Axiom’s War On Biglaw

Axiom’s IPO application foreshadows problems for Biglaw.

Axiom’s war on Biglaw continues, and this time it’s making a move that Biglaw cannot, by definition, respond to.

Axiom, the alternative legal services provider founded in 2000, has been on a tear in recent years. Its most recently reported revenues, from 2017, came in at $300M for the year, about the same as an Am Law 150 firm. It has over 1,300 attorneys on staff, global reach, and high-powered clients eager for alternatives to traditional, pricey Biglaw. Axiom’s success has been one more example of how smartly deployed 21st-Century technology has allowed small startups to rocket to the top of well-established industries in relatively little time.

Late last month, Axiom dropped a potentially game-changing bombshell. The alternative legal services provider recently applied for an IPO in the U.S. We don’t know yet the terms of the IPO, or where the stock will be listed, or really much of anything other than the fact that an IPO is on the menu. What we do know is that Axiom is looking to turbocharge its growth, which has already been explosive for several years.

We’ve Got Stock, But No Options

For leadership of law firms that Axiom is competing with, this development is equal parts terrifying and frustrating. It’s terrifying in that the IPO threatens more growth by one of the companies that has been aggressively eating into what was traditionally a law-firm-only pool of work. And it’s frustrating because U.S.-based law firms have no equivalent countermeasures.

As I’ve discussed in this space previously, one of the major economic and organizational hurdles that law firms of today face is the ethical bar on ownership of firms by non-lawyers. The ethical rules are there with noble intention: we want to ensure that the biggest decisionmakers and stakeholders impacting our clients and their cases are all bound by the ethical rules that govern our profession.

There’s a healthy debate to be had over whether this aspiration is worth the limits it places on law firm development. In practice, it means law firm management is often composed of attorneys with limited or no organizational management training. It further limits the pool of non-attorney managers that law firms can turn towards, since law firms can’t offer equity in the company, as would be offered to most high-end management candidates. When you self-impose limits on the ways you can pay your staff, you self-impose limits on the quality of that staff.

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Shark Tank vs. Loan Sharks

As we’re now seeing with Axiom, the problem isn’t just limited to limiting how law firms attract and compensate their managers. The problem extends to how those firms finance their growth.

Growth takes cash, and IPOs are a great way to get cash. Take a successful company on a winning streak, offer to allow the public to buy a piece of equity, then take that investment money and grow the company further. In an ideal world the company makes money, the investors make money, and everyone ends up happy. That’s exactly what Axiom is hoping it can pull off, and it’s free to do so since it’s not a law firm.

Law firms don’t have this same luxury, which is one more reason why news of this IPO is so disheartening. For the same reason we can’t give equity in our firms to potential managers, we can’t sell equity to the non-JD-having public at large through an IPO. If a law firm wants to finance growth, its only options are to do so out of its own pocket or to take out a large loan.

Growing out of one’s own pocket is a fine goal, but it generally requires major sacrifices to income and stability that most law firm partners aren’t eager to take on. Plus, many projects will just be too expensive to self-finance. In those instances, law firms are left seeking gigantic business loans. Unlike IPOs, loans have to be repaid, on time and with interest tacked on. If a company that went IPO experiences slower-than-expected growth, its investors will grumble, but have little to no recourse. If a law firm’s loan-financed expansion doesn’t pan out, the firm and its partners may find themselves in serious legal jeopardy.

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In short, Axiom gets to go on Shark Tank. Biglaw gets to see the loan shark.

A Business Model That Belongs In A Museum

Biglaw is in a tough spot right now. Most large firms have barely finished clawing their way back to where they were prior to the Great Recession, despite roughly a decade of overall economic expansion in the U.S. Our customers are increasingly looking to decrease their spend with us, whether by dragging work back in house, or resorting to alternative providers such as Axiom or the Big 4 accounting firms. Work is increasingly funneling to either the absolute tip-top of the market, or to niche, commoditized boutiques, leaving a middle market that’s struggling to survive.

Axiom’s IPO should be read as both a warning sign and a wake-up call. In this environment, we need every tool and every innovation possible at our disposal to make our century-old business model relevant again.

Relaxing the rules on law firm ownership by non-attorneys seems as good a place to start as any. The UK has been experimenting with publicly owned and traded law firms for several years at this point, and the sky has yet to fall. There surely must be a way to allow firms to grant equity stakes in themselves while still insulating the legal decision-making from their non-attorney owners. Until we recognize that, we’re bringing a knife to a gun fight. If you’ve seen Indiana Jones, you know how that turns out.

Biglaw has lost ground to Axiom and its kind for the last two decades. We imposed the ethical rules on ourselves to protect both the public at large and the industry’s reputation. If those same ethical rules allow our space to become dominated by non-attorneys who aren’t bound by them, are they not doing more harm than good?

The time to move is now. Axiom isn’t waiting, so why should we?


James Goodnow

James Goodnow is an attorneycommentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of NLJ 250 firm Fennemore Craig. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.