Now that 2016 is more than a month behind us, law firms have moved through reporting the year’s financial results to partners and into compensation discussions. This is the time of year when equity partners puff up their chests and emphasize their importance to the firms and compensation committee members attempt to placate thousands of outsized egos. From the early reports, 2016 was another decent year for many large (e.g., AmLaw 200) law firms. The top 100 were up, collectively, about 4% in revenue and the next 100 up about 1% in revenue. Not the salad days prior to 2008, but certainly not the armageddon many feared.
When I said “decent year,” I really meant a disastrous year for clients, junior partners, associates, law firm staffs, and the legal profession generally. But, a decent year for equity partners in many firms (a 1% average revenue increase strongly suggests some firms had a down year). Before I go further, you may want me to clarify the first sentence of this paragraph. Why disastrous? Well, because anything that masks what is really happening in the industry—in this case large law firm rate increases that offset declining productivity, decreased demand, and increased costs—helps most lawyers deny that a different future already has arrived. And, that brings us to white dwarfs.
A Bit of Astronomy
Look up into the night sky and you will see a lot of stars. When you look at the Milky Way, about 97% of the stars you see in it are neutron stars (our Sun is a yellow dwarf). But, sprinkled among the neutron stars are white dwarfs. Not to be insulting, but a white dwarf is a star that didn’t make it.
We don’t want to get too far afield in this post, so let’s go with the following summary genealogy. A star begins growing. Some will grow into red giants. Some of the red giants will get rid of their outer layers, forming planetary nebulas (not really planets, think instead “gas cloud”). What remains of the red giant after getting rid of the outer layers is the white dwarf.
The white dwarf is dying. It does not have a source of energy so it cannot sustain itself. It is slowly degenerating. Now by slowly, I mean billions and billions of years to degenerate, but it is degenerating. Eventually, it will reach a point where it will become known as a black dwarf, or it may combine with a nearby star, or it may explode. Given the long time horizon for white dwarfs, we really don’t know what will happen at the final stage, we just have guesses.
Back to Law Firms
While the AmLaw 100 saw revenues grow almost 4%, the AmLaw 50 saw revenues grow an average of 5% and the top 20 firms saw even better performance. For many years, the top 20 firms have been pulling away from the rest of the AmLaw 100 and early results tell us that trend continued in 2016.
We can think of the top 20 firms as the yellow dwarfs of the legal industry. They made it. They have not become immortal, just as our Sun will eventually reach its endpoint, but they have reached a point where success seems to be with them for the foreseeable future.
That leaves us 180 firms that have not achieved yellow dwarf status. Of the 180 firms, some number will make it to yellow dwarf status. We don’t know which ones or when. “Legalology” is less advanced than cosmology.
Since not all of the 180 will make it to yellow dwarf status, what will happen to the rest? Well, we are seeing that question answered each year. Some will merge with nearby stars (other firms). Some will quickly degenerate and die. Others, will take a long time to fade away and it is fair to say we don’t know what will happen to them.
Beware the White Dwarfs
We can rant and rave, bay at the moon like wolves in the night, or hide our heads under blankets, but nothing we do will change what is happening in the night sky. White dwarfs will fade away. They won’t get a new source of energy. Combining with another star is an exit strategy, but the white dwarf goes away.
Most equity partners at large firms (other than the top 20) will look at the results for 2016, shake their head sadly that the go-go days of law firm growth are gone, and go back to work. They aren’t starving, their firm hasn’t collapsed, and all the naysayers were proved wrong. In 2017, they will need to scramble a bit more, fight a bit harder, and tweak what they do, but thank goodness they only have a few years until retirement. They can weather the storm.
That, of course, is why 2016 was a disaster. The platform is not visibly burning. For many, it is hard to see any smoke. Partners overwhelmingly oppose change (almost 70% on the last survey I saw). To them, even if the naysayers are correct and even if the end is coming, they can make it. All they need to do is get to retirement. The fire may be there, but since they can’t see it or smell it, they chose to ignore it. As a white dwarf firm, it probably has a long time before the end finally comes.
In the past, I have suggested that we let the white dwarfs be white dwarfs , that is, let large firms be what they want to be. If the large law firm equity partners are content to let their firms disappear (after they retire, of course) and they own the firms, who are we to tell them to run their businesses otherwise? New legal services organizations are rising and some of them will take the place of law firms. Some of the firms will survive, and we can presume there will be enough lawyers to staff those firms and meet the demand for legal services pulled from large law firms and not handled in-house. So, while entertaining to watch, what is the big deal?
The big deal is not the large law firms. The big deal is lawyers. For society to function, we need governance systems. Our governance system is the rule of law and the institutions that create and implement it. If those institutions change, but we still have individuals skilled in creating and implementing law, then we will adapt. But, if the demise of the institutions brings down those who create and implement law, the future will dim.
Richard and Daniel Susskind have taken their best shot at demonstrating that whatever lawyers may have added to society in the past, that “thing” is being replaced by computers. To paraphrase the old song, “whatever humans can do, computers can do better.” The slow death of white dwarf law firms won’t matter because computers will step in to handle some, many, most of the “things” those lawyers did. Perhaps a few things will remain in the fragile hands of humans, but our time (like that of other professionals, the Susskinds are agnostic on the demise of professions) has passed.
This is the trick. Some of what lawyers do can be automated. Over time, that will increase. If we take a very long view—50 years or more—we can imagine everything lawyers do being taken over by computers. If that happens this discussion is moot (or as many clients would say, it is “mute”). But, some of what lawyers do involves normative decision making. A lawyer may tell a client he can do something, but that he shouldn’t do it. A judge may decide he could rule for the plaintiff, but it would be better if he ruled for the defendant. A jury can decide the defendant is innocent even though there is strong evidence of guilt, because they are swayed by the circumstances of the crime. Much of what lawyers do does not get written into caselaw, into contracts, into policies, or into legislation. Through persuasion, custom, appeal to the higher virtues in all of us, or simply through arguing the pragmatics of a situation, lawyers shape what happens each day.
The question for those who look forward to our computer overlords is not whether we are willing to have computers do the simple, routine, or automated stuff, it is whether we are willing to turn over our humaneness—our destiny—to computers. It is easy to argue that using computers to cure or prevent cancer is for the better good. Is it as easy to say a computer should decide whether to send the abused spouse to jail for a murder? What about deciding whether to prosecute? What about deciding whether to bring it to the prosecutor?
Those who pay the invoices of white dwarf law firms should care about the white dwarfs. For the rest of us, worrying about the white dwarfs diverts our attention from the real issues facing lawyers. The annual debate about which firms are neutron stars and which ones are white dwarfs, and then how fast each white dwarf is degenerating, is better left to the law firm leaders and those clients who prefer to look to the past rather than embrace the future. For the rest of us, it is (well past) time to focus on why lawyers are important to society and how we can evolve so that lawyers do not turn into white dwarfs or quickly degenerate into black dwarfs.