In the late 19th Century, large law firms (defined at the time as having four or more attorneys) began to emerge in order to meet the demands of businesses growing and requiring increasingly specialized legal services. These firms began with a small number and grew to more than 1,000 in 1925. The “Cravath system” was created in the early 1900s. It gave law firms the modern pyramid shape with many associates serving a few partners. Most law firms still use this pyramid structure today.
In the 1960s the modern large law firms began to emerge, as corporate America became the target of increased regulation. For several decades, the large firms thrived. After the M&A boom in the 1980s, large law firms were faced with the rise of alternative service providers, technology, and financial crises.
In recent years, the legal profession has witnessed the rise of a new structure for law firms.
The virtual or distributed law firm industry has grown rapidly since 2002 with FisherBroyles, followed by a gradual addition of other players (such as Rimon Law and Potomac Law Group) before exploding during Covid. These firms provide their lawyers with a new approach to practicing law.
Distributed law firms give their lawyers the freedom to work from anywhere, set their own billing rates, and bill according to their requirements. They also provide a lean and non-bureaucratic administration model. These firms offer support similar to traditional firms but without the extra perks. The profit margin of each lawyer is increased by avoiding large leases, staff salaries and other unnecessary expenses.
Although the adoption of the distributed model has been slow, the remote working model has helped. Some distributed firms have hundreds of lawyers now, including many former AmLaw 100 partners.
The majority of partners at distributed law firms work from home or use office sharing arrangements and share paralegals on a per diem basis. Most partners in distributed law firms work at home or share office space, and paralegals are shared on a daily basis.
Wells Fargo Legal Specialty Group, in a survey conducted 2023, reported a 10% decline in productivity (hours charged) amongst the top-grossing U.S. firms. The group attributed this drop to fewer legal services being demanded. Although both demand and productivity had decreased, revenue and hiring each had increased by around 4%. Increased billing rates are responsible for the increase in revenue.
A temporary measure is to increase billing rates in order to compensate for a decline in demand. Clients no longer have the same loyalty to law firms and are looking for firms that offer a comparable level of service with a lower rate and bill less hours. Law firm partners are stressed by the prospect of competing in a larger labor market, billing fewer hours, and selling clients at higher rates. This can be a major challenge to retaining talent. Will this added stress lead more partners to move from Big Law towards the distributed model of law?
Big Law partners have become accustomed to being well taken care of, and they are happy with a credible brand on their card. What else can these traditional big firms offer their partners? What keeps them there, besides inertia and fear of change? Many partners are finding that they no longer need to work for a large firm to practice law. They can serve their clients just as effectively as solo practitioners or in much smaller firms.
It is possible that partners who are leaving large law firms to set up a solo practice or a small firm do not have time to begin their own business. A small or solo firm requires the same skills as a startup. You must keep books, get paid, develop business, hire staff, remain knowledgeable and competitive, have access to state-of-the-art technologies, purchase insurance and much more. Most small and solo firms spend between 30-40% on non-revenue generating activities.
A distributed law firm allows partners to work like solo practitioners, but with the full support of their firm, a strong brand, stable operations and an increase in pay. The model of a distributed law firm has made it easy to transition from Big Law into a more solo-like environment.
Even distributed law firms are evolving. Some firms (like Aliant – a global distributed firm) treat their lawyers like clients. They offer the same comprehensive support as a traditional firm, but with the independence, flexibility and higher profits of a distributed law firm. In addition, they provide a bespoke service selection and robust business development and sale support. This is an innovative approach to treating law practice as a business, and law firm partners as clients of this business. This mindset puts the customer first and makes lawyers happy.
Lawyers are looking for ways to retain clients, charge less, and earn more. This has led to a significant increase in the number of distributed law firms. The AmLaw100 firms have not made it clear if they see the distributed model a threat, but the signs are there. The distributed model, which can offer lawyers independence, profitability and depth of practice in addition to credibility, may replace many Cravath System law firms.
The article Evolution of Distributed Law Firms first appeared on Attorney at Law Magazine.