Why do law firms exist?

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What is the point of a law firm?

This is neither a rhetorical nor a snarky question. I’m interested in nailing down the economic rationale for a law firm’s existence. What benefits flow to both clients and lawyers from law firms? In what ways are the buyers and sellers of legal services better off because a law firm is the platform of choice for their transactions (instead of, say, an individual lawyer-client exchange)?

A good way to answer that question, I think, is by reference to the work of 20th-century economist Ronald Coase, who (among other things) authored a pioneering treatise titled The Nature of The Firm. As The Economist observed in celebrating Coase’s 100th birthday last year, Coase asked and answered a similar question in the business world: why do companies exist? “His central insight,” The Economist wrote, “was that firms exist because going to the market all the time can impose heavy transaction costs. You need to hire workers, negotiate prices and enforce contracts, to name but three time-consuming activities. A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome.”

The magazine went on to point out that while important, reducing transaction friction is only a partial answer to the why of corporations: “[Companies] can marshal a wide range of resources — particularly nebulous ones such as ‘corporate culture’ and ‘collective knowledge’ — that markets cannot access. Companies can organize production and create knowledge in unique ways. They can also make long-term bets on innovations that will redefine markets rather than merely satisfy demand.”

Companies exist, therefore, because they:

  • reduce transaction costs,
  • build valuable culture,
  • organize production,
  • assemble collective knowledge, and
  • spur innovation.

So now let’s take a look at law firms. I don’t think it would be too huge a liberty to state that as a general rule, law firms:

  • develop relatively weak and fragmented cultures,
  • manage production and process indifferently,
  • assign and perform work inefficiently,
  • share knowledge haphazardly and grudgingly, and
  • display almost no interest in innovation.

That’s an inventory of defects that would make Ronald Coase wonder exactly what it is that keeps law firms together as commercial entities. And he’d be further daunted by the following considerations:

  • This week, Bruce MacEwen at Adam Smith Esq. wrote about the difficulty of “branding” a law firm: “Law firm partners are anything but designed or acculturated to delivering a ‘consistent experience’ or ‘a particular quality level.'” And in any event, he added, “what exactly is the [law firm brand] promise?” In many law firms, the client experience varies wildly from lawyer to lawyer, to such an extent that basic documentation and even invoices will differ from one partner to another. In that light, it’s difficult to say that a law firm has an “identity” or a “way of doing business.”
  • Last week, Mark Hermann at Above The Law, tackling the old question of whether clients hire lawyers or firms,  averred that “[i]f clients have any sense at all, they hire lawyers.” This is because firms are unsure of the quality of their own lawyers, and because hardly any firm systematically conducts internal quality assurance to review and approve its lawyers’ work. For the same reason, lawyers are reluctant to cross-sell “partners” whose expertise they don’t know or trust and to whom they won’t dare refer their prized clients.
  • Back in July 2010, Anthony Kearns wrote for The American Lawyer about the absence of risk assessment and post-mortem systems in law firms. These systems could reduce the chances that something will go wrong in the first place, and could create processes by which lessons can be learned from errors and the same mistakes avoided in future. But law firms are extremely culturally resistant to admitting that lawyers have failed in the past and will fail again — and as a result, there is no institutional expectation that errors be acknowledged and treated as learning opportunities.

These are not problems, it should be noted, that you can easily correct through the simple application of good management practices. These are problems bred deep in the bones of lawyer culture. Lawyers tend to protect and promote their own individual interests over that of the collective to which they belong. Many sensible management innovations that have tried to gain a foothold in law firms over the past couple of decades — including knowledge management, cross-selling, brand discipline, billing reform, associate apprenticeship, collaborative workflow, and so forth — have foundered on the shoals of lawyers’ reluctance to sacrifice some individual short-term good for some collective long-term gain. This isn’t a bug of law firms; it’s a feature.

So what does that leave? From the original list of Coaseian advantages, we still have the first and most important: the reduction of transaction costs. There’s no denying that this is an important and useful aspect of a law firm. While there are many legal tasks that can be accomplished fairly easily by a single lawyer working alone, there are many more that require more resources to accomplish: other lawyers, numerous staff, many knowledge assets, multiple connections and contacts, and so forth. A client with an even slightly complicated legal matter does not want to go out and contract individually with each of these players and suppliers; she wants a centralized platform, a one-stop shop. Lawyers, equally, don’t want to access the market every time they need an asset; they prefer to keep them all on hand.

And that, to make an over-long story short, is why I think the fragmenting of legal services and the rise of viable non-firm suppliers pose a threat to the continued existence of law firms. New competition and technology are lowering the transaction costs of complex legal work; they’re reducing the friction loss traditionally associated with repeatedly accessing the legal market. New resources such as legal process outsourcing companies, virtual law firms, temporary and contract lawyers, and sophisticated software programs are available, reliable, and increasingly accessible in a timely and cost-effective fashion. We used to lower the hassle and cost of accessing multiple legal resources by putting them all inside a law firm; we don’t need to do that anymore. The remaining fundamental rationale for law firms is under siege.

To be clear, I’m not forecasting an imminent worldwide cull of law firms; many firms are still better at cost-effective legal transaction facilitation than the vast but jumbled array of separate providers. But we’re about to see the rise of a new generation of effective legal resource organizers (which, when you think about it, is all law firms really are). They’ll organize disparate, far-flung, specialized suppliers of legal services into a complex, finely tuned, just-in-time assembly and delivery system for complex legal services — supply chain managers for the modern legal marketplace. And they’ll do it more affordably and with better quality controls that law firms can offer. Some firms might evolve to fill this role, but if they do, we’ll barely recognize them when compared to their ancestors. Legal information and systems companies like Thomson or Lexis might fit the bill; so might LPOs; so might completely new businesses financed through the Legal Services Act.

That’s why law firms need to understand their own economic purpose, what role they really serve in the market. If, as I’ve argued, it’s to be an effective organizer of legal resources, then they need to get much, much better at identifying, organizing, and efficiently managing those resources, inside and (especially) outside their walls. That’s the role — quarterback, manager, general contractor, call it what you like — that’s up for grabs right now, and it’s the only one that really matters. That’s the point of a law firm.

Jordan Furlong speaks to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

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10 Responses to “Why do law firms exist?”

  1. Betsy Munnell

    Well put Jordan. Thank goodness you are there to articulate these plain and simple truths without the surliness, outrage or disdain so many long practicing lawyers feel. For my part, I have always been especially disturbed by the non-collaborative nature of the average lawyer. Granted, work, hours and credit hoarding in a young person yoked to billable hours minimums is unsurprising. The same behavior in a partner is outrageous–yet rarely does it prompt censure from the firm. Worst of all, it is not uncommon for even a top rainmaker to abandon the loyal associate who, having labored for years in his enforced shadow, comes up for partnership short on business and predictably dependent on said so-called champion.

    But I actually do have a question, one prompted by your posts on the changing models for the delivery of legal services:

    Where in this web of suppliers will the true “counselor” sit? Where will we find the archetypal trusted adviser, the lawyer whose rate is of no concern, since he or she is called to action only for bet the company matters? Will the counselor be sourced from a brilliance boutique of sorts? A “concierge” legal services business? Will more companies–able to access more affordable legal services, have the funds to hire general counsel with the breadth of experience, and gravitas, to deal with the most complex of issues in house?

  2. Jeff Carr

    Jordan — Brilliant! I often wonder about the same things — but not from the rhetorical or theortetical standpoint, but rather from that of the client. As Jordan points out, it’s as if the firms are listening to only 50% of the marketing consultant’s talk about brand power — that missing 50% is the promise to the customer of a consistent customer experience. So, since this is missing, I think the question is not why law firms exist, but rather why do we as customers put up with such dysfunction?

    We work very hard here to hire the firm, not the lawyer. In fact the ACC Covenant Counsel — the model document for value-focused relationships — encourages customers to stay with the firm so long as they continue to walk the talk. It also encourages firms to keep those players that get it and jettison those that don’t.

    Here at FMC Technologies, we have one engagement letter, applicable to all matters handled by the firm — this might be best thought of as an alliance agreement or a master service agreement just like we here at FMC Technolgies enter with our customers and our suppliers. By granting access to a particular matter through our web-based matter management system, the firm is given a “work order” or a “PO” for that particular project. The matter profile specifies the type of compensation model — fixed fee, ACES, ACES LT etc.

    Some firms get this concept — Beirne Maynard, Eversheds, Littler, Seyfarth, Sutherland, Summit, Valorem, and Womble — among others — come immediately to mind. To my mind those firms, and those that understand branding and the real reasons why firms should exist, are those that will grow and prosper.

    Others, those that don’t get it, are tantamount to hotels for lawyers. The loyalty to the hotel of the individual lawyer remains only so long as the mint on the pillow is tastier than the one across the street.

    Quality

  3. Jordan Furlong

    Where in this web of suppliers will the true “counselor” sit? Where will we find the archetypal trusted adviser, the lawyer whose rate is of no concern, since he or she is called to action only for bet the company matters? Will the counselor be sourced from a brilliance boutique of sorts? A “concierge” legal services business? Will more companies–able to access more affordable legal services, have the funds to hire general counsel with the breadth of experience, and gravitas, to deal with the most complex of issues in house?

    Betsy, great question. I’d say the archetypal trusted adviser, like the 800-lb gorilla, can be anywhere she wants — those kinds of services are that valuable. That lawyer will design her own platform. She will ask herself: what kinds of complementary skills and resources do I actually need in order to fully realize my abilities — what sort of support network should I assemble? Depending on the type of law she practises, she could probably use:

    – a few strong lawyers with complementary skills whom she can direct and develop;
    – a collection of professionals to handle the intermediate legal and quasi-legal stuff; and
    – a business support team to handle the thousand details of everyday practice and help manage her brand and profile.

    Of those three, only the first group needs to be physically proximate; all the others can and should be outsourced, ideally supervised and directed by a sort of project manager/CEO for her law business. So her “practice” would look like a very small law boutique with a series of remote business lines extending across the country or the world. To me, that’s what the respected and in-demand lawyer of the future will construct as a platform. It certainly won’t be the present-day large law firm, which more and more is revealing itself to be, as my Edge colleague Doug Richardson likes to call it, a collection of egos connected by central heating.

  4. Betsy Munnell

    Wonderful response, thanks! (And I have committed to memory both Doug’s and Jeff’s definitions! “A collection of egos connected by central heating.” & “A hotel for lawyers.”)
    I’m hopeful you’ll blog at greater length on a related, and especially worrisome, challenge: Training of the next generation of trusted advisers–the ones you include in the first group of lawyers that our primary rainmaker will “direct and develop”. It would be interesting to reflect on possible career tracks for those chosen few.
    Last query of the day–how will the brilliance boutiques resist the expansion mandate? Or will they be so much better structured and purposed that they can grow without repeating the countless mistakes of their BigLaw ancestors? I’m thinking, without much data, of the explosive growth of Boies, Schiller & Flexner, now at 200 –superb–lawyers. How does a firm like that fit into the 21st century law firm model you’ve been discussing in your blog posts over the past few months? Did they get the “outsource now for God’s sake” memo?

  5. Jordan Furlong

    I’d guess that rapid expansion of the Boies variety won’t happen as often or to the same degree in future, simply because it won’t be economically feasible to do so.

    Setting aside BigLaw, which has personnel volume wired into its DNA, legal enterprises will come to recognize that you keep as many fee-earning professionals in close proximity as absolutely necessary, and not one more than that, because you won’t be able to profitably leverage dozens of associates and you won’t be able to afford their salaries, support, overhead, etc. Look at all the boutiques now springing up, started by good lawyers who left AmLaw 100 or higher firms — they’re disproportionally lean and innovative (Radiant Law is a fine example: http://www.radiantlaw.com/).

    I wouldn’t be shocked, of course, by another round of steroid-driven inflation of law firms brought on by overly optimistic assessments of the market. But my guess is that the law firm pyramid will narrow more every year. Or as I put it when addressing lawyers: if you were starting a law firm tomorrow from scratch, would you seriously set it up like a modern large firm? That’s the model people are waking away from, not towards.

  6. Jack Lebowitz

    Brilliant analysis, Jordan. As a veteran equity partner of numerous mid-sized law firms in the Albany NY area over the past 20 some odd years, I share your colleagues view of the firms being little more than a collection of solo practices under one roof, or egos sharing a heating system, as you say.

    From the prospect of someone with a boutique “bet the farm” practice (environmental litigation), I found it hard in recent years to find remunerative salaried positions with law firms.

    My practice has always been “boom or bust” depending on economic conditions, and in down times like the Great Recession (or any time) the typical law firm notion of “you bring us a book of business worth $300,000/yr and we’ll pay you $120,000 salary) sounds like an uninviting proposition, even if the basic premise somewhat resembles the fairy tale about spinning straw into gold.

    Moreover, the basic premise in all the firms I’ve been part of is based on this curious notion that the frontmen marketing guys, the so-called “rainmakers”, are responsible for all the firm’s business because of their golf handicaps, relationships with bankers and gift of gab.

    Not only doesn’t “team effort” or individual attorney results (e.g., winning high profile cases) seem to count for much at bonus time as “origination” or PPP numbers, but I’ve witnessed (and been in) some unseemly tiffs with partners about “origination” which resulted from such things as people rooting in other peoples’ offices after hours or combing though phone message slips at reception so they can learn of a new deal and “open a file”, claiming origination credit, before the other guy did.

    That’s the past. I’m doing a solo VLO because unlike a law firm, I can speak to the clients in my own authentic voice unmediated by the terrible royal, vague “we” marketing of the typical law firm website. And I can attract clients (and attorney outsourcing!) from all over the state or country instead of the confining local markets of the brick/mortar “full service” firm.

    The internet totally demolishes distance , and makes it feasible to offer a statewide practice for consulting work which does not demand one’s physical presence, which in my practice area is most work.

    The next step for me, one I’m working on now, is developing a content rich website that actually informs prospective clients about environmental law in an interesting, accessible “show don’t tell” manner. I’m having fun with law for the first time in a long while, hopefully profits will follow!

  7. Renn

    The “law firm” seems to be the product of the demand for legal services, nothing more and nothing less. When I represent a personal injury client I have to create a space to work as the lawyer. That means hiring others that can do the para-legal, investigative and administrative work. I sure most law firms have less bookshelves with law reports than 15 years ago because we can access these resources in cyberspace. As in the concept of the “corporation” the law firm is a fiction more true than reality.

  8. Bergeron Clifford

    You’ve raised a really good point here Jordan and I’m afraid you raised more questions than answers, because you got a lot of lawyers scratching their head with this article.

    Most clients, I noticed, they hire the lawyer that was recommended to them or the lawyer that earned their trust and not so much the law firm. However, this is mainly in my situation, because when you look at Intellectual Property Law Firms for example most clients will hire the firm for their reputation. So I guess the law firm is more important in certain fields than in others.

    On another note, I think you are spot on when you list the way most law firms operate. We always try to move away from this general trend though.

  9. Trey Meyer

    This piece is spot-on, especially the idea that the “lawyer will design her own platform”. Despite the massive layoffs at the big firms, there are more opportunities now for attorneys than ever before. The confluence of various technologies (SaaS, PaaS, ubiquitous connectivity, etc.) and an evolving (albeit slowly) spirit of innovation in the delivery of legal services now permits attorneys literally to virtualize the entire operation of “the firm”, thus completely neutralizing the advantages of the firm identified by Professor Coase and thereby permitting an attorney to design and operate her ideal law practice. If law firms believe that our venerable profession is not susceptible to Schumperterian waves of creative destruction, they need to think again. Forming new levels of lower paid associates (see At Well-Paying Law Firms, a Low-Paid Corner, New York Times, May 23, 2011) is not, in my opinion, a terribly meaningful response. My money is on the supremely talented individual lawyer that builds a system of independent contractors and software to deliver high-quality, bespoke legal services. This is going to be fun.

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