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The Big Office: Big Law’s Obstacle to Changing Real Estate Cost Structure

If necessity is the mother of invention, then Alberta should be a nursery of new ideas in the coming months.
With the world in pandemic paralysis, petroleum producing jurisdictions have been forced to double-down on hard times by the geopolitics of oil. Yesterday, the President and CEO of the National Bank (Louis Vachon) aptly characterized the latter as “an act of economic warfare”. The twin crises will force companies, big and small, to reimagine themselves to survive. A key feature will certainly be cost constraint.

Big Law is no exception. To survive (let alone remain competitive), Big Law would be wise to lower its costs in an effort to lower their charge out to clients. However, there are economic and cultural reasons why this is not likely to occur in a meaningful or impactful way. Big Law’s Big Office is far from cost efficient.

The Big Office: Big Law’s Obstacle to Changing Real Estate Cost Structure

The attributes are familiar. Opulent finishings, furnishings and art collections – worth millions. A separate office for each lawyer. The Wall Street Journal tells us that on average partner offices occupy 225 sf, with associate offices taking up 150 sf. Support staff space is predetermined by a 2 or 3 to 1 sharing ratio with lawyers. Ample and luxurious meeting rooms and reception areas. A law library and paper file storage rooms in the digital age (let alone external storage for paper files). Full accounting and marketing staff in a downtown office in the telecommunications age. An internal staircase cored through the building’s floor plate.

A commercial kitchen and dining facilities. As the musician Beck said in his song Nitemare Hippy Girl, “she’s a witness to her own glory”. The purpose of the Big Office was never really utility so much as creating a monument to Big Law. This
line of thinking seems to belong more in the 1970s than it does in the 21st century. The present problem for Big Law is how to change its real estate cost exposure, when many of these commercial decisions have already been made.

Big Law typically holds 10-year lease terms. In this era, that usually means higher lease rates agreed upon in economically better times. In the post Covid-19 age of telecommuting though, Big Law can hardly hand back unused rooms to the landlord, one at a time. Combine higher lease rates with the amortization of an expensive Big Office, and you have a largely static operating expense stream. With sunk operating costs and a lost opportunity to implement adaptive cost reductions, the Big Office inhibits Big Law from changing its real estate cost structure.

There are yet other factors. How does Big Law increase the utilization of its space if an expensive renovation would be required to make that change? Converting a law library or creating a centralized support staff pool would require yet more capital investment. And what about in periods of growth? Hiring additional lawyers and staff means securing additional office space, built out to match the current office’s aesthetic and design. More furniture, more art, more meeting rooms. It is a treadmill that will take years for Big Law to get off, even if it wanted.

So, what is New Law doing differently to cut its exposure to hefty real estate costs? Well, a few things:

  • New Law firms tend to take on much shorter lease terms, creating market points for dealing with office growth or retraction.
  • New Law tends to shy away from the idea of a dedicated office per lawyer. In an age where lawyers attend meetings in client offices, or on Zoom calls, there is no point in paying for an unused cube of space.
  • New Law tends to place each lawyer’s desk to sit in an open office concept in the style of Internal Co-Working. What remains to be seen post Covid-19 is the balance between the economics of a more open plan, and infection controls.
  • New Law lawyers tend to have a lot of freedom around whether work is completed remotely or in the office itself – a trend likely to be accelerated by the quarantine and even younger professionals’ own preferences.
  • Word processing and paralegal support work, if even required, are done remotely by consultants with their own offices.
    Accounting and Marketing are managed by software in the first instance, with actual support work done remotely by consultants working from their own offices.
  • New Law firms aim to run paperless offices, negating the need for substantial storage space or storage furniture.
  • New Law offices more closely mirror the degree of opulence in their clients’ offices. Class B office space is perfectly fine and, most importantly, shows clients what their money is not being wasted on.

The foregoing strategies greatly reduce a firm’s exposure to real estate burn, which is one reason New Law can provide senior lawyers to clients for much lower hourly rates.

In our own experiment at CITO Energy Group, we have managed to reduce our operating costs per month down to about $1000 per person. This opens the door for real value delivery to clients – unhampered by historical decisions about capital and leasing. It is an exciting new cost model that drives us to grow New Law every day. As Beck also said on Lord Only Knows, every day is a “hot dog dance party” and we think it’s time to dance to a different tune.