Rebundling the law firm

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Posted in: Big Firms, Solo & Small Firm

Perhaps most importantly, unbundling has the immensely positive effect of removing from lawyers our self-imposed burden of omnipotence. Our intense dislike of risk and our fervent striving for control has left us vulnerable to taking on more responsibility for our clients’ outcomes than we often should. The modern view of clients — one they share themselves — emphasizes partnership over patronization, collaboration over command-and-control. Many lawyer-client relationships still fit well within the traditional model; but many more do not, and they need a better option. Limited scope retainers make for a very good start.

That’s a brief excerpt from my foreword to Stephanie Kimbro’s forthcoming book Limited Scope Legal Services: Unbundling and the Self-Help Client, to be published next month by the ABA’s Law Practice Management Section. (With Stephanie’s permission, I’ll post the entire foreword here when the book comes out.) Perhaps needless to add, I support both the theory and practice of limited-scope retainers. Yes, it must be done carefully and yes, there are insurance issues that need to be addressed. But the potential risks of unbundling shouldn’t keep us from doing what we can to help people access its substantial benefits.

Interestingly, though, I’ve recently been thinking about what might be a related concept to unbundling. It came up in a conversation I had with Thomas Prowse, an innovative open-source technology lawyer based here in Ottawa, as we were discussing the imminent dismantling of the traditional law firm. Thomas coined a phrase that I immediately liked: “rebundling.”

Unbundling, Thomas suggested, is not a sign to give up on lawyers and law firms as primary legal service providers. It’s merely the first step in the process, similar to the creative destruction that occurs periodically in the high-tech sector, where the failure of one industry or company provides the conditions needed to foster the emergence of new ones. He also saw a parallel with situations where the internet-enabled disintermediation process led to the emergence of new intermediaries to deal with continuing market complexities (e.g.,  iTunes filling many roles once played by recording companies).

I find “rebundling” a very appealing notion. Unbundling, as I suggested above, requires the lawyer to let go some of the work she has traditionally performed, permitting some flexibility to take hold in the previously rigid definition of law practice. But once you’ve unbundled legal tasks or even entire law practices, what do you do with all the individual elements left lying around? One of the reasons law practices have been such successful entities is that there are real benefits of efficiency and specialization to be gained from integrating related tasks and elements into a single enterprise.

The problem is that these enterprises — law firms — have grown stolid, over-encumbered, and intransigent. The traditional law firm is like one of those old steamer trunks — huge, heavy, unwieldy, often latched with padlocks and difficult to move anywhere, but highly effective at gathering everything you might need and keeping it safely tucked away. The problem, of course, is that hardly anyone uses steamer trunks anymore. We opened them up, unbundled the contents, and for the most part threw them away.

But we didn’t leave our unbundled clothes and toiletries and such lying about individually, or stagger around with everything stuffed into our arms. We rebundled most of it into more portable containers: rollaway suitcases, smaller luggage, carry-on handbags, and so forth. Some items we stopped bringing altogether or trusted others to provide, buying water at the airport or downloading books onto our Kindles. We repackaged our assets into smaller, more flexible cases, some of which could either snap together as a larger unit or function on their own. As travel became more difficult and confining, we adjusted how we traveled.

I don’t want to stretch the analogy beyond its modest capacity, but I do think “rebundling” is a helpful way to think about the challenge that lies ahead for law firms. Doing everything for everyone is a difficult business proposition, but it’s the fundamental basis not just of the full-service law firm, but also of the full-service lawyer. We need to become more flexible and nuanced in how we construct our legal enterprises and carry out our legal projects. We need to make greater use of the construction industry model, where a general contractor gathers individual tradespeople for their skills and disbands the team when the work is done. We need more small boutiques in niche areas to flourish. We need to see the relaunch of the sole practitioner as a 21st-century online mobile entrepreneur. We need fewer steamer trunks and more rollaway carry-ons.

Despite what you may have heard (or what some may think I’ve been saying), the lawyer is not dead and the law firm is not dying. But the time is here to restructure our models, our approaches and our offerings — to start rebundling the law practices that market forces are relentlessly unbundling for us.

Jordan Furlong delivers dynamic and thought-provoking presentations 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.

Who should have the right to own a law firm?

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Posted in: Governance

And so the floodgates have opened, and here come the “non-lawyers” surging into the law firm ownership stream. The Legal Services Act‘s long-awaited authorization of Alternative Business Structures in the UK took effect in January. Within the first two weeks of February, here’s what followed (all transactions unofficial until approved by the Solicitors Regulation Authority, which so far has received 121 ABS applications):

Now, at long last, we get to test-drive the worst-case scenario. Ever since the implications of Sir David Clementi’s commission recommendations were first absorbed — even before that, since Queensland made the legislative changes in 2004 that allowed its law firms to float on the stock exchange — we’ve been hearing that non-lawyer ownership of law firms was the beginning of the end, the steepest of slopes down which professional independence and dignity would inevitably slip. All the arguments up to this point, pro and con, have been theoretical. Now we get to see — in a £40 billion legal market anchored in one of the world’s great financial city-states — what the practical actually looks like.

You might have noticed that all three of these ABS pioneers are practitioners of personal injury and/or insurance law, which are essentially both sides of the accident-compensation coin. Their leadership in this regard make sense — personal injury lawyers have long been the profession’s unsung pricing innovators (cf. contingency arrangements), while insurance companies watch their legal costs extremely closely and don’t hesitate to make aggressive moves to reduce them. We expected that ABS expansion might first occur in consumer-side practices such as wills & estates or family law; but with these firms, we get to see both consumer and corporate interests take a dip in the ABS pool and test the waters.

What can we now expect? At this early stage, specific predictions are obviously impossible. But it’s safe to say that some of these and other future experiments will fail — the wrong fields were entered, the wrong firms were chosen, the execution was ham-handed, bad luck intervened, etc. Equally, however, we can be sure that some will succeed, often spectacularly: massive publicity, booming business, satisfied customers, rising firm values, continued expansion, etc.

What we won’t see is across-the-board failure of the ABS experiment, because there’s nothing fundamentally wrong, from a market perspective, with the ownership model. There’s no reason why law firms run by non-lawyers should be less successful than those run by lawyers — in fact, there are many reasons why the opposite should prove to be the case. If you’ve worked for or with lawyers, you can probably think of several right off the bat.

But what drives the opponents of non-lawyer ownership of law firms isn’t the likelihood that these businesses will fail — they’d probably concede that some of these operations will do very well. Their argument is that by allowing control of law firms to pass out of our hands, lawyers will lose our professional purpose and identity — we will have sold our souls for private equity gold. Not only do I not subscribe to these arguments, I think they reveal the fundamental problem at the root of our profession’s vulnerability in this new market.

A concise example of the arguments favouring lawyer-only law firm ownership is contained in this Wall Street Journal Law Blog interview with Robert C. Weber, general counsel of IBM. It should go without saying, here at the outset, that Mr. Weber deserves enormous respect for his position and accomplishments, and that his clear concern for the good of the profession and the clients we serve is one that every lawyer should share, as I certainly do.  But I think there are problems with the arguments he puts forward in his cause. I want to identify three:

“When the world was such that lawyers were able to raise their rates 5%, 6%, 10% a year… and profits per partner at big firms and small were outpacing the GDP, you didn’t hear about [non-lawyer equity in law firms].” He said the profession has grown more selfish in recent years and less focused on clients, which, in turn, has given the idea of outside ownership room to grow.

“Now it’s not ‘I’m doing something good for society and my clients’ — it’s ‘How far can I push things to maximize my personal potential,’” he said. “All you need to do is open the paper and read about groups of partners jumping from one firm to another. The notion of partnership has degraded at these mega law firms.”

This argument, it seems to me, actually demonstrates that the evils of non-lawyer ownership against which we’re being warned have been here for awhile. Greedy firms, selfish lawyers, disloyal partners — we’ve managed to achieve all these outcomes without any assistance from non-lawyers at all. The current lawyer-owned law firm business model, with its rictus fixation on annual partner profit, produces unpleasant and undesirable lawyer behaviour all on its own. Non-lawyer ownership, whatever its real and imagined faults, at least has the virtue of requiring a sustainable, long-term rise in the value of the business, accomplished through mature management and forward-thinking research and investment. Law firms don’t need to fear equity shareholders obsessed with short-term profit who’ll empty the entire piggybank into their pockets every year. They’ve already got those.

The purpose of the rules of professional conduct for lawyers is to protect the integrity of the attorney-client relationship and guide decision-making based on the client’s best interest, Weber said. “Lawyers have a separate set of rules that are used as a defense of the profession policing itself. Once we get to the point that we start behaving like any other business, then I would take the position that we are forfeiting our right to self-regulation,” Weber said.

What’s interesting, however, is that the loss of self-regulation didn’t result from non-lawyer ownership in Australia or the UK — it preceded it. Those jurisdictions took self-governance away from lawyers because lawyers’ self-regulating bodies had failed to curb lawyers’ cavalier treatment of clients or to respond adequately to client complaints. The state didn’t suddenly notice that law firms were behaving like businesses and therefore no longer deserved self-regulation — they noticed that lawyers, in lawyer-owned law firms, were serving their own interests above those of their clients and the public. Law firms have always behaved like other businesses because they’ve always been businesses, albeit with far less sophisticated management.

“I can tell you the way of the world is that incrementally those protections [suggested by the ABA] will begin to go away and non-lawyers will have more and more say, and this profession will have given up not only our independence but our rightful differentiation from a business.” He went on, “The only way you could say that’s not going to happen is to ignore human history, to ignore the example of the investment banks and to say lawyers really are different, better people by nature than others. As much as I love lawyers, that isn’t the case.”

Hang on — these two statements don’t jibe. The first says that law firms are differentiated from other businesses because they’re run by lawyers, clearly implying that lawyers are a cut above the average businessperson when it comes to professionalism and scruples. The second says that no, lawyers actually aren’t any different than other businesspeople, that we’re just as prone to the temptations of greed and selfishness as anyone else. Which is it? (It’s the second, of course.) This is important, because it goes to the heart of this debate. When we say, as Mr. Weber and others say, that lawyer-run law firms are better and more admirable and more desirable than firms run by non-lawyers — what exactly do we mean by that?

What we mean, of course, is that we’re better. We have higher ethical standards, better behavioural norms, more high-minded professional concerns than everyone else. That’s what the overused term “non-lawyer” really means, doesn’t it? We’re the only profession I can think of that divides the world into “us” and “not us” — have you ever heard of “non-plumbers” or “non-nurses”? We do this because we really believe, in our hearts, that there are two types of people — lawyers and everyone else — and we are certain that we’re the wiser, nobler, and more responsible segment. That’s why we’ve never been able to come up with a better term than “non-lawyer” — it’s because we don’t need to. It’s perfect. It says everything we believe about ourselves.

And it’s folly. Look, I’m a lawyer, and I’m proud of it. I’ll be the first to jump out there and defend us against patently false accusations that we’re worse than other members of society. And I’ll be the first to say that lawyers, at our best, are extraordinarily civic-minded, responsible, generous — leaders in and pillars of our communities. But it’s delusional for us to believe that we’re the only people who answer to that description. It’s the worst kind of elitism to maintain, even implicitly, that we occupy higher moral ground than everyone else. But fundamentally, that’s the belief that underlies opposition to non-lawyer ownership of law firms.

I call this “lawyer exceptionalism” — the belief, held by lawyers and lawyers only, that our professional standards, ethical training and higher calling places us in a separate and better category than those without our advantages, both making us socially indispensable and justifying special treatment. You might never have articulated it in so many words, but I’ll bet that subconsciously, that idea stirs feelings of recognition and affirmation. It’s an assumption that was planted in our minds in law school and has been growing quietly in all the years since.

If lawyer exceptionalism were valid, I’d expect lawyers to be unusually exemplary in their personal and professional conduct, law firms to be models of outstanding corporate behaviour, and the legal system to be as fair and accessible as this life will allow. You and I both know, of course, that that’s not the case. We know it because we’ve dealt with too many lawyers, spent time inside too many law firms, and met too many people who can’t afford or even understand the justice system. Mr. Weber referred to the crumbling behavioural standards within increasingly profit-hungry law firms, and people inside those firms could provide plenty of ugly examples.

A legal marketplace run solely by lawyers has successes to its credit — but also failures and missed opportunities. If we really expect to defend lawyer control of law firms — not to mention the legal market itself — we need to mount an airtight, categorical case that we have consistently placed the interests of our clients, our communities and our societies ahead of our own. Anyone want to go first?

Here’s what I think is going to happen when non-lawyers have the right to own law firms. Some firms owned and managed by non-lawyers will turn out to be very profitable businesses, some will show mediocre performance, and some will consistently lose money and eventually fold. Equally, some of these firms will turn out to be exceptional businesses that genuinely increase access to justice, while some will be unimpressive peddlers of legal services and some will be lousy businesses that make employees and clients equally miserable. In other words, I expect non-lawyer-owned law firms to be pretty much the same as lawyer-owned law firms, because I happen to think that lawyers and non-lawyers are just as good and just as bad as the other. The primary market difference is that non-lawyer-owned law firms will be far more efficient and will offer far more affordable services.

But maybe I’m wrong. Maybe lawyers really are better than non-lawyers, and maybe law firms run by non-lawyers will prove to be a scourge of society. There is, as it happens, only one way to find out for sure. Lawyer-owned law firms need to prove, in direct competition with non-lawyer-owned law firms, that they’re better — better for clients, better for lawyers, better for staff and better for society. The legal profession has talked a good game for a long time, but it’s never had to actually play that game, until now. The flag has dropped in England & Wales. The competition is on. May the best model win.

Jordan Furlong delivers dynamic and thought-provoking presentations 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.

The imaginary normal

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Posted in: Clients

The joke goes like this: “The optimist says the glass is half-full. The pessimist says it’s half-empty. The engineer says it’s twice the required capacity.”

So what does the lawyer say when looking at the glass? In many cases, it’s: “Why hasn’t anyone refilled my drink yet?”

I speak to more lawyers and legal professionals every day who really get it — who understand how much is changing and who are preparing to adjust and respond. I can’t tell you how encouraging that is to me.

But I’m still taken aback by the number of lawyers and legal professionals who cannot or will not recognize what’s happening — who look at the market and see only what they want to see, interpreting a storm of the century as merely a passing squall.

For many such lawyers, I’ve come to conclude, the underlying cause of that delusion is a sense of entitlement. They’re entitled to respect for their position, steady work from clients, protection from unqualified competition, privilege at the top of the pyramid, stability in an unstable world.

And why should they think different? It’s all they’ve ever known and it’s rewarded them handsomely, so of course they believe it’s the natural order of things. They believe it’s normal, and they’re waiting impatiently for it to return.

Here’s what I want them to understand: It’s not normal. It never was.

The legal market hasn’t really been a “market,” in classical terms, at all. It’s been artificially constrained for decades by asymmetric knowledge, inadequate technology, limited competition, undifferentiated providers, seller-driven pricing, and most damaging of all, the absence of disinterested regulators. Accordingly, buyers have long suffered from weak bargaining positions and low self-confidence. Why, when you stop and think about it, would we ever have supposed that was normal?

The legal profession has been living inside a bubble for decades. And like all bubbles, those on the inside thrived disproportionate to the overall benefits they were delivering, while resentment and frustration continually grew on the outside. And we had no clue, because we figured that was how it was meant to be.

But now that’s changing. Consumers are gaining more knowledge and more choice, giving them more power. The bubble is leaking. The traditional mechanics of healthy markets, by which sellers truly compete with each other to gain the business of well-informed buyers on the buyers’ terms, are reasserting themselves. A legal marketplace that has always been tilted in lawyers’ favour is rebalancing itself.

This isn’t a market going crazy. It’s a market going normal. And it’s not going back.

What mergers can’t achieve

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Posted in: Big Firms, Innovation, Outsourcing

Back in my university days, I remember walking past the Graduate Students Office and seeing a photocopied diagram taped to the door. It was called “The Doctoral Candidate Flowchart,” and it provided a series of turns and directions for graduates struggling to get their thesis finally completed. My favourite entry on the flowchart was in the “Delaying Tactics” stream, a box that sent the user back up to the top to start again. The box was labelled: “Read another book.”

I thought of the Doctoral Candidate Flowchart after seeing all the recent reports of real or suggested law firm mergers in the US and UK, because it occurred to me that just as grad students read another book when they don’t know what else to do, many law firms start talking merger when they’re not sure how else to facilitate growth. After a banner year for mergers in 2011, we can expect, as my Edge colleague Ed Wesemann points out, much more of the same in 2012. But Ed, who has facilitated many such mergers, will tell you that he’s proudest of the ones he helped discourage because they would have come to a sorry end. More firms should reflect seriously on that.

Interestingly, the latest round of breathless merger speculation in the legal press is starting to give way to more skepticism. Alex Novarese doubts that cultural fit and business case no longer matter as much sheer size in merger calculations. Ron Friedmann asks a pertinent question: in what ways do merged firms demonstrably deliver greater benefits to clients than their smaller antecedents? And most significantly, we should all ask: do mergers produce stronger firms? SNR Denton, to take one example, is a transatlantic giant born of a merger two years ago, yet its UK arm suffered a 40% profit drop last year; nonetheless, it’s on the merger trail again.

Don’t get me wrong: many law firms mergers make eminent sense and create real growth. But others do not and will not. And in any event, I think all the merger talk right now might be distracting us from the main event, which is taking place in other settings altogether. Let me suggest four developments in the global legal marketplace in the last couple of months that I think are more important than the latest elephant mating dance.

  • One merger that really matters: King & Wood Mallesons, the Sino-Australian giant whose emergence has caused barely a ripple among many legal market observers. But this colossal firm, Asia’s largest with almost 2,200 lawyers, looks better positioned than any global incumbent to generate real business opportunities in southeast Asia and Oceania, if not beyond. And Mallesons, before the merger, was the most innovative law firm in the world. Are they a threat to the AmLaw 100? Not today; but they’re looking much farther down the road than today, something that’s true of very few AmLaw 100 firms.
  • Another Australian invasion: the outright purchase by Slater & Gordon, the world’s first publicly traded law firm, of national British firm Russell Jones & Walker for an eye-opening £54 million. Not incidentally, RJW is the owner of Claims Direct, a slick and highly effective public portal for personal injury claims, and I’d not be surprised if Slater & Gordon considered that to be the jewel in the crown it just acquired. (See this acute analysis of the deal by Edge’s Sean Larkan and Chris Bull.)
  • Along with the RJW move, two other transactions under the finally-active Alternative Business Structures provisions of the UK’s Legal Services Act: technology and outsourcing company Quindell Portfolio bought personal injury law firm Silverbeck Rymer for £19.3 million, and private equity firm Duke Street shelled out as much as £50 million for majority ownership of Parabis Group, parent company of insurance litigation firms Plexus Law and Cogent Law. That’s almost £125 million in two weeks’ worth of law firm shopping, for those of you keeping score at home.
  • Finally, a move that’s not a merger but still matters: Nixon Peabody’s announcement that it’s retaining Thomson Reuters’ LPO division Pangea3 as its preferred provider of e-discovery services. You might remember a time when large US law firms wouldn’t even acknowledge the existence of LPOs, let alone suggest they might work with them. This is a tacit acknowledgement by a major American firm that much work previously performed by lawyers can no longer be done profitably by lawyers, which is absolutely correct. Nixon Peabody has broken the ice: expect similar announcements from other firms in future, and expect this relationship to evolve past e-discovery.

LPOs, private equity shops, publicly traded law firms and Sino-Australian giants are no longer theoretical participants in a future legal market. They’re here, they’re real, they’re sitting at the same table as (or partnering with) traditional law firms, and most importantly, they’re outsiders. They don’t carry all or most of the habits, assumptions and baggage of the traditional Anglo-American law firm, which leaves them free to be as aggressive, disruptive or innovative as they like. They think the future legal market belongs to those who approach and engage it differently. I think they’re right.

The fatal flaw of all market incumbents is a failure of imagination, the inability to perceive that what they currently do could be done differently and better by someone else. Many law firms eager to merge and expand seem to believe they’re still competing against other law firms in a market suffering a temporary downturn, and that size and reach are the cures for what ails them. I think they’re mistaken. They’re actually competing against new models, new approaches and new attitudes, in a market that has started to evolve beyond them. Size and reach alone simply aren’t going to be adequate responses to that.

Jordan Furlong delivers dynamic and thought-provoking presentations 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.