Adam Smith – The Wealth of Lawyers

Adam Smith may have written the Wealth of Nations and been a seminal economist underpinning our capitalist thinking, but evidently his name-saked website about law firms doesn’t understand crap about law firm economics. 

Yesterday, The Wall Street Journal printed an Op-Ed about The End of Big Law.  In short, the author argues that we’ve seen the end of the big law firm as we know it.  It’s a must read for anyone interested in the subject.  Any reader of this blog knows that I’ve been predicting this for quite some time as part of my Law Firm 2.0 series

Today, however, I read one of the worst rebuttals I’ve ever read.  Adam Smith, Esq. is a website that purports to be experts on the economics of Law Firms.  According to their site, they provide consulting services to Big Law firms, so clearly there is no bias there, right? (sarcasm intended).  You can probably guess that they argue the the End of Big Law is a myth

The "rebuttal" (in quotes, because it really doesn’t deserve the description) is that Big Law is just like any other industry hit by the recession.  What they are missing are the massive changes that have taken place in the past decade in the Big Law ecosystem.  I won’t go into detail (if you want detail, read my Law Firm 2.0 series), but how can supposed experts on law firm economics not see that these changes are only being hastened by the recession, not caused by it?  The changes started a long, long time ago.  The recession is just putting the nails in the coffin. 

Secondly, any credibility the author may have is completely destroyed in my mind by two ridiculous assertions:

1. "I have yet to meet a managing partner not exquisitely attuned to the sentiments of their partners and the perceptions of their clients.” You clearly don’t get out much then.  This is absurd.  If this statement was true, one would not see the massive amount of partner transfers between firms and pissed off clients.  I am confident when I say that the majority of clients think exactly the opposite and disagree that law firms are "managing their firms as smartly as they are" (quoted from a previous Adam Smith blog); and

2. "Last time I checked, we were not capital-intensive nor do we have but the most trivial base of fixed assets." This is also laughable.  First, I find it enlightening that the author uses the word "we" when referring to Big Law.  Clearly this is another tip of the cap to bias.  Secondly, law firms are notorious for getting in over their heads with fixed assets.  See: Brobeck and / or my prior posting on this.  And this doesn’t include the multiple of dozens of conversations I’ve had with AmLaw 50 partners agreeing with me that fixed costs are out of control. 

This blog is simply reinforcing what’s broken and wrong in the legal environment.   Me, I’m happy to see articles like this, as it emboldens me as a venture capitalist to exploit and profit from the inefficiencies of the market. 

Lastly, the Adam Smith post accuses the WSJ article of being  "a truly impressive exercise in the abject failure of critical thinking" and likens it to a "tabloid."  I’d call this a case of the pot calling the kettle black, but in this case there is no kettle. 

  • Tom Lorek

    Poor Adam Smith, Esq. Kettleless and alone.

    • Nice.

      Jason Mendelson

      Sent from my iPhone
      – please forgive iTypos.

  • My favorite recent quote on the exquisitely attuned point is from a DLA Piper lawyer who moved to a smaller Penn firm, telling the ABA Journal "Somebody from Lansdale didn't necessarily care that I had an office in Kuwait." Great stuff.

    • Yeah that is great. And clearly the big law managers are so attuned that no one would ever think about going on their own and creating their own firm, eh?

  • Dave

    Jason, this is hysterical to me. Managing partners at almost every firm I know of are the most out of touch people in the firm, particularly the firms where the MP is a "full time" non-practicing position. They are the idiots who cleared hiring the massive associate classes that are now generally getting fired and the 10% rate increases every year even when the economy is in the toilet.

    It is ludicrous to think to think law firms have low fixed costs and real equity. Law firms have (1) very little tangible equity, certainly nothing resembling any company of comparable size and only a handful of firms (Generally the top NY firms) have real "brand" equity in any traditional sense, (2) revenue generators who can (and do) walk out the door on a moment's notice and cannot be bound by a non-compete, (3) high fixed costs in real estate, (4) high costs that firms consider "fixed" due to ego and an unwillingness to act like a business–namely associates–how many firms have fully utilized associates right now? at most firms I've spoken with, it seems like 25% or more associates and at least 10% of partners would need to go before you even got close, and (5) then there are all the ancillary expenses that big firms have like marketing teams, accounting teams, etc. (add up how many "C's" your firm has that are non-lawyers).

    • You are dead on.  Great comments. 

      • Dave

        If MP's are so in touch, I wonder how many law firm MP's know what their net promoter score is? Or, better yet, how many know what a net promoter score is at all and why it can be a great tool…I wonder if any law firms even use NPS, while most businesses I know use it or some variation to track customer satisfaction. I cannot think of a law firm that does real customer sat testing…

  • Agree that the Adam Smith, Esq. was remarkably off base. Unfortunately for the firms, there are a host of structural problems which impede fixing the problems – MPs have limited control over the partners, the entire house of cards is built on the billable hour such that compensation is at odds with client goals and service delivery, the list goes on (as well discussed in your Law Firm 2.0 series).

    I'm still looking forward to the day that US firms can have non-lawyer owners and raise capital like a real business – one actually accountable to customers and investors instead of being organized like a medieval guild. It's already happened in Australia (where at least one firm went public) and the UK, but for some reason there doesn't seem to be much traction on this front in the US.

    • That’s a very good point.  I think Axiom is the only “law firm” model that has figured this business ownership issue out.  Would be nice if others could do it more simply. 

      • I believe they've done so by not being a law firm, but a placement agency – as I understand it Axiom does not form an attorney-client relationship with their customers. The individual Axiom attorneys have that relationship. This avoids issues of conflict as well.

        However this is not a silver bullet – if the individual attorneys cannot share information freely, knowledge management (which is critical IMHO) becomes more tricky. At our firm we have made a huge investment in KM, disseminating best practices and experiences, capturing the knowledge, and ensuring everyone practices the same way. It pays big dividends in client service, scalability, and consistency. Without dedication to sharing and organizing information, I think any firm (whether traditional or the Axiom model) does not reap benefits from its experience long term.

        Perhaps the folks at Axiom – who I have huge respect for – have figured out how to do this well but it must be more complicated than in a traditional firm.

  • Jason good post – I tried to add to it with my own entry.

  • Frank Greces

    You know my sentiments on this one Jason….the majority of BigLaw partners I have spoken with recently are still drinking the cool aid…..thinking that the "green shoots" the economy is starting to witness are growing in their field (of dreams that is). They are about to experience the meaning of a new word added to their little Black Dictionary: "Distintermediation"

    Onward and Upward….


  • Frank Greces

    wow….three emails re: my poor spelling….and the comments were all from lawyers…hah!

    here we go again…"d I s T i n t e r m e d i a t i o n"…….the disruptive nature that "I T" has on the provision of legal services based on the old, stodgy, BigLaw biz model;)….

    Thanks folks for being exquisitely attuned to the sentiments of my blog post 😉

    Onward and Upward…..


  • Luke

    James, you might want to read that post in the _context_ of some of his other excellent commentary. Say…starting with the post before? 21st Centry Armageddon

    He's an insightful commentator. There's gold in that blog, going back a long way.

  • Elaine

    Thanks for sharing and I really enjoyed this piece.
    If you have a chance, check out a virtual law firm:

    Rimon has also stripped down the overhead costs of a traditional law firm, and only employs high-end partner-level attorneys from top law schools and firms. They get an added cost benefit of using ex-pat lawyers – thus getting the attorneys for a lower cost simply because of their location.

    • Great to see law firm 2.0 in practice!

      Jason Mendelson

      Sent from my iPhone
      – please forgive iTypos.

  • Sent from my iPhone
    – please forgive iTypos.

  • I like his theory.