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Law and Disorder: Perspectives on the Cravath System, Disruption and New Law

June 9, 2016

 

Is the legal services industry at an inflection point?   Are the glory days of Big Law well and truly over?  Is disruptive innovation finally impacting that most conservative of industries – the business of law?

 

At the risk of having old Paul Cravath turning in his grave, I will posit: yes, very likely, and very imminently.  

 

But first, some historical context.  Almost 200 years ago, the venerable law-firm we know today as Cravath Swaine & Moore LLP was founded in New York. Early in the 20th Century, its longest-serving partner, Paul Cravath invented the "Cravath System" – a set of principles that went on to become the avowed business model (and one that ensured rapid growth, success and pedigree) for not just white-shoe New York law firms but probably every aspirational law firm in each large legal market - this was the foundation of the contemporary Big Law business model. 

 

The Cravath System broadly comprised of six key principles that produced the following attributes – characteristics that are probably shared by all Big Law incumbents or aspirants today: Attracting top legal talent from prestigious law schools, usually at inflated salaries; Using "leverage", i. e., having the bottom of the pyramid of full-time junior lawyers doing the bulk of the legal work for clients; Creation of a tournament to motivate junior lawyers coming up the ranks to become equity partners – together with an “up or out" policy for those not making the cut; Tight control on the number of equity owners of the law firm, at any point of time; Structuring as a partnership with no partner having any outside interest and more or less enjoying permanent employment, and; Charging high hourly rates to clients, rather than fixed fees or stage-wise fees – probably as much based on the strength of its expertise, as the mystique associated with getting the Big Law "brand".

 

It’s a model that worked well for equity partners at Big Law firms – for over a century.

Until very recently, top-notch legal talent and resources were available only to deep-pocketed corporate clients of Big Law firms. Those lacking resources to high-quality legal services, such as startups and early-stage companies, made do with low-quality, do-it-yourself solutions, getting advice from a less-expensive (and often less-experienced) attorney, or, in most cases, no legal advice at all. But even deep-pocketed corporate clients, which are becoming more cost-conscious, have been feeling the pinch of Big Law’s cost but lacked viable alternatives.

 

But how has all that changed? The last few years have witnessed an explosion of new business models in legal services – termed, rather predictably, “New Law” - that have significantly expanded the variety of affordable legal services available on the market. The birth of New Law is certainly a “disruptive innovation” in the legal services industry. Coined by Harvard Business School professor Clayton Christensen over twenty years ago in The Innovator’s Dilemma, “disruptive innovation” describes a phenomenon whereby a smaller company, an “entrant,” usually with limited or scarce resources, successfully competes with more established businesses by offering its products or services—typically considered as inferior or low-quality—to markets that are overlooked by the more established businesses at much lower price. As the entrant continually improves its products or services, mainstream customers begin to subscribe to the entrant’s offerings to the point where the entrant dominates the market.

 

The New Law business model is considered disruptive because they serve an unmet need for the relevant market.  Like all great start-up ideas that succeed,  the model provides an effective, efficient and reliable solution to a problem worth solving.  With increased prevalence and market awareness, its quite likely that New Law will acquire a trajectory that will upset Big Law’s dominance over most legal markets. Mainstream customers are already beginning to switch to New Law; many New Law firms count Fortune 100 and Fortune 500 businesses among their clients.  To be sure, while clients may still tend to engage a Big Law firm for bet-the-company litigation or complex corporate deals, such matters are clearly exceptional, and clients are increasingly turning to New Law to handle more conventional, day-to-day and urgent legal work.

 

New Law is able to give Big Law a run for its money for two primary reasons. One of the reasons is, of course, cost-effectiveness. New Law provides simplified and affordable legal services, without unnecessary and costly bells and whistles. Big Law clients complain that they are overpaying firms for legal services. This isn’t surprising. Lavish offices, pressures to increase profits-per-partner, steep salaries, massive overheads—all these factors force Big Law firms to maximize the number of billable hours that their attorneys crank out. In fact, it is not unusual for these firms to have around a 2,000­­­ hour/year billable hour requirement.

 

New Law businesses, on the other hand, have embraced business models that do away with (or at least look beyond) the billable hour requirement. Most decrease overhead (and, thus overall cost to client) by doing away with expensive office space or adopting new, efficient technologies such as cloud-based document management, time-keeping and invoicing. Some also reduce cost is by dispensing with guaranteed salaries and paying attorneys only for work done. Others do not hire junior lawyers, who are expensive to train, and instead hire lawyers with relevant experience from Big Law firms. Others use unique fee structures. For example, they may offer flat-fee arrangements, hybrid fixed and variable fees, service packages, monthly subscription fees, and even deferred payment arrangements. A combination of these elements all translate to a significantly lowered price on legal services.

 

The other big reason is that that New Law businesses often employ—and, indeed, are frequently founded by—former Big Law attorneys. These attorneys have the pedigree and the rigorous training under their belt to deliver quality services. Up until a decade ago, lawyers working in Big Law firms traditionally faced one of two options to advance their careers—either make partner, or go in-house. With New Law, these lawyers have a multitude of attractive options to practice law at a high-level and are spared some of the darker aspects of Big Law, including, for example, lack of work-life balance, pressure for lawyers to be rainmakers in addition to fee-earning, as well as the economic uncertainties in law firms as competition increases and the share of legal work decreases as much work is done in-house. New Law eliminates these frustrations by implementing novel models and working arrangements for lawyers who wish to stay in private practice but not necessarily with the "baggage" that comes with it!

 

New Law is also seen as disruptive because they provide legal services to those who have been priced out of Big Law but who need the sophistication and experience of Big Law-experienced lawyers. A frequently overlooked but critical segment of the legal services market are startups and early-stage companies. These businesses, which can be as nascent as “two guys in a garage with an idea” to companies that are a little further along the development pipeline, will, at some point (and preferably early the process) need advice from a seasoned attorney.  At the outset and at the very least, every founder will want to have robust corporate legal documentation, whether for their business operations and relationships with customers and suppliers, or inter-se between founders and investors, in terms of management and administration of the company and inter-se rights and obligations.  Last but not the least, founders will need cogent advice on creation or, protection for and leveraging of intangible assets such as intellectual property, often the most valuable asset for a technology-related startup.

 

In our experience, most Asian founders are less than comfortable with using lawyers as key advisers very early in their evolution.  Since these businesses are usually cash-strapped, most, if not all, funds go directly to operational aspects or investing in the technology for the business. Very few startups can afford a Big Law attorney’s billing rate, which can be in the hundreds of dollars per hour. And few have the funds (or enough work) to justify hiring a full-time in-house general counsel.

 

Is there a market for high-quality, affordable legal services accessible to startups and early-stage companies?  We at Collyer Law LLC certainly think so!  Part 2 of this article will discuss in more details how we plan to strategize and implement our vision and mission as a New Law player, particularly through our twin-engineered (no pun intended) legal solutions, FirstContract and FirstCounsel.

 

Only time will tell whether New Law businesses will completely disrupt the incumbents in the business of law. Clearly, disruptive innovation is a process – not an overnight phenomenon. In any event, it’s an exciting time to be a New Law practitioner!

 

Azmul Haque
Tri-qualified Lawyer, Founder@CollyerLaw, #NewLaw Evangelist

 

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