With the downturn in the economy you are now starting to hear a lot about overcapacity. You hear, for example, that the U.S. car industry is suffering from a great deal of overcapacity. If you listen carefully enough you hear about some Big Law firms suffering from overcapacity. I can assure you that smaller law firms and solo practitioners suffer from overcapacity as well.
All of this deals with a concept in economics called "capacity utilization". This refers to the extent to
which any enterprise, including the United States government, uses its installed productive capacity. In short, it refers to the relationship between the potential output that could be produced and the actual output that is produced by any enterprise with installed equipment. If market demand grow, then capacity utilization rises, and if demand weakens then it falls off.
The key to me is the reference to installed equipment. You might think that such a thing mainly applies to factories and such. But, I am here to tell you that in a broader sense it refers to law firms as well. Okay, maybe we should not call it equipment as some of it is equipment and some of it is human resources. I often call it infrastructure. In terms of law firms it deals with the amount of office space a firm has on long term leases, the amount of furnishings and tech it has employed, the number of staff the firm employs, and the number of lawyers it has working for the firm.
By these measurements, traditional law firms are designed (intentionally or by happenstance) to handle a certain degree of capacity. In other words, it can handle so many cases or clients with the infrastructure it has. If the cases and clients are increasing, a law firm can find itself running to catch up. This would represent undercapacity. You see this a lot in Big Law on the grow. They are opening new offices, searching for lateral transfers, adding law school interns, bringing on new associations, and increasing their technical expertise. It all means more, more, more stuff. More overhead. More costs. More debt. More obligations.
Likewise, when business starts to fall, or possibly when large groups of lateral transfers leave in mass, the law firm can find it has too much office space, too much staff, too many lawyers, too many partners, and way too much stuff and obligations. This represents overcapacity.
Sometimes undercapacity is not good, but overcapacity kills. Why? Because all of the things or categories that make up overcapacity make up long term obligations (debt really). Leases are long term. It is hard to get rid of staff and lawyers quickly, easily or without expense. Besides, when you get rid of staff and lawyers, they are likely to take some business with them, leading to ever increasing overcapacity. The firm simply gets in a position where the cost of the infrastructure is too much for the small amount of business the firm has on its books, and it is often not possible to downsize quickly enough.
That is really what I like about the Third Wave practice of law over that of traditional law offices. You can work individually from home or a small office and build a practice outwardly, as you need it, though the use of collaboration with other attorneys and virtual staffing. These are not employees, they do not require space to which you have to commit, and they do not force you to add ever increasing infrastructure, such as leases, computers, broadband, office furnishings and the like.
The Third Wave practice allows you to expand capacity when you need it, and allows you to decrease capacity quickly and effortlessly when you do not need it. It allows your practice to adjust to the changing environment with speed. If you have undercapacity you can deal with it quickly. If you have overcapacity you can lower it fast without severance packages, lawsuits, breaking long term leases, or bankruptcy.
The Third Wave practice of law really does represent a one size fits all type of environment.
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