The blind side

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My newest column has been posted at Canada’s best legal website, which regular readers will know is Slaw.ca. Even though the article is also posted here for posterity, take the opportunity to absorb all of Slaw’s great information by going to read it there.

I have to admit, when I started a recent series of trips to make presentations in the U.S. and Canada, I’d been questioning whether my recent assessments of and predictions for the legal profession had maybe become too radical. Having now returned from speaking with and listening to some of the sharpest and most engaged minds in the business, I’m coming to think I haven’t been radical enough.

Certainly, there was encouraging news. Delivering serious and perhaps discomfiting messages to state bar leaders in Chicago and law society executives in Toronto, I was heartened by the openness to these ideas and the readiness to address our current challenges that our profession’s leaders displayed. Some lawyers and some firms might be ignoring what’s happening in this marketplace, but in no way is that universal, and I think it bodes very well that the people in charge of many of our legal institutions are facing these challenges head-on. Listening to the managing partners of some of the world’s largest law firms at a Georgetown Law symposium in Washington, D.C., it was also refreshing to hear at least some of them acknowledge that the old model is passing away and the adaptation to a new model will be difficult but necessary. Certainly, everyone else in the room, which included almost every thought leader who wasn’t otherwise engaged at ABA TECHSHOW, was fully cognizant of what we’re facing (and two new surveys confirm it).

For all that, though, I came away from these experiences more convinced than before that major, rewrite-the-rules change is imminent in this marketplace, and that some current institutions simply won’t survive in recognizable form. You should read the media accounts of the Georgetown Law Firm Evolution event, from observers like Aric Press, Rachel Zahorsky, Ron Friedmann, Greg Bufithis, and various Twitter correspondents (as well as a response from Robert Sawhney), to get a sense of the scope of change that was discussed.

But for me, the penny dropped during the dinnertime address by Richard Susskind, whose remarks included a heartfelt plea for conference delegates to lead a change for the better that the profession and justice system desperately need. One of Richard’s topics was the Legal Services Act in England & Wales, and its soon-to-be-active provisions allowing alternative business structures (ABSs), including non-lawyer equity investment in law firms and legal enterprises (here’s a sampling of articles, from last September to last week, describing scenarios under which law firms might invite such investment).

Richard, however, has been speaking with investors who are actively engaged in preparing entry to this marketplace, and he reported that law firms are not their primary target; in fact, their interest is coalescing around legal service providers that we now consider to be on the fringes of the profession, like legal processing outsourcing companies. These are the providers that outside investors think are much likelier than law firms to emerge successful from the ABS upheaval, and it’s where most of the new capital is going to go.

Match that up against what the private equity people have been saying on the subject. Jeremy Hand of Lyceum Capital is quoted in two of the previously linked articles as saying his company has a “focus on new business delivery models, not traditional law firms,” and is looking to work with firms with “a modern, streamlined, low-cost delivery model — quite different from that of the traditional partnership.” Tony Williams of Jomati Consulting, who advises Lyceum, added that the new private-equity model emphasizes equity over debt, and equity-driven investors require high rates of return: “So firms need to have a very clear understanding about what they can do with that money that gives a higher rate of return to them and to the private equity people.” None of these remarks resonate with how the vast majority of law firms go about their business — but they do sound a lot like how non-lawyer providers conduct themselves and view the marketplace.

Put all that together, and this scenario emerges: private equity enters the legal marketplace in England & Wales, but it pays just glancing attention to traditional law firms, deciding that it doesn’t need the headaches that come with trying to manage lawyers and reinvent law firms built around the billable hour. Instead, most of the money heads for efficient, accessible, predictable, process-driven operations that are aligned more closely with how modern businesses operate, including LPOs, online and virtual service providers, and streamlined, fixed-fee lawyer boutiques. Already, Intermediate Capital Group has made a £440 million investment in CPA Global, the LPO firm that famously took a huge chunk of legal work from Rio Tinto last year. That purchase effectively placed a marketplace value on CPA Global approaching $1.4 billion. How many law firms, if they were to go public today, could aspire to a $1.4 billion market cap?

LPOs, it has to be emphasized, are not just doing first-year associates’ grunt work, not anymore. They are moving up the value chain steadily and with surprising speed, taking on the work of second-, third- and fourth-year lawyers — not just by using lower-cost labour, but by doing the work more systematically and efficiently. As I said a while back, these companies will not be content with basic work forever; they see no reason why they can’t eventually do the toughest legal jobs. Billion-dollar legal services providers, unfettered by traditional lawyer restrictions, can go global instantly and almost effortlessly. They’ll have more than enough money to acquire the top talent from the best firms worldwide, to invest in new systems and innovations that will reduce costs even more, and most importantly, to change clients’ expectations about what a law firm can deliver. They will be law firms, in effect, and even if lawyers in a given jurisdiction somehow succeed in keeping them out, the landscape will have changed: clients will demand their lawyers compete on the same playing field.

Some firms, especially in the UK, seem to sense this already, and they’re taking outsourcing seriously (though perhaps none as seriously as Eversheds, which has gone into the LPO business itself, albeit with risks). More interesting are attempts by some firms and clients to rethink workflow, such as the move by Royal Bank of Scotland towards a “Mexican Wave” system (pioneered by Lovells) that you’ll be hearing much more about in the months to come (a City firm does the “higher-end” client work while sending more routine work to lower-cost firms in smaller centers). Also intriguing are joint lawyer-client ventures in the UK (such as those by Geldards and Kent County Council and by Berwin Leighton Paisner and Thames Water) whereby in-house and outside counsel are integrated to an unprecedented degree. I’m pleasantly surprised by the innovative approach these firms are taking, and I hope it’ll be enough to secure their positions when the floodwaters really start pouring into this marketplace.

For many other firms, though, the challenges are extremely serious. The prospect that emerges from all this is a legal services marketplace in which many law firms are simply irrelevant — they’re not structured in ways that deliver maximum value to clients and they can’t compete with rivals that are. There was a lot of talk at the Georgetown event about whether “BigLaw is dead,” and I have to agree with those managing partners who dismissed the notion: these firms are obviously up and about and making a great deal of money, and it’s absurd to pretend they’re dead men walking.

The worry, for me, is that many firms, of all sizes, aren’t ready for the radical ways in which the playing field is about to change. Their focus is either straight ahead, on their clients, or internal, on their own condition and competitiveness. They’re like a quarterback whose gaze is either locked downfield on his receivers or focused dead ahead on the defenders in his path. As a result, he never sees the hit coming, from his blind side, that flattens him and turns the ball over to the other team. It’s not just lawyers and clients who matter anymore. New players, with an unprecedented combination of size and speed, are charging onto the playing field like a storm and rewriting the rules of the game as they come.

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2 Responses to “The blind side”

  1. Genuine Question

    I definitely understand the push to make the delivery of legal services more efficient and cost effective. I keep reading similar articles predicting the “end of the world as we know it” legal model. But can someone PLEASE address the question of accountablility? If anyone with money to invest can engage in the practice of law – and the delivery of legal services – who is signing their name on the bottom line? Who is responsible for the work that is done? Are you telling me that one lawyer will be responsible for the work of 100 that gets outsourced? Why would that poor chump accept all of that responsiblity when all of the money is going to the investors? Is the answer really to eliminate “traditional lawyer restrictions” like law school, the bar exam, ethics standards and bar admission? If these models succeed, isn’t that what you’re saying? Why would anyone ever spend money on law school tuition when they can just invest that money in a firm engaged in the unauthorized practice of law?

  2. Jordan Furlong

    GQ, thanks for your question. The short answer is that every law firm in the world already has equity investors who keep all the money — they’re partners. They buy equity in the firm for the purpose of generating revenue. They also happen to be contributing to the revenue generation, each in a very small way, as fee earners, but they’re investors all the same. And they accept the responsibility, to a greater or lesser degree, for the quality and accuracy of work produced by dozens or hundreds of other lawyers whom they don’t supervise and often have never met, even though they themselves only see a fraction of the profit that the firm produces. My point simply is that there’s nothing new about equity investment in law firms — what seems to be causing all the furore is the idea that “non-lawyers” would be putting up the cash and taking home the profit, and I have difficulty seeing how their money is any different than ours. All the flaws and pitfalls that you describe are already fully present in every law firm partnership in the world today.

    The way I look at it is that there’s no inherent reason why the law firm partnership as we’ve always known it is the best, only, natural, or most effective way of delivering legal services. The point of law, as I’m certain you’d agree, is not to serve the interests of lawyers but to serve those of clients and society generally. So the question becomes, what structures or vehicles for legal service delivery best meet those interests? And the answer is we don’t know. We don’t know in the same way that we didn’t know, before the internet, what was the best way of delivering written news. We only had newspapers, and so we had to go with that. Then the Net came along, and Google, and the iPad, and who knows what else this decade, and now we have an actual marketplace of distribution systems, each competing against the other to find out which is the best, which will survive, and which won’t. It’s messy and chaotic, but it’s what we should expect when a new marketplace is born and hits the ground running.

    Similarly, we don’t know what the best way of delivering legal services is, because all we’ve ever really had is the lawyer-controlled law firm: the legal services marketplace was a closed one (and we’ve done our level best as a profession to keep it that way), and so there was no possibility for experimentation, to see whether, just maybe, lawyers didn’t necessarily have the magic formula. Now, whether we like it or not, we will have that experimentation. We’ll have multiple vehicles for the distribution of legal services:

    - firms with 100% lawyers and 100% lawyer financing;
    - firms with 100% lawyers and 75% non-lawyer financing;
    - companies with 50% lawyers and 50% non-lawyer professionals;
    - companies with 30% local lawyers and 70% overseas lawyers;
    - companies with 10% lawyers and 90% paralegals;
    - companies with 1% lawyers and 99% computer algorithms;
    - companies with 0% lawyers and 100% operators standing by to take your call.

    …and any number of other permutations. Will they all succeed? Probably not. Will they all offer equal levels of quality and accuracy? Of course not. Should they be regulated? Absolutely. Will lawyers perform that regulation? I seriously doubt it. Will the 100% lawyer-populated and lawyer-controlled law firm prove to be the best way for all or even most of the marketplace to get legal services? I doubt that even more. But the market will decide. Let people choose among different models, price ranges, timeliness standards, satisfaction guarantees, product quality, professional indemnities, brand promises, and a host of other factors on which people base their purchasing decisions. Let the market sort itself out, and by the time the dust clears, we’ll have a better sense of where the lawyer-controlled law firm fits into the array. But let’s not delude ourselves that the way we’ve always done it must be the best way it can ever be done. When 80% of the population can’t afford a lawyer for anything more than the simplest of tasks, I’d say we’ve pretty amply demonstrated the failure of our approach to theis market.

    Note that nothing I’ve said touches in any way on the standards of lawyer training or conduct, or suggests that they ought to or must be diluted. If anything, I think these standards should be raised, tightened, applied with more vigour than we’ve seen up till now. If you want to be a lawyer, you’d better be very good at what you do — and if we want to compete as a profession with the other imminent entrants to this marketplace, then we’d better ensure that quality is higher than ever, because it’s one of the first things we’re going to have to compete on.

    Why, you ask, would anyone invest in a law degree when they could just as easily invest in a firm carrying on the practice of law (“unauthorized” will eventually be an anachronistic adjective, for better of for worse)? If all you want to do is make money, then by all means, take that tuition and plow it into the legal services provider of your choice, and godspeed: you’re an investor, not a lawyer, and that’s great. But if you want to personally and directly serve clients’ interests with a wide range of tools and skills according to high standards of professional conduct, then get the qualifications and get called to the Bar; it remains a great calling. There will always be a market for good lawyers. It won’t be the same market that we know today, it might be less profitable or more profitable, but it will be there, and good lawyers will do just fine serving it.

    The bottom line is that how legal services are delivered to the public is going to change, whether we like it or not. It *should* change, because the people in charge of this marketplace for the last several centuries haven’t done nearly a good enough job of making it accessible, affordable or understandable. The question for lawyers is how we’ll respond to that change. If we’re smart enough and savvy enough to combine the best of our professional standards and instincts with the most innovative models soon to be on offer, there’s no reason we can’t continue to dominate the market — but this time, on merit. But if we end up obsessing over whether the people writing the cheques have law degrees, then not only will we miss the train, the train will run us over.

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