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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 GarmanAt a relatively young age (my mid 30s), my partners elected me managing partner of one of the largest and oldest firms in our area.  This was the era in which the regional law firm model had come into its own, the era when the elite New York law firms began to pull away from the pack in terms of billing rates, profitability and expansion into other markets consuming work that had traditionally gone to local firms.  

During my tenure as managing partner, we tripled our headcount and opened five new offices. We added some of the best and brightest lawyers I have ever met, and they brought with them exciting new clients.  But seven years into my tenure, I left the firm entirely.  Stepping down not only as managing partner but forfeiting my partnership.  Together with a handful of colleagues,  we set out to build a new firm, a boutique firm, one with a business model that could meet an ever evolving marketplace.  Now seven years later, our business model has proven to be more resilient and more successful than we ever dared to imagine.

Legal Services and the Law Firm Business Model Are Changing Faster Than Lawyers Want to Admit

Why did we walk away from our existing firm to start a new one? Because the business model of nearly every regional law firm, and all but the largest of national law firms, were and remain in decline.  And we were no different.  The firm I had worked so hard to build was broken and it probably couldn't be saved.

Of course such a sweeping statement doesn't apply to all law firms.  But anecdote is the enemy of data.  There is no doubt the AmLaw 50 (American Lawyer) are doing better than ever and their bottom line is awe inspiring.  But much like the larger economy, the success of these 50,000 lawyers do not represent the fortunes of the other 1.3 million practicing lawyers in the US. The notorious end of the year bonuses of this elite 5% of lawyers generally working on Wall Street continue to mask the fundamental shifts in the legal profession and the business of law (as distinct from the practice of law).

Our new firm doesn’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.  Where possible, we try to avoid the billable hour (although it still accounts for the majority of our revenue).  From our very first year, I began making between 4x or more than I made in my best year at my old, much larger, firm. 

In this post, I’ll share: 

  • Why the economics of most large law firms aren’t sustainable in the long term;  
  • Why the growing profits of the Am Law 50 firms isn't a sign that all is well in the legal industry; and 
  • How smaller law firms can avoid the traps of the old business models to build a more sustainable, healthier firm from both a financial and life balance perspective.

Towards the end of the article, I’ll also explain why we created a platform to help solo and small law firms operate more profitably and with less overhead by using virtual associates and experienced freelance attorneys across the US.  For a preview of the tools we built that support our own firm, you can click here, or learn more and sign up here.

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

I realized the traditional law firm business model was broken and it couldn't be saved without a fundamental restructuring that was not appealing to most of my partners.  So, a small group of us decided to leave and start a boutique firm, where the business model was fundamentally different.  That change has exceeded my most optimistic expectations.

At the outset, I would like to provide a little context and background that form the foundation of my experience and my conclusions.  I became the managing partner of one of the oldest and largest law firms in our area.  At the time, the firm's reputation in the business community was incredibly strong and had a nearly 50 year track record for outstanding legal work, strong community and client relationships, and a roster of outstanding partners.  After getting my law degree and putting in years of hard work as an associate, I was a relatively young partner.  When I graduated law school, this was exactly the position I had wanted to be in at exactly the firm I wanted to work at.  Yet, the writing was on the wall that things were changing.  Regional firms had entered our market beginning in the late 90's and were beginning to take a foothold.  They were not only capturing corporate clients in disproportionate numbers, they were beginning to attract talent from the local firms, including some of our former partners.   

A number of my partners and I saw the threat the regional and national firms posed upon the future of our firm.  Evolution was inevitable.  The firm we had grown up in was doing great, but would ultimately face existential threat from newer, larger, faster regional and national players.  And we had to change.

With a partnership of our size, there was surprising consensus that we needed to grow and embrace the large firm model.  Establish new practice groups, grow our geographic footprint, and non-lawyers to engage in activities such as lobbying in state capitals and D.C.  And with this vision and mandate, I was elected Managing Partner.  To a large extent our strategy succeeded.  We established an enviable growth trajectory.  We hired away from our competitor's talented lawyers, we attracted exciting new corporate clients, and we opened five new offices in large cities like Los Angeles and D.C.  

Mistakes We Made and Hurdles We Faced

On the surface things looked great (and they were), but fundamental changes were underway in the legal industry that were difficult to identify.  We had added a number of high profile practice areas and some really great lawyers — former partners that I miss on a personal level. 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 (or tried to have it).  Yet, in the parlance of technology, being "Full Service" turned out to be a bug not a feature.  

At the end of five years of executing on our strategic plan, we had accomplished nearly everything we set out to do.  We had added all the practice areas necessary to be full service, we had added to the partnership rainmakers with large books of business, we had added bluechip clients, we had expanded our geographic footprint, and we had raised our billing rates.  Our revenue was skyrocketing, but our profits weren't growing (and were actually shrinking on a per-partner basis).  

What had happened?  We had built exactly the regional firm we set out to create.  At the end of the year, the firm's CFO and I sat down in a conference room to analyze our progress and next steps to propose to the partnership.  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 to increase profitability?

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, and the entire legal industry, had been focused for decades on revenue growth instead of cost containment.  As an industry, we had been growing faster than the economy.  And business models had been singularly focused on capturing revenue, assuming that increased revenue would necessarily elevate profits.  But it didn't, and it won't in this environment.

We, like the rest of the industry needed to make fundamental changes.  And those changes would primarily be driven by altering the cost structure and focusing on our core strengths. 

There Are 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 engage in marketing, pay utilities, fill the conference rooms with refreshments, and buy office supplies.  But compared to other industries, those expenses are de minimis in the context of overall operations.  

Problem 1: Underutilized Associates and Of-Counsel

The desire for firm to be “full service” has unintended consequences.  The most obvious is the lack of “specialization”.  As we have written about here, finding your niche and developing a reputation as a subject matter expert leads to higher billing rates.   But an equally important consequence is the desire to keep associates (or even entire practice areas) that underperform. 

There is a desire (I think a mistake) among lawyers to staff for the next case, not the workload that can be supported.  In my experience, this leads firms to burden themselves with unproductive (or under productive) members because their “intangible” value is perceived as being more important than profit.  Questions like “What will our clients think if we no longer [insert excuse]” Or “we need that lawyer to be able to market to [insert client or practice area].  Excess 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 reaching staggering levels firms can no longer justify the financial burden of underutilized lawyers.

Below we discuss how we maximize our firms productivity and reduce fixed overhead through the use of virtual associates and freelance lawyers.

Problem 2: Profitable Lawyers and Practice Groups Subsidizing Unprofitable Lawyers and Groups

At all law firms, compensating the lawyers and staff is the largest expense. Inside this expense category (compensation) is where we found another critical insight: High margin practices were subsidizing lower margin practices; and in our case profitable offices were subsidizing unprofitable 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 example, tax lawyers are a great luxury for regional law firms in trying to demonstrate their ability to attract M&A and corporate 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 and reputational benefit to the overall firm.  And that's where the slippery slope begins. 

Too many 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.

Based upon the limited success of most firms in cross-selling, it doesn’t make sense, from a profitability standpoint, to keep adding practice areas simply to be “full service”. More often than not, it simply drives expenses without generating additional profit for firm partners and in fact can cost firms a lot of money.

Problem 3: Reverse Economies of Scale 

Finally, there aren’t economies of scale in law firms past a small handful of attorneys. In fact, the economics of scale become inverted.  There is no doubt a small number of attorneys can find economies of scale sharing a secretary and a conference room.  But as a rule, the more attorneys you add to a law firm, the higher the cost structure becomes and the faster it grows.  Instead, once you go above a certain number of lawyers, you have to add layers of non-billable staff (the legal industry's version of middle management). Similarly, the conference tables get longer.  The billing department gets bigger.  The video conference system becomes more expensive. The client dinners get fancier. The computer systems get more complicated.  Rent is higher. The list goes on. 

This fact is probably the most obvious but the most overlooked in consideration of changing your business model.  It's not rocket science, but if you raise the cost structure you need to raise rates or bill more hours just to tread water. 

How We Started a Boutique Law Firm to Create a More Sustainable, Scalable Business Model (Without Adding Fixed Overhead)

The first few days of starting our new firm weren’t nearly 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, we bought office supplies, equipment, snacks and all the things we had previously had a team of staff (very expensive staff it turns out) to do. 

That first morning, we rolled out the cloud based software we had planned to use instead of expensive server based systems.  We told everyone to “pick a computer and a space to work”. 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. Our costs are lower than our old firm by 30% and our revenue is higher by 30%.  That’s a recipe for success and profit.

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 would be corporate bankruptcy and litigation. In our experience, these practice areas go hand in hand and were the rare experience of synergistic practices at our old firm. Today, these practices usually account for 85% 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 practices that support the restructuring and litigation work.  They are more than support functions to the other practices, but these practices were intentional in our planning.  Having skilled lawyers in these areas support the entire firm.

Another decision we made is to never have more than 20 lawyers total. Our goal isn’t to be everything to every client, because as we’ve discussed,the cost structure doesn’t make sense.  Instead, we pursue high margin practices to the exclusion of low margin/low-cost practices.  And this avoids the pitfalls that accompany subsidization. So now, at our smaller firm we dont make short-term decisions.  We dont stretch if a client has an employment problem, we’re not going to solve that problem for the client.  Instead, we’re going to refer that work to someone else who specializes in employment law.  Generally, this is someone we have built a relationship with and know will take care of our client and not simply someone we find on linkedin. 

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 almost always have enough work so that all of our lawyers are at near 100% utilization.  Subsidies dont happen at our firm.  We are in near total economic alignment.  We don’t have idle capacity or underutilized associates.  Instead, we use subscription associates/virtual associates to support our cases when we are past 100% of capacity. 

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, ”How can bring the remote workforce to the legal industry?”  There are literally hundreds of thousands of lawyers looking for career opportunities to work remotely or on a part time basis.  

The hurdles were real, but they were achievable.  Why had nobody done this yet?  Obviously it would have to be compliant with the ABA model rules and each states ethical rules.   It would have to be attorney to attorney only (no clients).  It would have to be nationwide.  And it would have to have a largepool of very talented and experienced virtual associates/freelance lawyers.  And if we built it, would it solve the two concerns identified above. 

The final question seemed to be: we are just lawyers, can 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 beyond anything we could have ever imagined.

Currently we are using two subscription associates.  Both have 20+ years of deep subject matter experience.  One we employ for 60 hours a month and one for 80 hours a month (often with substantial overtime that is profitable for both of us).

Law Firms Are Uniquely Positioned to Work Remotely With Virtual Associates and 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 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 while others are solo-practitioners looking to supplement their income as they build practices. 

In the case of Big Law refugees, they’ve been trained and practiced at the cutting edge of law.  But then  often forced to leave because they don't have the million dollar book of business necessary to make partner. While some decide they want a better quality of life.  

Finally, burnout in this industry is real, and our marketplace permits some of the best andbrightest lawyers to work on their own terms — when and how they want. There are many virtual associates that don’t want to deal with clients directly. They’re not interested building a client base or running a firm. They just want to put their skill and knowledge to work “doing” the written work. The average experience level of the thousands of lawyers on our marketplace is 11+ years and the overwhelming majority have intentionally chosen this career path to that of 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 or fixed cost structure.  We could easily justify another full-time hire, but our model is to keep everyone at 100% utilization and use virtual associates to cover the rest. For us (and dare I say for most firms), 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.  

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.  

In a recent quarter, our firm spent just over $100,000 paying freelance lawyers and virtual associates through LAWCLERK.  It produced $275,000 of billable time because as 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 worked with us on a high profile trial that and worked as a seamless  extension of our firm.

LAWCLERK Resources

We built LAWCLERK out of our desire, as practicing lawyers, to improve the work product we generate for our clients and the value we provide them.  Yet at the same time we knew a better better business model existed than the one we had at a larger firm 

If you’re curious and want to learn more, check out our Ultimate Guide to Legal Outsourcing or book a demo here to see how LAWCLERK can improve your practice and your firm. 

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, our YouTube channel is full of educational videos that help law firms and attorneys improve their profitability and general well-being.

Greg Garman is a founding partner at Garman Turner Gordon LLP, a boutique flaw firm with a national reputation in the area of corporate debtor representations in Chapter 11 bankruptcy proceedings.  Greg is also a co-founder at LAWCLERK which provides virtual associates and freelance lawyers to growing firms focused on increasing their profits.  

This post was originally published in August 2021 and updated in June 2021.

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.”