The Law Firm Disrupted: A Solution to the Overcapacity Quandary

Overcapacity was part of the legal market conversation before last week, but the job cuts at Cooley raised the decibel level from a steady murmur to a roar.

While earlier this year, certain firms—including Cooley, as well as Gunderson Dettmer

Stough Villeneuve Franklin & Hachigian and Kirkland & Ellis—quietly sought to ease lawyers out the door, Cooley this time found no way around a blunt announcement that it was letting go of 150 associates and staffers.

For the seeds of this decision, look back to 2021, when Cooley—buoyed by its emerging companies practice—succeeded in growing its revenue by an astonishing 28%. That sort of jump can’t happen without a lot of worker bees putting in the work on IPOs, de-SPAC deals and other transactions. Unsurprisingly, the firm’s head count grew by over 17%, giving the firm over 250 more FTE lawyers last year compared with the previous year.

Combine the height of that jump with today’s halting tech economy, and it’s a fair assumption that the firm didn’t have a lot of other options. But what about other firms struggling with their own overcapacity quandary, albeit without some of the extreme factors that Cooley faced? Do they have any levers to pull that can spare them from becoming the subject of a parade of headlines in this and other legal publications?

As Washington, D.C.-based recruiter Dan Binstock wrote on our site recently, repurposing underutilized personnel is easier said than done. Associates might be happier to land in a

new practice area than to land a severance package, but that doesn’t necessarily equate to long-term satisfaction. And partners may agree to take on their new assignees for the good of the team, but that doesn’t mean they’ll be thrilled about it. Furthermore, they’ll also be cognizant that clients won’t be thrilled about being billed for a fourth-year associate with zero years of relevant experience.

Binstock doesn’t argue that this repurposing is a fool’s errand, emphasizing the value of open communications between associates, partners and also clients—with discounting potentially a part of that discussion.

Now that we’ve introduced discounting, what about an even more substantial shift of the law firm financial model for the sake of avoiding layoffs? Burford Capital co-chief operating officer David Perla approached me about the prospect of firms using this moment to deploy underutilized lawyers toward affirmative litigation, with the aid of outside capital.

This would be more of a philosophical shift rather than a complete upheaval. In this scenario, lawyers would be shifting focus, while still using the core skills they’ve developed. One example would be taking IP specialists and embedding them with established litigators to build a patent litigation team. Or former corporate associates helping to dig into some of the forensic work that underpins securities litigation.

“The firms that do have a litigation practice and have specialty practices that haven’t historically leveraged those specialties into their litigation have opportunities here,” Perla says. “Firms that have risk-based practices in limited groups that have treated those as exceptions to the firm’s preference for hourly billings can expand this appetite for risk.”

The obvious caveat is of course Perla and other funders have a stake in increasing a law firm’s comfort with bringing more cases on contingency—with third-party finance serving as a tool to mitigate some of this risk. A bigger appetite means more investment opportunities to deploy capital. That’s significant in a slowing business cycle where the prospect of noncorrelated returns has heightened appeal and funders are competing to find the strongest bets.

They have to be good cases too, backed by talented teams of attorneys. And Perla is convinced that firms can find the former while assembling the latter. “If they believe in the economics, they can find their way around the training and the pricing,” Perla says

But his business isn’t the one that has to upend its habit of billing by the hour and also settle younger attorneys into new roles that diverge from past experience. Yet other choices could be even more unpalatable.

In the News

>> We’re not finished with the Burford conversation yet. Looking across the Atlantic,  Burford CIO Jonathan Molot is enthusiastic about how the alternative business structure

(ABS) model in place in England provides a pathway for funders to invest directly in firms. 

His comparison is several law firm IPOs that have yielded disappointing results. Of course, outside of Arizona, this discussion remains purely theoretical in the U.S. 

>> Meanwhile, for the work that is getting done, the dance of billing rate increases combined with discounts is already underway between firms and clients, according to my colleague Andrew Maloney. “Is it widespread? I don’t think so,” said consultant Brad Hildebrandt. “I think we’re seeing it, but it doesn’t come anywhere near regular billing.”

>> Regardless of the frequency, this practice is not music to the ears of Lex Fusion cofounder chief strategy officer Casey Flaherty, who has a lengthy screed on the 3 Geeks and the Law blog, about the always fraught dynamics of pricing and law firm-client relationships. In short, he’s skeptical about the “marginal utility of simply pressing harder on the traditional levers of cost control”: discounts, panels, RFPs, outside counsel guidelines, AFAs. Sometimes, he argues, doing nothing is better than doing the wrong things.