This is the next post in my series on the unwinding of the attorney bubble. My last article discussed why the lawyer bubble is bursting in 2018. Rapid decline in the demand for legal services (especially in the areas of criminal defense, personal injury, and employment related law) is resulting in the suffering of quite a few firms. This situation has led to rapid consolidation amongst the larger law firms. While data isn’t really available for the plight of solos and 2-3 attorney firms, I’m sure we’re seeing consolidation there as well. As I’ve discussed previously, when bubbles burst they do so violently and quickly. As a result, the end of 2018 is going to look a lot different then where we are at the start of May (which is way different than where we were at the start of the year). This is going to result in a lot of attorneys looking like this:
With a select few looking like this:
Let’s take a look at what the remainder of the year is likely to bring.
Law firms will continue to consolidate at a rapid pace and a smaller number of firms will increasingly gobble up profits
I explained in my last article that “big law” firms have been setting a new record every year for mergers and consolidations. 2018 is looking like it’s going to set another record. We can expect to see these same types of trends in smaller firms. 2-3 attorney firms will likely become 3-4 attorney firms. 3-4 attorney firms will become 4-8 person firms and so on. This will result in there being fewer and fewer solo practitioners. This consolidation will be due to a simple reason. This reason is the fact that firms, which are more successful, tend to be that way due to superior business practices (which I’ll discuss in my next article). As demand continues to dry up, those business practices will allow such firms to survive while smaller, less efficient, firms fail. The amount of work that was going to those smaller firms will then be obtained by the firms which were more successful in the first place.
The math of the aforementioned consolidation will look like something like this – Firm “A” has three attorneys (two partners and one associate) in addition to support staff. Firm “B” is a solo who is struggling, as is Firm “C.” Neither B nor C have enough business to stay afloat and both close up shop. What work that B and C did have then goes to A. This leaves A in need of an additional associate. A hires B to be their fourth attorney. C then realizes that careers in law have dried up and they begin the next stage of their working career. This involves finding some non-law related job and driving for Uber at night.
If you think that last sentence was a joke then think again. I’ve received at least five Uber/Lyft rides, in the last eighteen months or so, from attorneys who were driving at night due to not having enough business during the day.
Another characteristic of the coming consolidation will be that fewer and fewer firms will suck up larger and larger percentages of the profits. This is, again, due to efficiencies gained from simply being a better business and having lower client acquisition costs. It’s also due to the fact that, under the hypothetical above, the revenue of three firms would now be flowing into one. Will there still be solo practitioners in the near future? Yes. There will simply be far fewer of them.
The provision of legal services will be seen as a commodity and many practice areas will go away or dramatically decline
Let’s be blunt and brutally honest. Most attorneys see themselves as providing a unique legal service. The bottom line, however, is that there are a large number of legal matters that are going to have essentially the same outcome regardless of who handles them. A few examples of such matters include:
- Drafting business formation documents
- Drafting a simple will
- Preparing an uncontested divorce
- Preparing stipulations, orders, and parenting agreements in family law cases
- The sealing and expungement of criminal records
- Drafting simple land/real estate contracts
This list could have been much longer, but you get the point. Due to the extreme excess of attorneys, the handling of such matters has essentially become a commodity (Forbes actually referred to the lawyer “commoditization crisis” in this article). Like any other commodity, these services will soon be handled, darn near exclusively, by large companies who can deliver services rapidly, conveniently, and efficiently. An example would be how H & R Block handles simple tax returns. For a legal example, read this article from the Financial Post about the Axess Law Firm, which provides legal services out of Walmart locations. The Axess’ firm’s model is now being copied, as the ABA explained here. One firm, modeling Axess’ success, is The Law Store, which has opened multiple Walmart locations in Missouri, Texas, and is continuing to expand. Again, these types of models will lead to a small number of firms doing a bulk of the work.
So, instead of ten law firms each performing five record expungements a month, you’ll see one law firm performing fifty. This, in turn, will put the financial hurt on many solos and small firms and force them to go under.
Another characteristic of the bursting bubble is going to be a rapid decline of many practice areas. In the very near future DUI cases, car accidents, and other practice areas will exist in such small numbers that they will no longer be the “bread and butter” for many firms. These, instead, will become secondary practice areas that exist within larger firms. The statistics supporting these facts were laid out in my previous articles.
Many attorneys will be shell shocked as the profession melts down
What’s going to be interesting is the extent to which many attorneys are going to be shell shocked as the profession melts down. In 2007 the financial sector was quickly going to hell but the average American didn’t realize it. It wasn’t until the average person couldn’t turn on the news without hearing about the “financial crisis” that they realized there was a problem. Similarly, the legal profession is in a state of free fall and, interestingly enough, most attorneys think the situation somehow doesn’t apply to them or that the meltdown is off in the distant future. These attorneys are, sadly, in for a rude awakening.
What trends are you seeing in your business in 2018? Please chime in through the comment form below.