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Why the Large Law Firm Business Model Is Dying and What We’re Doing Instead

By Greg Garman
August 18, 2020

Greg GarmanIn 2012, at the relatively young age of 36, my partners elected me managing partner of one of the largest and oldest firms in our area.  It was an exciting position that I was proud to have reached. During my tenure, we tripled our headcount and opened five new offices. But by 2015, in what came as a surprise to some of my partners, and a disappointment to others, I left.  

Not only did I resign my position as managing partner, but I and a handful of colleagues left the firm altogether.

The job I gave up had been my dream job at my dream firm. Why did I walk away? 

Because the business model of nearly every regional law firm, and all but the largest of national law firms, was in decline.  And we were no different. The firm I had worked so hard to build was broken.  And it couldn't be saved without a fundamental restructuring that was not appealing to most of my partners.

A small group of us decided to start a boutique firm, where the business model was fundamentally different. 

That change has exceeded my most optimistic expectations. We don’t try to be everything to everybody.  We focus on higher margins and lower overhead.  We are small, nimble and focused.  We encourage working smarter not harder.  We embrace success fees, alternative fees, monthly retainers and virtual associates.  From our very first year, I began making between 3-4x more than I made in my best year at my old, much larger, firm. 

In this post, I’ll share: 

  • Why the economies of larger law firms often aren’t sustainable in the long term; and 

  • How smaller law firms can avoid this trap and what a more sustainable, scalable business model looks like for them.

Towards the end of the article, I’ll also explain why we created a platform to help small and midsize law firms operate more profitably and with less overhead by using incredibly experienced freelance attorneys across the US. 

How and When I Realized the Large Law Firm Business Model Was Broken

At the outset, it’s important that I preface this article with some background as it forms the foundation of my experience and my conclusions. 

I became the managing partner of a regional, midsize firm in my mid 30s after starting there as a summer associate and working my way up.  

We were on a growth trajectory and opened offices in Los Angeles, Phoenix, and Reno, as well as lobbying arms in D.C. and our state capital. 

It looked great on the surface. 

We had added a number of high profile practice areas and some really great lawyers. We had an intellectual property group that represented a who’s who in the areas of professional sports and entertainment.  We added a premier criminal group that was the go to defense team for elected officials and high profile criminal defendants. 

Like most larger law firms, we had put together every type of lawyer you can imagine — employment lawyers, litigators, regulatory lawyers, criminal lawyers, bankruptcy lawyers, securities lawyers, gaming lawyers, and so on.  

You needed it, we had it. 

We had been growing pretty fast and allocating a lot of our revenue to growth.  At the end of my sixth year at the helm of the firm, we were headed to end the year with revenue a couple of points down.  Given the investments we were making to grow, it had impacted partner distributions.  

In mid-December, my CFO and I sat down in a conference room to analyze the year, and discuss our plans moving forward.  

We expected to spend an afternoon or two.  We ended up spending two weeks in that conference room examining the business of law.

During those couple of weeks, we set out to explore and answer three questions:

  1. What changes need to be made to our business model?

  2. What does the future of midsize regional firms look like?

  3. What does the legal industry look like in 5-10 years? 

At the end of that process, there was an obvious conclusion.  The firm would need to make fundamental changes.  And those changes would primarily be driven by altering the cost structure.

Three Fundamental Problems with the Cost Structure of Larger Law Firms

The cost structure of a law firm is driven almost exclusively by compensation to your lawyers, rent, the size (and cost) of your non-income generating staff, insurance and technology. Of course, you have to pay utilities, fill the conference rooms with refreshments, and buy office supplies, but those expenses are de-minimis in the context of overall operations.  

Problem 1: Not All Practice Groups Share the Same Overhead; Profitable Practice Groups Subsidizing Unprofitable Groups

At all law firms, compensating the lawyers and staff is the largest expense. Inside this expense category (compensation) is where we found our first critical insight: High margin practices were subsidizing lower margin practices (and offices). 

This economic reality is extremely common in mid to large firms.  The obvious example is that billing rates are not uniform across the legal spectrum.  However, there are more hidden distinctions between practice groups.  Some need extra staff who are an overhead cost instead of a revenue generator.  Some need more infrastructure in the way of fancy conference rooms and marketing materials to win “beauty contests”.  Some simply have lower realization on their billings that sap profits. And most importantly, some just have higher rates. 

For instance, tax lawyers are a great luxury for regional law firms in trying to demonstrate their ability to attract M&A work.  However, in talking to my colleagues across the country, tax lawyers at all but the largest and most elite firms are more often a net cost than a profit center.  But tax work often is justified as providing “intangible” benefit to the overall firm.  And that's where the slippery slope begins. 

Mid to large size firms strive to be “full service” and have all types of lawyers ready to jump on any conceivable client problem.  However, that means the concept of shared overhead supported by practice groups with divergent economics is rampant: truth be told, there are lots of non-profitable practice groups adding to the cost structure of these firms. 

Why do law firms continue to do this? Because there is a culture of trying to be everything to every client. There is a notion in law firms that if we don’t have a particular practice group, we are at a strategic disadvantage.  We may lose business if we can't meet all of the clients’ needs. This idea is sound in principle, but uncommon in practice.

In my experience, and the experience of most other attorneys I’ve spoken to, cross-selling is rare for individual lawyers who work at large law firms. The idea that because you do a client’s corporate work you're also going to capture litigation work is usually a myth. Rather, large clients usually have their business attorneys, who may be in-house or at one firm, while their litigators are at another firm.

Thus, based upon the limited success of most firms in cross-selling, it doesn’t make sense from a profitability standpoint to keep adding practice groups simply to be “full service”. More often than not, it simply drives up expenses without generating additional profit for firm partners. 

Problem 2: Underutilized Associates and Of-Counsel

The second cost structure problem at most midsize to large firms is simple: excess capacity. Capacity to take on that “next big case” is a luxury firms can't build into their cost structure.  With the cost of young associates in larger markets now exceeding $120,000 or more, and all the data showing the productivity and realization of “of-counsel” declining, firms can no longer justify the financial burden of underutilized lawyers. 

Problem 3: Reverse Economies of Scale 

Finally, there aren’t economies of scale in law firms. In fact, the economics of scale are inverted: The more attorneys you add to a law firm, the higher the cost structure, because once you go above a certain number of lawyers, you have to add layers of non-billable staff. In addition, other overhead grows. The conference table gets longer.  The billing department gets bigger.  The video conference system gets more expensive. The client dinners get fancier. The computer systems get more complicated.  Rent is higher. The list goes on. 

So for these three primary reasons, after my CFO and I spent 2 weeks in that conference room, it became apparent that the cost structure of many larger firms like ours were headed in the wrong direction. It is possible that we could have righted the ship in the short term, but I knew deep down our profession was already in the midst of fundamental change in 2015 and the law firm of the future needed to look very different. 

How I Started a Boutique Law Firm to Create a More Sustainable, Scalable Business Model (Without Cost Structure Problems)

Background Story

The first few days of starting our new firm weren’t as glamorous as being a partner at a larger firm. We were our own IT department.  I remember distributing computer equipment (still in boxes) on the first day and saying to our awesome staff that “we will figure out the rest”.

Over the weekend before we opened, one of my partners and I went to Fry’s and bought computers and monitors for the entire firm. We drove them all to the office and set them on the conference room table. That first morning, we rolled out the cloud based software we were going to use, told everyone to “pick a computer and a space to work at”, and we were off to the races.  

Our mentality was that of a startup.  Let's break the old ways and build it from scratch. It wasn't perfect on day one, but I’m proud to say that we were cash flow positive in 40 days, and profitability has exceeded the most optimistic models we built before we launched. 

Let’s investigate why.

Logistics: Exactly How Our Small Law Firm Business Model Avoids the Cost Structure Problems of Larger Firms

We decided to create a business model in which the two largest drivers of revenue at our firm are bankruptcy restructuring work and litigation. In our experience, these practice areas go hand in hand. These practices usually account for 80% or more of our annual revenue.  We are intentionally not diversified in our revenue streams.  But we also have real estate, finance, transactional and estate planning lawyers that have both stand alone practices and support the restructuring and litigation work.  However, we will never have more than 20 lawyers total.

The goal isn’t to try to be everything to every client, because as we’ve discussed, the cost structure doesn’t make sense.  We pursue high margin practices to the exclusion of low margin practices.  And this avoids the pitfalls that accompany subsidization. 

So now, at our smaller firm, if a client has an employment problem (just one example), we’re not going to solve it for them. We’re going to refer it to someone else who specializes in employment law.  Someone we have built a relationship with and know will take care of our client. 

Second, at our firm, we solve the associate underutilization and overhead problems we discussed earlier by having less associates than our peak workload. In other words, we have enough work so that all of our lawyers are at near 100% utilization.  No one is subsidizing anyone else and we don’t have idle capacity or underutilized associates. 

While there are several benefits to the business model we built, running a small law firm also presents a unique set of challenges (which we set out to solve).

Why We Created a Marketplace for Freelance Lawyers and Virtual Associates to Help Our Firm (and Other Small Law Firms) Scale More Effectively and Be More Profitable

There are two questions/concerns that arose when we first started our boutique firm:

  1. How do we support our existing client base and caseload with subject matter experts without growing to be the large firm we had just left?

  2. How do we service client needs at those times when we are at 100% capacity without permanently increasing headcount and overhead?  

Like many law firms, we have experimented with contract lawyers, but with marginal success.  We were always limited by the inability to find just the right person (or even close to the right person), and were often trying to put a round peg in a square hole.  Often the contract lawyers were not available when we needed them or did not have the expertise we needed at that time.  

And that’s when we thought, “What if we bring the gig economy to the legal industry?”  It would have to be ethically compliant.   It would have to be attorney to attorney only (no clients).  It would have to be nationwide.  And it would have to have a large pool of very talented and experienced freelance lawyers.

If we built this, it would solve our two concerns listed above:

  1. How do we support our existing client base and caseload with subject matter experts without growing to be the large firm we had just left?

  2. How do we service client needs at those times when we are at 100% capacity without permanently increasing headcount and overhead?  

The final question seemed to be: since we are lawyers, could we assemble the team to build the platform and could we attract the best and brightest lawyers, with every imaginable skillset, to work as freelancers? 

The answer, it turned out, was a resounding yes! 

Law Firms Are Uniquely Positioned to Work with Extremely Talented Freelance Lawyers

The virtual associates who join our marketplace are not freelancers because they “couldn’t get a real job”, which is a very common misconception. 

Huge numbers of lawyers choose to freelance because they’ve worked at a big law firm for 10+ years and want to spend more time with their kids or take care of aging parents. We also have a large number of military spouses that are constantly relocated.  The same is true of law school professors and semi-retired lawyers who want to keep a foot in the business and love the intellectual challenge.   

Many lawyers on our marketplace have worked at the biggest and most successful firms in the world. They’ve been trained and practiced at the cutting edge of law.  But then they leave “big-law.”  Some don't have the million dollar book of business necessary to make partner. And some decide they want a better quality of life.  

Burnout in this industry is real, and our marketplace permits some of the best and brightest lawyers to work on their own terms — when and how they want. 

There are many freelance lawyers that don’t want to deal with clients directly. They’re not interested in working in or running a firm. They just want to put their skill and knowledge to work “doing” the written work. 

The majority of lawyers on our marketplace have 7+ or more years of experience, and they intentionally choose an alternative to the traditional legal career. 

How Using Freelance Lawyers and Virtual Associates Helps Our Firm Operate More Profitably

My firm consistently uses LAWCLERK (similar to thousands of other attorneys nationwide) to get work done without growing our headcount, even though we have plenty of work and could justify full-time hires. But, this is a better solution. We can draw upon exactly what we need and only when we need it, without the overhead of full time employees.  

In a recent quarter, our firm spent $100,000 hiring freelance lawyers and virtual associates through LAWCLERK.  It produced $275,000 of billable time because it is ethically permissible in all 50 states to bill your freelancer’s time on an hourly basis at reasonable market rates.

For example, over the last month, several virtual associates with appellate expertise have worked with us as an extension of our own firm. We have 8 bankruptcy lawyers in my practice group, and we often have enough work for around 10 or 11. So we built a team of virtual associates that we found through our marketplace, and we go to those same people over and over again.

Our firm is at nearly 100% capacity all times.  So we use freelancers/virtual associates for that next 20% or 30% that we've got to get done. 

Among our team of virtual associates is a law school professor.  He has practiced before the United States Supreme Court and clerked with a federal circuit court. We also work closely with a retired bankruptcy practitioner who frequently argued before multiple bankruptcy courts, circuit courts, and the Supreme Court.  We round out our team with several brilliant former big-law attorneys that have started freelance practices so that they can spend more time with their kids.  And when we have niche projects, discovery, or large document review projects, we go out to the marketplace and find the freelance attorneys with the ideal skill set.  

As we’ve discussed, this is a business in which freelancers have incredibly specialized and great credentials. And the most common thing we hear at LAWCLERK is, “I’m shocked at the quality of the applicant and work I got — it blew me away”. 

LAWCLERK Resources

If you’re curious and want to learn more, check out our Ultimate Guide to Legal Outsourcing and detailed FAQ page for hiring attorneys

In addition, we have an entire resources page with several useful documents, sample projects by area of law, podcast, webinar and tutorials, and more. 

Finally, feel free to check out our YouTube channel, where we consistently publish educational videos that help law firms and attorneys improve their profitability and general well-being. 

LAWCLERK Customer Success Stories

 

Jess Birken, Owner of Birken Law Office

“So I first heard of LAWCLERK and thought it was a brilliant idea. And I had desperately needed to delegate for a really long time. For whatever reason, I think lawyers are prone to that sort of ‘No, I have to do it myself’. And I’m as progressive as they come as far as doing this stuff. 

And I still really just mentally resisted delegating. But my practice got to a point where with the subscription services, I wanted to offer so much more than I was capable of. 

Even when I first started my account, I am embarrassed to admit that it took me several weeks — maybe even a month — to post my first project. And I don’t know what that was about. 

Finally, my wingwoman Megan set me down on a table and said, ‘You’re not leaving this table until you post your first project’. 

And I literally called Ricky at LAWCLERK (each hiring attorney gets a dedicator advisor) … and he walked me through the process. I think I was really just not comfortable with a lot of unknowns, and so Ricky was delightful and got me through that first one. 

And once I realized how easy it was, then I was off to the races...”

Ayesha Mehdi, Principal Attorney at Frontier Health Law

“I reached that stage in my practice very quickly when I needed help. But I didn’t want to take on the overhead that comes with hiring help and the expenses that come with it. I thought OK, I need to go on to LAWCLERK finally. 

The good thing about LAWCLERK is that it allows you to make teams, so I work with people in my team. Now I have enough of a relationship that I just contact them first and then ask them how much time they think that it’s going to take. They tell me and then I just post that price point for them. 

They’re happy. I’m happy. And then the client is happy because things are getting done quicker and the product is better…” 

Michael Cristalli, Partner in the law firm of Gentile Cristalli Miller Armeni Savarese

“When I was first introduced to LAWCLERK, I was skeptical. I didn’t understand the system and I didn’t know how it would benefit my law firm. I thought it would be easier to use my associates that I have in house with my law firm or do the work myself. 

But when I understood the process and the simplicity associated with it, and then started interacting with the lawyers — and understood the level of experience they had and could deliver/bring to the table —  it became a simple decision. And now I use it regularly and it has really changed the dynamics of my law practice. 

What we have found is that LAWCLERK provides us a vehicle to get the best possible support for a particular case to get a specialty that will work best for us for the issue that our client is dealing with. 

It does it in a way that’s economically not only reasonable, but economically beneficial to my law firm. 

And also economically beneficial to the client. So we could service a client and give that client a specialty in a particular area of law that supports us in a case for a fraction of the cost.” 

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