Law firms’ shopping mall problem

The last time I went to a shopping mall was a week before Christmas. I had several people for whom I needed to acquire gifts (I’m an inveterate last-minute shopper), and I wanted to cover as little distance in as little time as I feasibly could to achieve that goal. The mall offered me convenient access to many different stores under one roof. But what’s interesting is that the mall itself did not sell me any goods or services of its own, other than two hours of parking. Everything I bought was from its tenants.

Empty shopping malls = seriously creepy.

Joshua Kubicki argues persuasively that the same model applies to law firms. (Not a flattering analogy, given the state of malls in 2019, but a pretty apt one.) In his essay “The Emerging Competitive Frontier in BigLaw is Practice Venturing,” Joshua contends that a large law firm’s myriad practice and industry groups are, effectively, standalone service businesses housed within a single platform that really only exists to host these businesses. The law firm’s true “customers” are not the firm’s clients, but its equity partners:

The firm is providing an ecosystem in which buyers (clients) and sellers (partners) can more easily connect and transact business. The firm itself is not producing or making anything other than facilitating exchanges of value between these two interdependent groups. While clients of the lawyers are paying a fee-for-service, the customers of the law firm, the equity partners, are paying for access to a business platform, much like store owners pay to be part of a shopping mall.  

This seems like a good model for understanding some of the most vexing problems in law firm management. For example, look at all the difficulties firms have encountered with cross-selling across their practice and industry groups.

In theory, proximity to other legal specialists  with deep client portfolios should be a business development gold mine. In practice, however, firms struggle to cross-sell because few lawyers are willing to risk referring “their” clients to their colleagues in other practice areas. But once you consider that these individuals aren’t “colleagues” so much as co-tenants running separate affiliated businesses in the same location, the problem becomes easier to understand. Baskin Robbins has little interest in referring its customers to The Gap one level down. 

So if the firm’s only clients are the equity partners in its various business units, what does it provide to those clients? Joshua identifies five benefits firms sell to their equity-partner customers: risk pooling (to combat practice cyclicality), shared services, branding, access to other specialties, and a funnel for new talent. There’s enough real value in these benefits to justify an individual practice group’s (read: standalone business’s) decision to remain within the firm. Or at least, there used to be.

Joshua relates how the immigration law practice at Epstein Becker pulled up stakes recently and moved out — but not to another full-service firm. The lawyers and staff moved en masse to Berry Appleman Leiden, a specialist immigration firm. Joshua surmises that the equity holders within the immigration practice were finding the benefits of the broad full-service platform less appealing at a time when immigration practice requires serious investments in technology and process improvement to stay competitive. Since Epstein Becker seemed happy to facilitate this move, the firm appears to agree that parting ways was the best option.

Joshua’s article goes on to make a number of other insightful points, but I want to dwell on the implications of this one. Because it’s not only immigration law practices that will need significant customization to their business model to stay afloat in a more demanding and competitive market.

The same would apply, for example, to labour and employment law groups: They will struggle to compete with specialty shops like Littler Mendelson and Ogletree Deakins, which turn a profit on increasingly low-margin work by running their operations very efficiently and building systems to collect client data and turn it into a value-added service. The same would apply to IP groups facing off against specialty boutiques, insurance law practices taking on insurance-focused giants, and so on. Litigation practices will need e-discovery and outcome prediction capacities. Corporate law groups will require investments in due diligence AI and contract management and analysis software.

Every individual practice group within the firm, in other words, will eventually require some specialized application or technician or relationship that will have value primarily or only to that group. It’s one thing for partners to underwrite the firm-wide costs of marketing personnel and law libraries and IT functionality, because these are features that deliver more or less the same benefits to all groups. But when individual practice and industry groups (the mini-businesses) engage in what Joshua calls “practice venturing,” things can take a sudden turn.

Practice venturing is designing a new business model through the process of discovering, testing, validating, and launching (and perhaps buying or selling) a new strategy and value proposition, a new market or customer segment, and a new business model. …  It is about reengineering a practice to better address client needs and opportunities. When done completely, often something new that departs from the traditional legal service model is created.

Practice venturing does bend (and sometimes breaks) the law firm business model …  [T]o succeed at practice venturing, the groups not only need to focus on validating their changing business, but also have to focus on organization adoption of their changing business. This creates stress, dissonance, confusion, and often outright hostility toward the practice group.

The law firm can make only so many concessions to its individual “tenants” before its other customers (the other equity partners) start asking why they’re paying for so many features that have no relevance to their own work.

In time, evolving client demand and competitive circumstances could eventually require each specialized legal business inside the law firm “mall” to figure out what structure and model will make it most competitive and profitable in its market. If the law firm can’t find a way to accommodate those structures and models within the firm, then the group, like Epstein Becker’s immigration practice, will migrate elsewhere to find what it needs.

Lots of space in this firm.

If this theory holds up, then there’s some serious turbulence on the way for those full-service law firms that are what we always suspected them of being: hotels for lawyers, malls for practice groups, farmer’s markets for legal services. They lack any real operational direction or managerial sophistication, and they are owned by people who don’t really value either one of these things. It’s probably not going to end well.

The winners, by contrast, figure to be those firms that are both culturally cohesive and operationally agile. The cohesion allows the firm to have a more mature and sophisticated relationship with its equity partners than simply landlord and tenant, and to persuade the partners that spending money to improve the competitiveness of one business unit will generate more profits and opportunities for everyone in the firm. The agility will allow it to assemble and plug into the firm’s infrastructure the specialized pieces that each business unit needs without bringing the whole platform down in a heap. 

Can we envision any firms with this combination of cohesion and flexibility that could make these kinds of adaptations? I think so. Here are a few headlines from the legal press that have turned up just in the last few months:

Subsidiary businesses, technology nurseries, data analysis applications, and lower-cost spinoffs are some real-world examples of what law firms can accomplish when they acknowledge and respond to growing competitive pressures on specific markets, practices, or industry groups. Some of these new initiatives will pay immediate dividends across the firm, which makes partner buy-in easier; but some of them — and I suspect in future, more of them — will have narrower applications whose immediate benefits will be clear only to certain segments of the firm. That’s when the real test of the firm’s leadership and cohesion begins. 

One last thought: The main reason why I go to malls so rarely, of course, is that I shop more frequently at the world’s biggest and most convenient mall at Amazon.com. There are still some purchases for which I need direct experience with the product and in-person service from an expert — shoes, clothes, maybe a “genius” at the Apple Store. But for most everything else, including a growing array of big-ticket items, I just go online. Law firms should think about that, too.



5 Comments

  1. Yvonne Nath

    Jordan, you know I am a fan of your writing. This is another very good article. I just wanted to make a minor point: that the analogy of mall tenants as lawyers in a law firm falls short due to the shareholder component. “Baskin Robbins has little interest in referring its customers to The Gap one level down.” Yet, at the end of the day, equity holders do care to refer work to other practices if if they (one would hope) trust one another with the client and there is an opportunity for others at the firm to help that client.

  2. Jordan Furlong

    Yvonne, thanks very much for your comment (and kind words)! You’re right that if there’s a foundational level of trust between and among a firm’s lawyers, then cross-selling and colleague-referencing becomes much easier, and the whole reason for even having a firm “clicks” as it ought to. This is what I was thinking of when I described the “cultural cohesion” of firms that successfully pull this off.

    Unfortunately, though, what I and others have encountered in many law firms are levels of mutual trust and reliability that are inadequate or even absent altogether. I’ve seen lawyers refusing to refer a client to another lawyer in the firm because they don’t think that lawyer is good enough to be trusted with the valuable client, or because they just don’t know the other lawyer well enough (and in large firms especially, it can be practically impossible to know all your partners well enough to trust your clients to them). Or the lawyer knows and trusts another lawyer at another firm more, and wants to send the client to this lawyer instead. I’ve even heard partners say that their biggest competitor is actually in their own firm, a “colleague” who angles to take the lawyer’s client work and relationships away.

    The key to this whole dynamic, of course, is the lawyer’s unconscious description of the client as “mine” — this sense that the ability to refer a client one way or another belongs to the lawyer, not the firm. I think that if firms could ever wrest control of the client relationship away from individual lawyers — so that the firm can say “the client is ours” — that would completely change the way this works. But I don’t think that’s a realistic goal — that’s not how either lawyers or clients regard their relationship now.

    Which is just another reason, on top of the ones I described in the post, why law firms are much more fragile enterprises than they often appear. A law firm with low levels of intra-lawyer trust and high levels of lawyer autonomy over clients is a law firm that has a very hard time in front of it.

  3. Mike O'Horo

    You nailed it, Jordan. To you mall metaphor, let me add the issue of varying margins. While Ogletree or Littler’s investments in performance improvement enable them to be profitable at lower margins, Employment practices in full-service firms face the same pricing limits without the benefit those margin-neutralizing investments. Other, higher-margin practices subsidize the partner compensation and overhead of the Employment practice. Baskin-Robbins doesn’t have to subsidize the overhead of the poor-performing stores in the mall.

    I see a growing number of senior lawyers leaving BigLaw firms for boutiques, virtual firms, and solo practices, where they report being able to charge a third less, work a third less, and make more money, all without the psychic drain of the politics and internecine warfare of their former firms.

    As they say in any investigation, “follow the money.” It all comes down to compensation. The 20+ boom years preceding 2008 created a compensation reality — and continuing expectation — that can’t be sustained now that Cost of Sales is a meaningful expense line item.

  4. John Eric Pollabauer

    I agree wholeheartedly with Mike.
    What really annoyed me was working with people who constantly resisted change and could be heard arguing “what’s in it for me now?” And oh, yes, I am oh so much more of a happier camper since having left


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