The lawyer vs. the law firm

So I’ve been thinking a lot about law firm mergers lately (especially between large Canadian firms and their much larger international counterparts). That in turn has led me to think about cross-selling, why it’s so important to the success of these newly merged firms (and others), and about the relative failure of firms to make cross-selling work. And these in turn have led me to my final post of the year, in which I usually try to assess the state of the legal market and what we can expect in the coming year.

At the end of 2009, I recommended we get ready for the rise of the client. As 2010 drew to  a close, I talked about the emergence of a truly competitive market for legal services. And as 2011 rattled off this mortal coil, lawyers’ increasingly precarious position in the market left me feeling generally apocalyptic. I don’t have anything quite so Armageddon-esque to suggest this year — Mayans notwithstanding, I feel pretty safe in predicting we’ll all wake up on Dec. 22. But I can forecast that a fundamental conflict at the heart of the private legal market will start to be addressed this year: the core, critical, and maybe irresolvable conflict between a law firm and its lawyers.

Mergers

Let’s arrive at that conclusion by the same route I took to get there, and start with mergers.

Law firm mergers are odd beasts: they rarely have the same causes or produce the same effects as in the corporate world. When businesses merge, the general idea is to combine production facilities and reduce inefficiencies to lower costs while eliminating a competitor from the landscape. When law firms join together, however, they generally don’t conduct layoffs (quite the opposite — they usually boast about their larger workforce), they don’t reduce inefficiencies (more commonly, their inefficiency grows), and the lawyers with whom they’ve merged are encouraged to do more business, not less. Combining two law firms is a little like bringing together two big Lego towers to form a much larger one by adding a few bridging pieces.

So if firms neither seek nor obtain the streamlining benefits of merging, why are they merging in the first place? I posed that question in my article “Why Are You Growing?” in the most recent “Strategic Growth” edition of the Edge International Review, and I couldn’t find a very persuasive answer. I suggested, in fact, that at more than a few firms, merging isn’t so much an outgrowth of strategy as a replacement for it.

I went on to dispute the idea, buried deep among the assumptions inherent in law firm mergers, that when it comes to lawyers, “more is better.” Getting bigger, I observed, isn’t really the point of law firm growth. Becoming more effective, more valuable and more profitable is the point — and when you’re dealing with lawyers, adding more of them could actually interfere with those objectives, because lawyers are hard to manage in any firm and virtually impossible to manage in massive ones.

Cross-Selling

Which brings me to cross-selling (and to some observations borne out of an online conversation with Toby Brown).

One advantage frequently put forward in defence of global law firm mergers is the prospect of more business generated through cross-selling. With more partners in more offices in more key regions, the theory goes, there will be more opportunity for partners to reach out and generate new work from new partners in new offices, and to return the favour in kind.

It’s an excellent theory, undermined only by a larger practical problem: lawyers rarely cross-sell. In any firm “midsize” or larger — and I’ve now come to define that as any firm where you can’t fit all the lawyers into a workable cocktail party — most partners do not successfully cross-sell, and many don’t really try that hard. In most of these law firms, individual lawyers — not the firm itself — control client relationships. Therefore, a client will be referred internally only if his or her lawyer chooses to make that happen. Quite often, the lawyer does not.

Lawyers, as we know, guard their clients jealously, even from colleagues in their own practice groups. They will make no referral, and especially no long-distance referral, if they so much as suspect that the attorney or practice group to whom the client would be referred might fumble the ball, overbill the client, or otherwise make the referring lawyer look bad and potentially threaten the client relationship.

Now, you can certainly blame partner compensation systems in part for this problem, if they fail to appropriately reward cross-selling, although that’s the least of the sins to lay at their feet. Fundamentally, however, lawyers’ reluctance to cross-sell their partners can be traced to the breakdown of internal relationships and internal trust among a firm’s lawyers — or maybe more accurately, the failure of trusting relationships to develop in the first place.

Even in firms of 30 or 40 lawyers, these elements can be found wanting; but in a firm of hundreds or even thousands of lawyers, in multiple cities, on several continents, that challenge can and does graduate from Herculean to Sisyphean. In firms that big, you simply don’t know most of your “partners,” and you likely never will. Absent a high degree of familiarity and trust, the risks vastly outweigh the rewards for the potential cross-seller. (My Edge colleagues Gerry Riskin and Michael White have written articles addressing some of these issues, by the way.)

Unfortunately, however, it’s not as simple as “fixing” trust and relationships within a large or newly merged firm, assuming that you could. The problem goes deeper than that, and it goes back to one of those buried assumptions about law firms. As a rule, the individual lawyer, not the firm, gets to decide whether or not the client can deal with another lawyer; basically, the client gets referred internally if the lawyer who controls the client feels like it.

When you stop and think about it, that’s kind of strange.

The Lawyer vs. The Law Firm

When you walk into a clothing store, the first salesperson who greets you (even if he works on commission) will happily pass you over to a colleague to answer questions, receive advice, or otherwise be part of the transaction. At a car dealership, the first salesperson with whom you deal (and I can guarantee she’s getting a commission) will be willing to do the same. They’re not doing this because they’re warm-hearted communitarians; they’re doing it because they work for the company, and the company considers that you are its customer, not the salesperson’s. And the company is correct to believe this. The salesperson’s individual interests in your time and attention do not trump those of the company.

“But,” you and every lawyer reading this will instantly respond, “law firms are not clothing stores. In a law firm, the partner works for herself, she’s an independent equity owner, and she might well have pulled in the client herself, and she’s the one whose services will be delivered to the client and on whom liability will rest. She should have every right to dictate what happens to the client with whom she deals.”

And that, to my way of thinking, is the problem. Because a law firm in which this is the dominant cultural belief is not a business. It is not a functional commercial enterprise in any sense with which we are familiar. It is, to be blunt, nothing. It’s a warehouse where lawyers share rent, utilities, and a library, but not risks, rewards, or professional aspirations. It’s a farmer’s market; a neighbourhood yard sale; a souk. Some lawyers still feel like debating the old saw, “Is law a profession or a business?” I’ll tell you this: the typical law firm described above is neither a profession nor a business. It’s a cheap knockoff of both that behaves like neither.

And it cannot stand. Not when so many other real, actual, conforming-to-the-laws-of-enterprise companies are entering this marketplace. In real businesses, the interests of individual product makers or service providers are aligned with and subsumed into the greater interests of the company. In real businesses, personal success and market validation are integrated with the success and validation of the company. In real businesses, the salespeople don’t own the customers. 

This is more than a bug or an inconvenience or a profitability hiccup for law firms: it’s an existential challenge. It goes to the heart of why a law firm even exists in the first place — what purpose the firm serves in and for the market. And it’s creating serious stress at some of law firms’ most vulnerable points. The strain is already showing.

The Pressure Points

Look again at cross-selling. Law firms need robust cross-selling, because it’s almost the only source of organic growth that flows from a partnership format (as opposed to a lawyer’s own individual efforts). Without cross-selling, lawyers must develop business alone, on their own initiative — raising the fundamental question of why they’re even in a partnership in the first place. A law firm needs its lawyers to cross-sell, but it can’t force them to do so, and lawyers consider their clients to be part of their personal inventory. When it comes to cross-selling, therefore, a law firm and its lawyers are locked in an ongoing struggle for control of the client relationship — but for the firm, it’s always been a losing battle, because extremely few firms have built anything approaching a collaborative business environment to enable client sharing. There’s no collaboration at a farmer’s market.

Look again at mergers. In Canada, all the talk is about the decisions by Fraser Milner Casgrain and Norton Rose Canada to accept mergers with global firms that have a large US presence. This has never happened before, because most midsize and large Canadian firms receive huge inflows of referral business from multiple US firms, and tying the knot with one US firm means cutting off all those other streams for conflicts reasons. But let’s press that assumption harder: What will happen to a firm that loses all those referrals? The referral work will likely go elsewhere, yes. The lawyers who received that work will likely leave too. The firm will be smaller. But it will also be more focused, more specialized, more globally integrated — and quite possibly, more profitable for the remaining partners. Because, again, being big is not the point. Being effective, valuable and profitable is.

A law firm that pursues a merger which will surely result in a near-term loss of both referral work and lawyers has made a fundamental decision: the collective interests of the enterprise supersede those of some of its individual partners. The firm is saying: “We accept that this course of action will cause conflicts problems for many partners, some of them insurmountable, and that we may lose those partners and their revenue. But we have a core business objective: to serve X clients in Y markets through the provision of Z services, and that can best be achieved through this merger.” That is not only a gauntlet flung in the face of many powerful lawyers: it is a statement of rebellion against the cultural assumption that lawyers control clients. It’s an assertion of institutional identity and independence by the law firm.

Not many law firms have the wherewithal to try this and succeed. But assertions like these will become more common, because they are becoming more necessary. This conflict has always simmered beneath the surface of law firms, submerged from sight, except when the occasional skirmish erupted above the waterline. But now the entire fight is coming out into the open. Legal services has become a dynamic, competitive, global market, and the main reason so many law firms are struggling within this new market is that they cannot respond institutionally. They are held back by their lawyers, hamstrung by their souk culture, unable to muster enough collective gravity and momentum to make critical decisions. But they’re trying, more than they ever have before. Law firms in the future absolutely must become more streamlined, systematized, managed, automated, and centralized in order to compete — but that’s not what many of their lawyers want. So who wins, the firm or its lawyers? That’s the coming battle.

There is no shortage of conventional wisdom with which to object, starting with the old standby that “Clients hire lawyers, not firms.” And that might well have been true, much of the time, for many years. But I’m coming to conclude that clients acted that way primarily, and possibly only, because that’s how lawyers trained them to act. There has only ever been one source of outside legal services: the law firm. Most law firms have only ever been driven by one strategic imperative: the interests of their most powerful partners. Clients choose lawyers in no small part because that’s what lawyers want them to do. But give clients an actual choice of providers that approach business and client relationships differently — which our incoming competitors will deliver, in spades — and you have the opportunity to create a brand new playing field with a potentially whole new set of rules.

The Outcome

The lawyer vs. the law firm is a fight that’s been spoiling for years, and it seems to me that starting in 2013, it’s on. Once that battle is finally joined and completed, I can see only two likely scenarios for law firms that experience it.

1. The full-service law firm partnership will collapse. There will be insufficient reason for a broad array of lawyers to band together in a partnership when that model provides them with very few business benefits. If your “partners” will cross-sell or refer to you only on a whim, why are they your partners? The large, “full-service,” multi-jurisdictional law partnership will shudder and start to break apart; small, local, intensely interlocked practice groups will peel off and become the new basic unit of private legal enterprise. That result is where all the foregoing pressures are leading right now — if firms cannot gather enough internal cohesion to establish a business-first, practitioner-second culture, then the centrifugal forces that have been slowly pulling law firms apart for years will finish the job.

2. The law firm partner will lose his or her position as the driver of internal legal business. As apocalyptic as that first option above might sound, this would be the truly revolutionary outcome. Law firms require generous cross-selling and enlightened referrals; lawyers control both and resist both; ergo, cross-selling and referrals must be taken out of the hands of individual lawyers, because otherwise the continued viability of the firm is threatened. Under this scenario, the firm wins the war and becomes the primary or even sole driving force behind its business decisions; the cost will be high, measured in an outflow of lost work and departing laterals, and the loss of blood might be more than some patients can survive. But in the larger picture, the cult of the corner partner begins to die off, and a new cultural imperative emerges to govern law firm behaviour.

Unsustainable situations can’t be sustained forever. Conflicts at some point have to be resolved, and there is no bigger conflict within law firms than this one. If law firms are not strong enough institutionally to wrest control of client business from individual partners and distribute referral and cross-selling opportunities in a more strategic fashion, then they lose their primary reason for existence. If lawyers are not strong enough to retain primary control over their sources of legal work, then they stop becoming independent legal entrepreneurs and become the functional equivalent of mere employees.

Either the center will hold, or it won’t. That’s the question; in 2013, law firms will start to learn their answer.

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.


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