Big Law Steps Into Uncertain Times

The legal profession sits at the nexus of dealmakers' worlds, from Wall Street to Silicon Valley to Washington. As regulations change and the threat of litigation rises, the importance of lawyers has never been greater.

Yet the legal industry itself has been confronting great pressures. The collapse of Dewey & LeBoeuf exposed the potentially fatal flaws in the bigger-is-better mantra that has swept through Big Law in recent decades. And business - throttled by the financial crisis - is still not booming.

Some big blue-chip firms, like Cravath, Swaine & Moore; Debevoise & Plimpton; and Cleary Gottlieb Steen & Hamilton have managed to navigate the industry's challenges successfully by sticking to their traditional ways, as Peter Lattman describes on Page 9. (My fellow New York Times columnist, James B. Stewart, has a poignant related essay on Page 8, reflecting upon his time as an associate at Cravath in the 1970s.)

So all is not bleak. Still, a more sweep ing transformation may be on the horizon. And it may look a lot like Axiom Law.

Axiom is a firm founded by Mark Harris, a former lawyer at the white-shoe firm Davis Polk & Wardwell. Mr. Harris is trying to rewrite the law firm business model. His firm, with some 900 lawyers, has no partners. The goal is to undercut the prices of the bigger firms on large cases and projects that require tens of thousands of hours. He hires lawyers of all stripes: some, from the biggest New York firms, do not have the drive or passion to become partners; others are lawyers who work from home.

Mr. Harris likens the difference between his firm and others to that between McKinsey & Company, the high-priced strategic consulting firm, and the consulting arm of PricewaterhouseCoopers. Cravath is like McKinsey, he says; Axiom is like PricewaterhouseCoopers. In the future, he imagines that companies will still hire the likes of Cravath for the biggest, most complicated work. But they will hire Axiom to trudge through projects that involve millions of pages of documentation and do not need to be done by an associate just out of law school billing $400 an hour. The law firms in the middle are likely to be squeezed.

“The legal industry is about to go through a transformational moment,” Mr. Harris says.

Perhaps change cannot come soon enough. Clients are unhappy, feeling overbilled and underserved. Lawyers are similarly miserable, feeling underpaid and overworked.

What happened to the legal industry?

The problem, many lawyers say, is “P.P.P.” (Some firms call it P.E.P.) P.P.P. stands for profit per partner. (P.E.P. is shorthand for profit per equity partner.) It has become the ultimate metric for measuring success among law firms. When American Lawyer magazine began publishing a ranking based on profit per partner in the early 1980s, it revolutionized the industry, but it also arguably led to a dangerous race among firms that left clients as a secondary priority.

Indeed, says Mr. Harris of Axiom, about three decades ago “the interests of law firms went from serving the clients to serving themselves.”

As Michael H. Trotter, a partner at Taylor English Duma in Atlanta, says in his book “Declining Prospects” that there are only a few ways to increase profit per partner. One way is for firms to “charge their clients more for what they do”; another is for them to “do more work for their clients by working more hours or using more lawyers”; a third is to acquire more clients; and the last option is for firms to “reduce their overhead by paying less rent, restraining the compensation of their lawyer-employees and other personnel.”

None of those options appear to be in the client's interest at all.

This is not a new lament.

A decade ago, Robert E. Hirshon, then president of the American Bar Association, declared that “the billable hour is fundamentally about quantity over quality, repetition over creativity.”

He explained that “because a lawyer's time is not an elastic variable, increased billable-hour requirements are squeezing out other aspects of what it means to be a lawyer.”

The focus on profits per partner is one reason so many companies have increasingly tried to move legal work away from big firms and have hired internal lawyers. And that means, Mr. Trotter says, that “the leverage that law firms have utilized to generate profits will go down and they aren't going to need as many associates.”

Depending on how the industry transforms its business model, an old joke may need to be rewritten.

A prospective client calls a lawyer, asking, “How much would you charge for answering three simple questions?”

The lawyer says, “A thousand dollars.”

“A thousand dollars!” the prospective client shouts. “That's very expensive, isn't it?”

“It certainly is,” the law yer replied. “Now, what's your third question?”