“Declining Prospects”: A Book Review

This is something new for this blog: a book review. I am posting it because I have just finished reading a book that I think will be of interest to many of the blog’s readers.

The book, published in 2012, is Declining Prospects: How Extraordinary Competition and Compensation Are Changing America’s Major Law Firms, written by Michael H. Trotter, a partner at the Atlanta firm of Taylor English LLP. The latter is one of what Mr. Trotter calls “New Model” law firms that are increasingly taking business away from the large business law firms.

Although the focus of the book is more on the transactional side of business law, I found many of Mr. Trotter’s insights and analyses to be applicable to litigation firms too. The sorts of changes that he describes are undoubtedly coming to litigation practices too; they might just take a bit longer to arrive.

The book is a fascinating and very well-documented study of the rise of the major law firms in the United States and, if not their fall, at least a profound upheaval that he says is now underway and is likely to accelerate in the coming years. I think that much of what he has to say is relevant to the national (and international) firms in Canada. If I were a partner (or even more so, an associate!) at one of those firms, even one practising in litigation, I’d be paying close attention to what Mr. Trotter has to say.

(Frankly, the book is also very relevant to small firms and even sole practitioners, although it might actually be good news for many of them, which is not the case with the large firms.)

In a nutshell, Mr. Trotter posits that large business law firms in the United States, which have become immensely profitable, are going to experience a significant downturn in their revenues as a result of a number of factors and that this will force them to re-think their entire business model. Of course, most of what he has to say would apply to those firms’ Canadian equivalents too.

Mr. Trotter charts the meteoric rise of Big Law in the U.S., from post-World War II to the present. Since 1985, he says, the gross revenues of the top 50 firms have increased by more than 1,300% and Profits Per Partner (“PPP”, an acronym that appears many times in the book) for those firms has increased by about 450 percent.

For the most part, those firms are organized on what Mr. Trotter calls, “the New York model”: “a large and highly leveraged firm with relatively few equity partners and a relatively large number of lawyer-employees, high charges by the hour or otherwise, and high billable hour requirements–all supported by a large staff of non-lawyer support personnel.” He notes that overhead for large law firms typically ranges from 50-70 percent. In order to achieve the level of profitability that they have, with that level of expenses to cover, those firms are usually  highly-leveraged (at least two associates to each equity partner and often ratios of 5:1 or even 6:1), billing at very high hourly rates and with billable hour targets of 2,000 hours per year or more.

One of the biggest drivers of cost for law firms, Mr. Trotter notes, has been salaries of associate lawyers. In 1960, a first-year associate at a major New York law firm was paid about $6,000 ($44,222 in 2010 dollars) but in 2008, starting salaries in New York reached $160,000. Firms paid ever-increasing salaries in order to attract the best law school graduates. Even such high salaries as these were justifiable because of the profitability of first-year lawyers billing 2,000 hours at the rate of $250 that he says is commonplace today.

But according to Mr. Trotter, things have begun to change for large law firms, principally because of five factors:

  1. The greatly increased number of lawyers who are, on average, smarter and better-educated than the lawyers of one or two generations ago. (Mr. Trotter notes that a perfect LSAT score is 180 and that the lowest score of any student admitted to Yale Law School in 2009 was 170! Lawyers of my vintage often tell each other that we’re glad that we’re not trying to get into law school today and some of the statistics in this book highlight how high the bar has been raised.)
  2. The rapid escalation in the price of legal services. According to Mr. Trotter, the gross revenues of the top 50 U.S. firms increased by about 1,500% over the past 25 years, a period during which inflation rose by only about 100 percent. (I must say that I’ve always wondered why any law firm would want to be listed as one of the Am Law 200“, being The American Lawyer’s list of the 200 U.S. law firms with the highest gross revenues. I would have thought that in-house counsel would avoid any firm on that list like the plague, at least for routine work. Interestingly, in 2012, profits were down for the Am Law 200 owing to increased expenses and lower leverage, which dovetails well with Mr. Trotter’s thesis.)
  3. The ascendancy of corporate law departments. This factor, he observes, is interacting with factor no. 2, because in-house lawyers are increasingly being tasked with reducing the ever-rising legal expenses of their employers. Mr. Trotter notes that in-house counsel, formerly second-class citizens in the legal firmament, now “rule the roost” when it comes to the lucrative corporate work which has historically been the life blood of Big Law firms. While general counsel have not concerned themselves very much with the cost of outside law firms in the past, they now have no choice but to do so. And they are addressing the issue by adding to their own ranks and having work done internally as well as by seeking out lower-cost outside counsel for work that cannot be done by the law department lawyers.
  4. Standardization and commoditization of legal services. Mr. Trotter estimates that as much as 75% of legal services provided by major business firms have become “commodities”, i.e. “legal services that have become so standardized in concept and execution that any one of a number of law firms can produce a good enough version to meet the needs of most clients”. This, he says, is driving competition on price. And he adds that more and more of legal services in the business world are falling into the category of “commodity”.
  5. Technology. We all know that technology has transformed law dramatically, certainly in the 30+ years that I have been practising and at an accelerating pace in the last 10 years. Richard Susskind, something of a law “futurist”, has written quite a bit about the major changes to the profession that have been brought about by technology (and by other factors). His new book will be out in a couple of months and we will get a new look at what his crystal ball predicts for lawyers. Mr. Trotter points to the vast increase in legal information available online allowing, he says, “any lawyer and any law firm in the United States with reasonable intelligence and energy [to] quickly become an expert on most legal matters”.

In Mr. Trotter’s view, the world has changed forever for the large commercial firms. He highlights some signs: the well-publicized collapse of Dewey & LeBouef last year (about which he was interviewed by the New York Times), the decline in starting salaries for first-year lawyers, the continued growth of corporate legal departments (with the resulting reduction in work available to private firms) and the increasing market penetration of “New Model” firms, including his own.

The New Model firms are characterized by:

  • lower leverage (i.e., a lower ratio of associates to partners);
  • smaller size;
  • lower overhead; and
  • lower billing rates.

One version of the New Model firm mentioned by Mr. Trotter in which I am particularly interested is the “virtual law firm”, which does away, wholly or in part, with a traditional law firm infrastructure in favour of a substantially online practice. Gone would be the corner offices, the oak-panelled libraries, the art collections etc. In their place would be a very much scaled-down physical plant, with lawyers and staff working, for the most part, off-site (usually from their homes). The resulting drop in overhead would presumably allow a virtual firm to price its services below those of large firms and gain a competitive edge. After all, we’re doing (or supposed to be doing) “brain work”. Once law firms have gone paperless (pretty soon all firms will be), the rationale for having a big, expensive physical plant starts to drop away.

A Washington law firm called “Clearspire” has been following just such a model for several years and has gotten the attention of the Economist, FastCompany and the Washington Post, among many others. I learned about Clearspire last year, when in-house counsel for a corporate client of ours, based in Toronto, told me that her company had been solicited by the firm. Ironically, the reason that our firm had been engaged by this client was the dissatisfaction of the in-house lawyer with the hourly rates being charged to the company by large Bay St. firms (hourly rates as high as $1,000!) She decided that it would be more economical to have the work done by our Ottawa firm, even with the travelling expenses that would be incurred.

All of this feeds into Mr. Trotter’s thesis of the “great levelling” that is taking place in law, in which “most potential clients in the U.S. are now fair game for any law firm in any city in the U.S. and for other English-speaking lawyers wherever they reside (subject to licensing restrictions that seem to be becoming less important).” Needless to say, the same is probably true of potential clients in Canada.

In our own modest way, ours has been a New Model firm (even before we knew that there was a new model!) And I take some comfort from Mr. Trotter’s comment, that “successful litigators will always be in demand”. Still, I think that the legal world is changing more quickly and in more ways than many of the practising bar realizes. I found Declining Prospects to be a compelling read and a book that I would commend to anyone involved with the practice of law, from the would-be law student level on up. Other authors (such as Richard Susskind) have written about some of this before, but as Bruce MacEwen (author of the influential Adam Smith, Esq. blog) noted in his review of the book on Amazon, “Those are all topics I discuss more or less continuously on Adam Smith, Esq., but I didn’t live it. Mike did. No one else in print has his perspective.”

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2 Responses to “Declining Prospects”: A Book Review

  1. B. Plagg says:

    interesting read, thanks.

  2. I don’t see (100%) paperless as the future of litigation. The court system is paper-driven and the enormous costs of going paperless including continually replacing hardware and software is going to scare off govt types (not to mention the specter of system failures). The court staff are in a union, right? There is another point of resistance, as the job reductions entailed by a paperless court system would inspire the clerks to the barricades (or maybe just a grievance committee).

    What about history? I can read 200 year-old court decisions in book from, but I can’t find any hardware so as to re-read my high school paper “Ennui in East Egg: Tedium in the Great Gatsby” on that 4.5 inch floppy that used to fit into a port on my Apple II C.

    Posterity’s loss I guess.

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