm we'll see a downhill slide that the horse drawn carriage experienced," he said at the start of his presentation. Later, he turned really pessimistic, asking, "what can firms do? Nothing. They're dead...what sustains them is regulation" that thwarts the entry of natural competitors into the market.

In his view, the law firm business model, however it's defined, is inherently fragile and crumbling under client and labor market pressures. He said that until recently he had some hope for the future of large law firms, largely because of what he called "their reputational capital." But he'd backed away from that view because clients can now essentially build their own sets of outside providers and law firms have been busy shedding the very traits that had built their reputational capital. The death of lockstep compensation, the rise in lateral partners, the end of vicarious liability among partners, and the sharp cuts in associate recruiting and training have all conspired to devalue the firm's unity and reputational capital. (Click here for Ribstein's and other conference papers.)

Robert Ruyak, the head of Howrey, and William Perlstein, the head of Wilmer Cutler Pickering Hale and Dorr, were less pessimistic but convinced that change in law firm operations was essential. Ruyak argued that much of the growth of large law firms had rested on raising rates and head count over the last decade. "We will need to change everything from the old model," he said. "I'm sorry but the pyramid [structure of law firms] is not going to last as long as those in Egypt." He pointed to his firm's efforts to use a variety of staffers, rewrite the rules for associate training and promotion, and re-configure compensation models and how profitability is judged.

Such efforts can be costly. "Law firms have to be willing to sacrifice short-term profitability for long-term success," Ruyak said. "That's something [we] don't like to do but we have to do it. We have no choice because some firms will, and they will eat our lunches tomorrow."

Perlstein agreed but pointed out that he, Ruyak, and a handful of other managing partners form a distinct minority of lawyers in those roles. "If you talk to most law firm leaders, they would dismiss these discussions and say it's really going to be business as usual again," he said. "You'd get more people saying, 'I just can't wait for the unemployment rate to go down.' Bob and I disagree with that."

In Perlstein's view, the period from 2000 to 2008 won't be repeated again, anytime soon. Money was free, e-discovery technology was primitive, extra payments to law firms were ladled on top of private equity fees.  "We all grew very fast without the development of the internal systems, and management systems, that merit the half billion and billion dollar businesses we became," he said.

The challenge of the future, he said, was for firms to be able to explain to their clients what makes them special and what value proposition they offer. Sometimes that might mean turning down business or referring it elsewhere; sometimes that might mean being able to manage tasks for clients that the clients don't want to be bothered with. But in any case, the future won't be a replication of the go-go era that ended for many firms the day after Lehman Brothers died.

For Mark Chandler, the general counsel of Cisco, and a longtime advocate for client and law firm change, evolution was not only inevitable, it's well underway. He saw the future--actually it's his current practice--as a division among mission-critical, ordinary, and highly routinized tasks. He expected efficient work at each level, and expected to pay at different rates, sometimes quite high, sometimes low, but less each year. And then he made an important point. He's not trying to drive down law firm profits, he just wants to get his work done for a fair price. "We aim for a win-win relationship," he said. "The success of my outside law firms contributes to my success."

Bernard Burk, a litigation partner at Howard Rice Nemerovski Canady Falk & Rabkin, saw a future, based in part, he suggested, on the record number of lateral moves among the Am Law 100 and 200 firms. He argued that as partners moved, they tended to "move upstream." Picking up on the Ribstein formulation, "each of us wants to be with someone who has as much reputational capital as possible," Burk posited. "If they want to make the most of their personal capital they surround themselves with other people of similar attributes to whom they can send business they can't do themselves. All of a sudden they're worth more."

The most optimistic of the speakers was Ralph Baxter, the chair of Orrick, Herrington & Sutcliffe. Another advocate for change, and part of Perlstein's band of law firm leaders who are beating their drums, Baxter declared that there is "as much chance that Big Law is dead as there is a return to the 2007 economy. Some firms will go away but Big Law has way too many resources and talent," a huge advantage. "We're not dead. This is just a time of opportunity."

Perhaps fittingly the first full day of the conference was scheduled to end with a talk by Richard Susskind, the British academic whose book The End of Lawyers?, has made managing partners hearts beat a little faster. Susskind likes to point out that his title has a question mark and that there will be room for lawyers, just that their roles will be different than the ones they're comfortable with today.

It ought to be an exciting time for the members of the Georgetown community who are still paying tuition.

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