Ethical rules governing lawyers are designed to maintain the illusion that law practice is something other than a business.

The illusion has always fit uneasily with reality, but never more than today.

Ethical rules governing lawyers are designed to maintain the illusion that law practice is something other than a business.

The illusion has always fit uneasily with reality, but never more than today. The forces dispelling this illusion include increased market pressures on clients to hold down costs, increased media attention on the law business enabling clients to peer into the formerly black box of law firms, heightened global competition in legal services, a robust outsourcing market, and the expanded role of in-house counsel.

The legal services industry cannot effectively respond to these pressures unless it abandons some of the ethical rules, particularly those governing the structure of law firms, which stand between lawyers and reality.

The traditional big law firm is particularly feeling these pressures. BigLaw’s profit model depends on clients paying a premium for the firm’s reputation. Firms can build their reputations only if their lawyers will commit efforts to such activities as monitoring, mentoring and promotion rather than solely to building their own books of business. Non-competition agreements reinforce non-lawyers’ commitment to their firms. But ethical rules limit the enforceability of these agreements in law firms.

Given the loose ties between lawyers and their firms, it is not surprising BigLaw is unraveling. Lawyers who cannot expect to earn profits from their firms will leave with their clients as soon as they get a higher offer. Firms must replace their departing rainmakers and generate the profits necessary to pay high-priced laterals by hiring more associates whose time they bill to clients at premium hourly rates.

Everybody is looking out for their next job and nobody is minding the store – that is, the firm’s reputation. As firms’ reputations decline, clients wonder why they are still paying the premium prices that keep the whole show running.

In the end, big firms must reduce their fees, fire associates, and keep playing musical chairs in the lateral market. This is the BigLaw death spiral we have been observing over the last few months.

Law firms’ problems go even deeper than just retaining lawyers and require even more basic changes in ethical and licensing rules. First, unlike most other large firms, law firms must be worker cooperatives because ethical rules allow only lawyers to own firms that provide legal services. This rule raises firms’ cost of capital and further constrains their ability to build durable businesses.

Second, legal advice has strong synergies with other types of advice, such as finance and accounting. Yet the restriction on non-lawyer owners inhibits the formation of multidisciplinary firms.

Third, much legal advice potentially could be packaged and sold like other intellectual property rather than dribbled out by the hour to individual clients. Yet professional regulation keeps law practice in its traditional mold by requiring legal information to be dispensed by licensed lawyers who work for firms that comply with the rules discussed above.

In a deregulated world, legal advice would be given by firms that look much more like Blackstone, Accenture, Microsoft or even Wal-Mart than traditional law firms. Competition is already breaking down regulatory barriers and forcing law firms to compete with these other business models. The legal services industry will have to adapt eventually. Why not now?

The first step is for lawyers and regulators to abandon the increasingly tenuous illusion that law practice is not a business.

For a more extensive exploration of the above issues, see Ribstein’s paper, “The Death of Big Law.”

Larry E. Ribstein is the Mildred Van Voorhis Jones Chair in Law at the University of Illinois College of Law. He is the author of leading treatises on limited liability companies and partnership law, as well as two business associations casebooks. Prof. Ribstein also authors a popular business of law blog, Ideoblog.