Law has a distribution problem. Too many corporate firms vie for a shrinking pool of outsourced work. Competition is also fierce in the retail segment of the legal market where, paradoxically, tens of millions of individuals and small businesses are unrepresented while thousands of lawyers are unemployed or under-employed.
Law has a related problem: price. Legal services are too expensive. That applies equally in the corporate and retail segments of the market. Corporate clients have asserted leverage and can now exact discounts and send out RFP’s. But retail clients do not have that leverage (that comes from large legal spend) and, so, are effectively denied representation because the price is too high. This is often referred to as the “access to justice crisis.”
One would expect the market to dictate price as it does in so many other professions and businesses. But the self-regulated legal market seems driven lawyers, not clients.
Why is legal supply misaligned with demand? What is being done to address the high cost of legal services? And why is innovation coming principally from technology companies and service providers, not law firms?
Socio-economic changes, law firm structure, and self-regulation provide explanations as well as potential solutions.
The Traditional Law Firm Model
The traditional law firm partnership model worked well for a long time. Equity partners sat atop a pyramid of non-equity partners and associates who stoked profit-per-partner (PPP) by billing as many hours as possible at ever-escalating rates. Partners took a “taste” of every billed hour.
PPP is the holy grail of legal metrics. High PPP enables a firm to retain rainmakers and entice new ones to join the ranks. It is also a key element in firm acquisitions and, to some degree, brand perception. But focus on PPP, like standard billing rates (“rack rates”) now routinely discounted, creates a skewed notion of the sustainability of the traditional law firm model in today’s marketplace.
PPP once kept the next generation of firm talent working hard and staying in the fold, because they too wanted to grasp the golden ring. Those who lost the partnership sweepstakes were usually assured a tenured home at the firm or partnership at a smaller one with lower PPP. PPP was, in a perverse way, the glue that bound many law firms. And is it a coincidence that The American Lawyer’s initial publication of firm PPP coincided with Gordon Gekko’s pronouncement in Wall Street that “Greed is good?”
Optimization of PPP now comes at a steep cost. Today’s ever-shrinking cadre of equity partners sustain PPP by pursuing a “future is now” strategy that often involves “pruning the herd” of upcoming talent and service partners. This short-term, “run the table until retirement” strategy serves equity partners well by propping up PPP, but it does not benefit clients or the firm. It casts doubt on the sustainability of all but a few brand differentiated law firms by undermining firm continuity and succession. Where will the next generation of leadership come from, who will do the bulk of the work, and how will clients view high turnover? Most of all, how does this promote brand loyalty among an increasingly peripatetic client base?
Most firms also have a generational divide whose fault lines are created by PPP. Older partners typically favor stasis in firm structure to preserve PPP. As Richard Susskind quipped: “It’s hard to convince a room full of millionaires that they’ve got their business model wrong. “
Younger partners seldom have a meaningful say in the firm’s direction, investment, and hiring/firing decisions. Equity partnership is now a statistical long shot. High-turnover rates evidence the itinerant nature of most legal careers- the average lawyer entering the market can expect to hold at least six jobs.
Thoughtful young lawyers might ask: “What is it that I would be taking over, anyway?”
Stress cracks in the traditional law firm structure- and the reluctance of most managing partners to do anything about it- presage a market void that will be filled by new client-centric, efficient, cost-effective, and transparent models. Translation: there are options to the traditional partnership model, but unseating incumbent firms is not an easy tasks or short-term undertaking. And lawyers must learn to collaborate with other lawyers as well as other professionals and paraprofessionals. This requires management skills not taught at law school or developed at firms.
And while in-house legal departments continue to expand in large part due to overheated law firm cost, this is a palliative, not a cure, for overhauling the delivery of legal services. It is more of a reshuffling of the deck than innovation. True, in-house departments generally are a more cost-effective alternative to law firms, but this is labor arbitrage, not innovation.
The Rise of Legal Service Providers
The practice of law- what lawyers do- has not changed much over the last several decades. But the delivery of legal services- the structure and by whom legal services are delivered – is undergoing a tectonic shift. Legal service providers employ lawyers that perform the same tasks they once did at firms. Their services are delivered at far lower price points and with greater efficiency and transparency than at firms. And this is attributable, in part, to the corporate structures of providers.
Service providers have grown in number and market share because clients realize many “legal” tasks do not require law firms. Clients- not law firms- determine which challenges are “legal” and require the specialized expertise and high-value legal judgment law firms provide. And for most everything else, legal service providers are increasingly the choice.
Legal service providers do not confront many regulatory and State Bar constraints that law firms do. Providers can accept “non-lawyer” (institutional) capital, partner with technologists and business experts, share revenue with them, engage in inter-disciplinary practice, and launch IPO’s. This flexibility has many ramifications, including capital to invest in research and development as well as an equal seat at the management table for legal, business, and technology experts.
It comes as no surprise, then, that well-capitalized service providers-not law firms-are transforming the delivery of legal services. Not only is their structure different than law firms, but so too is their DNA. It is linked to the business community it serves and, so, correlates service cost to client value. This is different than law firms that cling to the myth what they do is “bespoke.”
Legal delivery has become a three-legged stool supported by: legal, business, and technological expertise. Service providers reserve seats at the management table-and equal standing and financial reward-to technologists, business process, and legal experts who collectively contribute to improved legal delivery. They tend to be more client-centric than law firms, and this accounts for why they are steadily migrating up the complexity chain of “legal” tasks once controlled exclusively by law firms. Law firms, in contrast, are “legal centric” and tend to relegate technical and process experts to the “kiddy table.” Their metrics relate more to profitability than client satisfaction.
The Role of The Law Firm in Tomorrow’s Market
The days of law firm hegemony are over. Some of the more prescient ones are taking steps to reposition themselves in the marketplace, either as boutiques, integrators of the supply chain, stripped down firms with various subsidiaries (performing tasks once done by the “mother ship”), or as spin-offs with new business models.
Many firms are taking a “safety in numbers” (a/k/a bigger is better) approach. Dentons, for example, is pursuing a rapacious growth strategy fueled by mergers/acquisitions that is reminiscent of a corporate roll up. But that is simply kicking the structural can down the road.
The future of firms is to focus on highly specialized or bespoke work (e.g. “bet the company”) and leave the rest to providers. An exception: law firms that adopt alternatives to the traditional partnership model and acquire technology and process management expertise necessary to manage the legal supply chain. These are skillsets not currently taught at law school or resident in most law firms.
This presents enormous opportunity for entrepreneurs- including lawyers- to fill the void that will be left by a law firm shakeout. Undoubtedly, the new legal providers- like the successful providers that have already gained traction, will focus on clients and address needs not currently being served.
The Retail Market and its Tantalizing Prospects
Clayton Christensen’s theory of disruptive innovation posits that disruption occurs in the lower end of a market, drawing new customers. Upon establishing a foothold, it migrates up-market.
This is precisely what is occurring in the legal vertical. LegalZoom has established itself as the best-known brand in the legal space, even though it is a technology company, not a law firm. It provides easy, fast, and inexpensive access to legal forms that formerly required retaining a lawyer. LegalZoom has more than one million customers -individuals and small businesses. They have transformed certain legal services into self-help products. And they have added a network of independent contractor lawyers who, for a set fee, assist customers requiring “legal” services. LegalZoom’s technology is the conduit between clients and lawyers; it is not a law firm.
Rocket Lawyer, a Google-backed legal technology company, and AVVO, the legal incarnation of Match.com, are two other among a growing number of well-capitalized legal technology companies that are driving innovation in legal service procurement. These companies are bringing new consumers into the marketplace and, thereby, addressing the access to justice crisis. And they are providing a blueprint for legal delivery in the digital age.
Law firms no longer have a monopoly on information pertaining to law. Harvard Law School, in collaboration with Ravel Law, a legal technology company, recently struck a blow for public access by digitizing and making free to the public a significant portion of Harvard’s law library. This means that the cost of legal information has been largely removed and that legal services will focus on judgment- synthesizing, interpreting, and presenting that information. This will result in a significant reduction of legal delivery cost.
LegalZoom has taken things a step farther by becoming the first American legal entity to acquire an “Alternative Business Structure” (ABS) license in the UK. Among other things, this enables the company to operate as a law firm there. And just recently, their British arm, LegalZoom UK, announced the company’s acquisition of Beaumont Legal, a two-hundred year old British conveyance firm. Clearly, LegalZoom has intentions to leverage its brand, technology, and war chest to move up the legal complexity chain. LegalZoom UK’s CEO, Craig Holt explained:
“ We’re building a unique next generation law firm, from the ground up, with a singular, relentless purpose: to best meet the needs of consumers and businesses in the modern era. This requires the perfect blend of technology, lawyers, and other expertise, and Beaumont Legal are an important piece of that jigsaw.” (Business Wire, December 7, 2015);
AVVO is another technology company transforming the legal delivery landscape, matching clients with lawyers. By creating a virtual marketplace, the company is driving competition, providing clients with meaningful options, and freeing lawyers from expensive real estate, staff, and overhead. These factors will drive down legal costs and increase access to counsel. This creates a “win-win” for consumers and clients. And if it sounds like Uber, it does to me, too.
For those who fret that technology will replace lawyers, fear not. Lawyers will continue to be a part of developing the technology that will routinize certain legal tasks, provide metrics for outcomes and performance, and expand the scope of affordable legal services.
Likewise, lawyers will continue to provide specialized legal expertise and judgment that is the essence of the profession.
How and by whom technology, business process, and legal expertise are melded and who will integrate the legal supply chain are open questions. The structures, management, price points, and, most of all, client-centric DNA of service providers suggest that they better positioned to do this than law firms. So long as law firms focus on PPP, not clients, they seem destined to cede more market share.
Lawyers might be wise to remember the words of the British retailer Harry Selfridge: “The customer is always right.” And they should govern themselves accordingly.
This was originally published in the ABA Law Practice Magazine.