Biglaw

Amazon, Etsy, And Biglaw

How a website for selling homemade doodads may hold the key to Biglaw’s salvation.

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Amazon was one of the first companies to recognize the importance of having a best-in-class supply chain.  It spent years building up its systems rather than turning a profit.  Today, its logistical advantage has given it an unassailable position in the online retail market.  No one beats Amazon — at shipping, on price, or on most any metric you can think of.

Amazon keeps expanding into new markets and devouring them, with nearly every dollar of revenue being pumped into further expansion.  The more Amazon’s competitors struggle, the bigger Amazon’s lead gets.  It will keep accruing new advantages while its competitors lose what edge they had.   It may be just a matter of time before it truly becomes “the everything store.”

Amazon was on my mind while reading a new report on legal market trends issued earlier this month by Georgetown University and Thomson Reuters.  The report, which tracks performance metrics for law firms from the top of the market on to the midsize, was full of the same kinds of dispiriting data that have plagued much of the industry since the Great Recession.

Growth remains flat overall across the profession, with the Am Law 200 firms’ revenue dropping again for the third year running.  The number of attorneys in the legal world continues to rise, this year up 1.3%, while demand for legal services remains flat, meaning more lawyers dividing up the same amount of work.  Rates charged for legal work modestly increased, but the actual price ultimately charged and collected for that work remains about the same.  Translation: firms are raising their rack rates, but raising discounts almost in lockstep, which gives the appearance of growth without an actual effect.

Despite the overall growth of the economy over the last year, and the Dow continuing to climb to record heights, the legal industry has had trouble capturing that growth.  The reasons cited in the report are some of the same problems we’ve been talking about in this column over the past months.  Increasing competition from non-traditional legal providers.  Continued client pressure to decrease rates and commoditize practices.  A continuing swing of the pendulum toward in-house legal spend and away from traditional law firms.  The market for legal services is getting harder and harder for midsize and many large law firms to crack.

One segment of the legal market continued to outpace the rest in growth, though.  While midsized firms stayed stagnant and the Am Law 101-200 declined, the Am Law 100 grew by 2% last year.  In fact, wherever there were gains reported in the market, they were typically concentrated in the top 100 firms.

Interestingly, the gains weren’t spread over the top 100 firms evenly.  Per the report, most of the benefits accrued at the top of the heap.  The top three firms in the Am Law 100 accounted for 10% of the group’s total revenue, more than the bottom 20 firms combined.  In fact, fully 2/3 of the increases in revenues last year were concentrated in just the top 20 firms.

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In short, the power players at the top of the market are consolidating their power and growing, while their competitors are jogging in place or falling behind.  And if these market conditions hold, that spells additional challenges for the rest of the best, the “hollow middle” just outside the Am Law 100, that is struggling to find an identity following the market shakeups of the last decade.

When strength begets strength, it gets harder and harder to displace the entrenched powers that be.  We see it all the time in the sports world.  Of the 113 World Series that have been played, the Yankees have won 27, nearly a full quarter.  In the NFL, which has the strictest salary cap of any major American sport, we see Tom Brady and the New England Patriots heading to their eighth Super Bowl in 16 years.  Over in Europe, where salary caps are basically nonexistent, Spain’s top soccer league has played for 86 seasons.  Two teams, Reál Madrid and Barcelona, have won 57 of those championships, including 17 of the last 20.  It’s a self-reinforcing cycle where the champions get the fans, the fans bring in the money, the money brings in the best players, and the best players end up the champions.

It’s the same in business as it is in sports.  Getting a lead on the competition can lead to ever-accruing advantages.  Amazon played its supply chain advantage to the hilt, and its owner is now possibly the wealthiest person in history.  And now the world’s biggest law firms are getting stronger while the rest of the pack flounders.  When the next economic downturn comes around, the gap between the haves and have-lesses may spread even further.  What’s to stop one of those firms from making a play to become Biglaw’s Amazon, “the everything firm” that can’t be beat on price, services, resources, or name?

Here’s where I finally have some good news.  First, there are structural barriers that would prevent any firm from having a true monopoly.  As a profession, we thankfully take that whole “conflict of interest” thing pretty seriously, which means as long as there are cases being filed and deals being cut, there will always have to be different law firms on both sides.  There’s also the issue of rate disparity between regions.  Lawyers tend to cost more in Manhattan than in Milwaukee, which makes partnering across those regions difficult.

But the real reason I have hope is Etsy, the website where you can buy handmade Nicolas Cage stamps, sushi print socks, and other items that scream “why?”  This online retailer has survived the Amazon stranglehold by being the living embodiment of the long tail.  Its founders recognized that there was a vast supply of creators out there looking for a place to sell their work.  Etsy tapped into that unused supply and gave it a platform.  Creators that were too small for Amazon’s store suddenly had a market of their own.  Even the everything store isn’t going to carry too many knitted cross-sections of the human eye.

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The gap between Etsy and a law firm is narrower than you might expect.  As long as the supply of attorneys in the world remains abundant, some of those attorneys will choose to pool their resources and try to help each other connect with clients.  No firm will likely ever so dominate the market that a smart, dedicated group of JDs can’t try to break into that market.  With apologies to Jeff Goldblum: law finds a way.

James Goodnow

James Goodnow is an attorney, commentator, and Above the Law columnist. He is a graduate of Harvard Law School and the co-author of Motivating Millennials, which hit number one on Amazon in the business management and legal communications categories. You can connect with James on Twitter (@JamesGoodnow) or by email at jgoodnow@fclaw.com.

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