Month: September 2009

“Electric” as an adjective has kind of a dated feel, harking back to the 1970s when it modified Horseman, Company, Mayhem and Light Orchestra. But electric cars still retain a 21st-century buzz, keeping the momentum they developed during the recent oil shock as a serious alternative to gasoline-powered vehicles. The Economist recently devoted a special section to what it calls the electrification of motoring, and it makes instructive reading for lawyers. The legal profession could take some lessons from how some key innovations are completely redefining  the basic assumptions of the automotive industry.

Battery-powered cars operate on a different set of rules than gas-powered cars, not just in a mechanical or engineering sense, but also in paradigmatic terms. What you use your car to do, how far you can drive it, how fast you can accelerate, where and how you acquire your fuel — all these considerations and more are very different with battery-driven vehicles. For example, one electric car manufacturer is looking to create “electricity stations” where drivers can trade spent batteries for new ones, something made possible by selling — or renting — the battery separately from the car itself.

Separating ownership of the battery from ownership of the car changes the economics of electric vehicles. If you rent the battery rather than buying it, that becomes a running cost (like petrol) and the sticker price of the car drops accordingly. … Better Place, indeed, plans to go further. It will charge for its services (battery and electricity) by the kilometre travelled. The cost per kilometre will be lower than for petrol vehicles, and if you sign up for enough kilometres a month, it will throw in the car for nothing.

This isn’t completely new, of course — cellphone providers have been practically giving away the devices themselves, making money instead off the service plans. It’s the basis of the Free economy that Chris Anderson writes about, launched by King Gillette’s realization that he could give away razors but sell the blades. More and more manufacturers now make products available at no cost while charging customers for the service that makes the product useable and/or valuable. But for all that, it’s still shocking to think about getting a car for free in exchange for renting the fuel.

Law firms obviously don’t sell shavers, cellphones or cars. But what they do have in common with many modern manufacturers is that their tangible work product is becoming more commoditized, less differentiated, and more susceptible to low-priced, non-lawyer competition. Forms, contracts, simple wills, divorce papers and other basic documents are now available from kiosks and websites operated by courts, non-profits, and the non-lawyer private sector. The difference in quality between a document drafted by a  lawyer and one drafted by one of these alternative services is rapidly narrowing, and with it will narrow the premium that lawyers can charge above what these rivals charge (which in some cases is $0).

So how might a law firm give away products while selling services? Jeff Carr has observed that lawyer work falls into four categories: content, process, judgment and advocacy. The first two are well on their way to commoditization; the latter two remain the high-value and near-irreplaceable purview of lawyers. The day might soon arrive when firms publish and automate their legal knowledge, document assembly and document review process free of charge, over the internet, to anyone who wants them — but will charge a monthly retainer fee for the personal judgment, advice and representation that animates those documents and processes and provides real value. Wilson Sonsini’s term sheet generator is a step in this direction, but so are child support calculators and PCT calculators. The tangible product is the giveaway; the value, and the profit, are in the service.

To take another example: putting a battery in a car means taking out the internal combustion engine and its associated plumbing and wiring. That, in turn, means you suddenly have not only a whole lot more space under the hood to work with, but also the opportunity to completely reconfigure the space itself.

[O]nce the engine block and the gearbox are gone, the game of car design changes.  …  A number of carmakers and component companies are, for example, looking at getting rid of drive trains, and fitting electric motors directly into cars’ wheels. With wheel-mounted motors that mix motive power, braking and active suspension, more of the things conventionally fitted to a car become unnecessary. Because a gearbox, clutch, transmission and differential unit are no longer needed, and springs and other suspension items will probably go, too, vehicles could assume all sorts of shapes and sizes.

In the law firm context, we’ve long assumed that some elements, like extensive law libraries, were permanent physical fixtures. But while I hardly recommend tossing away all your texts, the fact is that many firms have streamlined their expensive premises by downsizing and computerizing their knowledge resources. But the electric car example offers many other possibilities. What if most of your administrative and secretarial support were outsourced to lower-cost jurisdictions or different time zones? What if telecommuting and telepresence became so affordable (as they almost certainly will) that your lawyers didn’t need to congregate in one place five days a week? Then you suddenly have the opportunity to rethink  your physical plant altogether. If you don’t have law books or legal secretaries or law firms, what does your law firm look like? Does your physical premises become less important than your website? Good questions, and they’ll need answers.

The Economist has long boosted electric cars, but even the magazine acknowledges that internal-combustion engines will rule the roads for some time to come. In the same vein, traditional law firms will continue to be the norm for a while yet. But we have the opportunity now to realistically picture what comes next.

Think of all the longstanding features of a law firm we take for granted — up-or-out partnership tracks, hourly billings to clients, billable-hour-based compensation for lawyers, powerful rainmaking partners, annual partnership draws, exclusive lawyer ownership, and on and on. Then loosen or remove even one or two of them, and consider the multiplicity of variations that result — the possibilities just keep unfolding. Next time you’re trying to picture the future of law practice, give some thought to the electric car.

Last week’s New Yorker column by James Surowiecki talked about health care reform in the United States, but it has something important to say about change in the legal profession too. Surowiecki noted the sudden remarkable rise in the number of Americans who say they’re satisfied with their current health coverage. Among other factors, he puts this down to people’s deep-set psychological aversion to give up what they’ve got in favour of something new:

Most of us, for instance, are prey to the so-called “endowment effect”: the mere fact that you own something leads you to overvalue it. A simple demonstration of this was an experiment in which some students in a class were given coffee mugs emblazoned with their school’s logo and asked how much they would demand to sell them, while others in the class were asked how much they would pay to buy them. Instead of valuing the mugs similarly, the new owners of the mugs demanded more than twice as much as the buyers were willing to pay….

What this suggests about health care is that, if people have insurance, most will value it highly, no matter how flawed the current system. And, in fact, more than seventy per cent of Americans say they’re satisfied with their current coverage. More strikingly, talk of changing the system may actually accentuate the endowment effect. Last year, a Rasmussen poll found that only twenty-nine percent of likely voters rated the U.S. health-care system good or excellent. Yet when Americans were asked the very same question last month, forty-eight per cent rated it that highly. The American health-care system didn’t suddenly improve over the past eleven months. People just feel it’s working better because they’re being asked to contemplate changing it.

Compounding the endowment effect is what economists dub the “status quo bias.” Myriad studies have shown that, even if you set ownership aside, most people are inclined to keep things as they are. … Some of this may be the result of simple inertia, but our hesitancy to change is also driven by our aversion to loss. Behavioral economists have established that we feel the pain of losses more than we enjoy the pleasure of gains. So when we think about change, we focus more on what we might lose, rather than on what we might get. Even people who aren’t all that happy with the current system, then, are still likely to feel anxious about whatever will replace it.

That sounds to me like a neat encapsulation of what’s happening to a legal profession facing unprecedented pressure to change. The outside forces attacking the industry’s status quo (technology, competition, client sophistication and generational shifts) grow stronger every year. In addition, there’s more dialogue than ever before within the profession about changing billing practices, law firm structure, talent management, technology usage, billable targets, client relationships, etc. And by most measures, a remarkable number of lawyers aren’t really that satisfied with their work or their careers. In theory, change should be rolling like a river through the profession right now.

But those of us in the change camp remain perplexed by the steady and growing levels of resistance we still encounter — not just among lawyers and law firms, but also among clients, law schools, and others. It seems like the harder we push, the more tightly lawyers grip the familiar features of their current system. And Suroweicki’s article presents a plausible explanation — the very act of advocating change increases lawyers’  resistance and their belief that the status quo is just fine, thanks.

So I’m coming to think we’ve been taking the wrong approach. Many of us, and I’m as guilty as anyone, tend to dismiss lawyers’ opposition to change — change that would make for a profoundly better legal system — as being grounded in selfishness, short-sightedness, and bloody-minded traditionalism. And I still think these factors do play some part.  But if we look at the situation through less jaundiced eyes, and take into account these natural and largely inescapable human tendencies towards preservation of the familiar, we can come to understand the resistance more clearly, and judge the resisters less harshly. The way things are, even if they’re not that great, still seem self-evidently good and preferable to the cost that change might exact.

So how can change be effected in an environment psychologically programmed to over-value the status quo? Here are three possible approaches:

1. Question the permanence of what people already have. Surowiecki suggests that Americans’ health coverage is far more tenuous than they think it is, and that therefore “the endowment that insured people want to hold on to is much shakier than it appears. … The message, in other words, should be: if we want to protect the status quo, we need to reform it.” Lawyers have been warned about the unsustainability of the current system and how much they stand to lose if wholesale reform from outside the profession sweeps away their privileges. But lawyers don’t frighten easily, and many have an unrealistic picture of their irreplacability in the greater scheme of things. This approach could yield more success as the upheaval inevitably gets rougher down the road, but probably not before.

2. Demonstrate the great advantages of change over the status quo. People may not want to sell that free mug for less than twice its value. But offer them a titanium thermos with built-in GPS and they’ll trade up in a hurry. Resistance to change springs largely from overestimating both the benefits of what you now have and the costs of what you would get, so headway may depend on showing that change is overwhelmingly positive: you will make more money, get more clients, have more free time, be happier, by taking a different approach. So we need to highlight (and reward) as many huge success stories of innovative lawyers as possible. We need more projects like Legal Rebels, showing off all the benefits to be derived from abandoning the status quo and embracing better ways of being a lawyer. It won’t convince everybody, but it will push us closer to a watershed.

3. Make the change as incremental as possible. People are usually more amenable to change if they don’t think of it as something wholesale and irreversible. So instead of advocating fixed fees across the board, maybe you isolate one or two small clients or practice  areas that could serve as laboratories. Rather than abandoning lockstep compensation altogether, maybe you start by adding some merit-based criteria to the existing salary structure. Once these small innovations take hold, you can press forward with more. Over the years, I’ve found that terms like “pilot project,” “test case,” “private launch” and so forth are remarkably effective in getting lawyers to lower their guard and try something different. Minimizing the risk and playing down the possibility of permanent change might undermine the overall case for innovation, but in practical terms it could deliver better results.

There’s at least one big difference between the US health-care debate and the upheaval in the legal profession. To a great extent, the health-care consumers themselves control the process of change through the electoral system, so if they decide they want things to stay the same, they will — at least until the system breaks down someday. Lawyers, by contrast, don’t control any of the factors that are causing or, like the recession, accelerating the change in the legal services marketplace. We can ignore the tsunami all we like, but the waves are still coming in regardless.

That makes it all the more important that resistance to change within the profession — natural and understandable as it is — be overcome. Most lawyers are either comfortable with their existence or don’t ask too much from their careers, so they automatically defend the current system without asking themselves: Is it really all that great for me? Couldn’t I do a lot better? What, exactly, am I fighting so hard to preserve? Getting lawyers to ask — and then answer — these questions will be more than half the battle.