Big But Brittle: Economic Perspectives on the Future of the Law Firm in the New Economy

Abstract

This Article addresses three deceptively simple questions. First, why have law firms grown for over forty years, up to the onset of the recent recession, as quickly as they have? Second, why did law firms grow in the unusual configuration widely observed during that time? Third, should lawyers, clients, law students, and law schools expect these familiar trends in growth and configuration to reassert themselves as the economy improves, as they have after every recession since the 1970s? The various academic approaches to these questions to date are grounded in such notions as diversification, asset specificity, “tournament” theory, and reputational and agency-cost concerns at the level of the firm as a whole. The authors argue that these approaches do not explain or predict actual events very well, and thus offer little guidance for the future.

The authors suggest two perspectives that appear more consistent with the available empirical evidence, and thus may better predict future trends. The first perspective shows that when lawyers with appropriately complementary reputations and connections (“relational capital”) join together in a firm, they can each better exploit the value of their own relational capital and thus jointly create value greater than the sum of their individual contributions. The positive feedback created by an internal referral network among firm members generates growth for the firm and provides a bond among its members, albeit a relatively weak one. This perspective is new to the literature on law firm economics, and helps explain why large firms have long continued to grow despite apparent diseconomies of scale. It also suggests why firms may grow to large sizes yet be brittle enough to shed partners regularly in the process–and in some cases suddenly splinter altogether.

The second perspective analyzes large law firms using familiar economic principles concerning technological innovation and transaction costs, principles that have been largely overlooked in the literature on large firms. The authors argue that reductions in particular transaction costs and in the cost of certain key inputs are helpful in explaining a number of the trends in the staffing and pricing of legal services documented in recent years.

The authors apply these perspectives to derive a range of predictions for law firms and law schools in the years to come. The authors conclude that, despite rumors of the “Death of Big Law,” the large firm is here to stay. But the authors also conclude that the evolving configuration of large law firms has profound implications for practicing and aspiring lawyers, as well as for the law schools that prepare students for the increasingly global and competitive market for their services.