It's a moment some have seen coming for awhile: rising rates by Big Law combined with a decentralization of legal talent (be it to platforms like LawTrades or to more in-house lawyers), and suddenly you have a situation for legal arbitrage.

Let's back up. In the 2024 Report on the State of the Legal Market, published by Thomson Reuters this week, is the finding that "many law firms have seen their ability to collect on those increasing rates falter, and clients have become more aggressive about trying to tier work to lower-cost firms." In other words, as Cecilia Ziniti, former Amazon in-house counsel posted to X, "The legal market predictably responds to sky high big law rates + AI + in-house lawyers being closer to the business. What a time to be a lawyer!"

And she's not alone. Back in April, Alex Su wrote in Off The Record that "Biglaw’s excessive focus on profits per equity partner (PPEP) will create a big opportunity for low cost providers in the near future." He added that "The problem though, is that when you raise prices, demand goes down. Because not everyone wants to pay more! They’ll either find another firm, or look for another way to get things done." And, guess what: they have!

AI has rushed in to take on many smaller, more rote legal tasks, and will continue to grow its share of that work. Meanwhile, what Su calls "low-cost providers", or regional firms, ex-Big Law attorneys striking out on their own, or contract lawyers working through platforms like Lawtrades, "are going gangbusters right now." This in turn has led to the growth of legal operations. "Legal ops focuses on process issues so in-house lawyers can focus on what they do best," notes Su. "That means advising on change management, updating processes, implementing technology, or finding new ways to get work done. They’re uniquely positioned because they can take a bird’s eye view of how legal work is done, and bring a more neutral view on risk and change."

Declining Profits

As the Reuters report notes, billing rates at major firms rose between 6-8% in 2023, and is on track to do the same in 2024. But just because "clients have been taking their work elsewhere…Big Law firms just don’t necessarily feel it."

THE VERDICT:

It's about time the legal industry underwent some serious changes. It appears the shift in tech and economic forces are doing what they do best—bringing about structural upheaval.