BigLaw levels up

My older brother used to give my teenaged self (with some justification) a hard time about playing Dungeons & Dragons. I eventually grew tired of the cracks about wasting time in a fantasy world, though, and I assembled what I considered a strong defence of the game. “D&D helps you build a lot of skills,” I said. “You develop your imagination and creativity; you practise your problem-solving abilities; you learn to collaborate with others and pool your unique resources in working towards solutions.” This triumph of rationalization clearly had “future law student” written all over it.

But here’s something else Dungeons & Dragons pioneered: It was one of the first games to reward a player’s success with greater abilities. You don’t gain powers throughout a game of Monopoly or Risk or Scrabble; you just amass more money or territories or points. But in D&D, every successful venture results in “experience points,” and when you reach a certain amount, your character moves up a level and gains new abilities as a result. Your capability increases as you gain experience — much, ironically enough, as in real life. It’s called “levelling up,” and today, so many games contain some variation on that theme that we take it for granted.

Of course, as you level up, your opponents become stronger and your challenges become greater — again, much as in real life. Large law firms, it seems to me, are now in the process of “levelling up” — through effort and experience, they’re forging successes that are increasing their effectiveness and helping them pull ahead of their peers. But as they do so, newer and tougher challenges are rising up to greet them — and it’s an open question whether the firms will be up to the task.

BigLaw has, in fact, been paying attention to what’s going on around it, and this should not really come across as a surprise. For all the grief that people like me enjoy giving them, large law firms are not actually hapless dullards stumbling backwards towards the edge of the cliff. They’re big operations with tons of money and some really smart people high in the org chart, and they’ve noticed that the legal environment is undergoing irreversible change that threatens their business model. Not every firm that recognizes its peril can do something about it; but those that see the challenge, and can execute to meet it, are more numerous than popularly believed.

A raft of examples has emerged just in the last few months to illustrate this. Prof. Bill Henderson highlights three large firms — Bryan Cave, Littler Mendelson, and Seyfarth Shaw — that have made great strides in technology, systematization, and workflow, and are revolutionizing the way they do business and serve clients.  The American Lawyer‘s Aric Press points out the rapid rise of pricing officers in BigLaw (76% of large US firms now have one) and its implications for changes to cost and profitability management, value definition, and partners’ pricing discretion. LeClair Ryan teamed up with LPO United Lex to create a Legal Solutions Center for doing routine, repeatable work with low costs and high systematization, just the latest in a line of firms to outsource straightforward work to a low-cost provider. Allen & Overy even commissioned and published its own report into the future of legal service delivery.

Ron Friedmann argues that far from being disrupted, BigLaw has begun to adapt to the new forces at work in the market: “Most US large firms continue to perform fairly well. While some firms do suffer, many thrive.” This undoubtedly is true. To a greater or lesser degree, many BigLaw firms have levelled up: they’ve learned, invested time and energy, and made adjustments that helped them improve their productivity and effectiveness. They should be commended for that, because it really is not easy to introduce change of any kind into large organizations with extremely diffuse decision-making authority and a deep ambivalence about innovation. [do_widget id=”text-7″ title=false]

But the thing about levelling up, of course, is that as your own powers increase, your quests become tougher too. Intermediate warriors don’t take on goblins and orcs anymore; they’re up against cave trolls and frost giants. It’s great that BigLaw is overcoming its initial challenges, because the next set will not only be tougher, they’ll be multi-dimensional. From my perspective, here are four forces with which large law firms will shortly have to contend:

The exponential growth of technology. I’m still relatively sanguine about the ultimate impact of technology on the legal sector — mostly because I’ve never yet had to reboot a lawyer. But it’s difficult to ignore the evidence that machines are becoming extraordinarily good at replicating many functions that firms traditionally assigned to their attorneys. Clio’s Joshua Lenon provided a useful overview of a panel at the most recent International Legal Technology Association meeting that featured insights from four accomplished legal tech leaders. Lawyerist’s Sam Glover explained Fastcase’s Bad Law Bot and its head-spinning implications for litigation. There are so many new applications now, from Shake and Fair Outcomes to Neota Logic and Picture It Settled, that it’s a matter of when, not if, tech will start seriously infiltrating BigLaw.

One name in particular keeps popping up in these conversations: Watson. The American Lawyer gave us a snapshot of what IBM’s machine-learning behemoth is now capable of (the version that won Jeopardy! could read 200 million pages in three seconds; the current iteration is 24 times faster). IBM’s GC, Robert Weber, believes Watson could pass the bar tomorrow. (Interestingly, he also believes non-lawyers shouldn’t be allowed to own law firms.) Watson’s potential legal applications are already emerging: a version called The Debater assembled arguments for and against banning video games based on a lightning-fast survey and analysis of existing content on that topic. Ron Friedmann described some reservations about the outlook for Watson in law; for my part, I think there are many more repositories of useful legal data than large law firms that would be willing to help create these tools. And when technology does finally penetrate BigLaw firms, one impact will be felt above all others:

The collapse of their compensation systems. Michael Mills of Neota Logic, a speaker on that ILTA panel, wrote an incisive article about legal technology and innovation, specifically about the one feature integral to law firms that blocks both these forces: the billable hour. “The elephant in the room is stamping and snorting and must be heard: Innovation destroys hours. Now, that’s bad wherever the majority of lawyers’ revenue is rates x hours. Every hour saved is a dollar lost. But it’s especially bad for law firms, and that is almost all of them, whose partner comp schemes set the income of individual partners with a formula that counts the individual partner’s hours, or the hours of her team. Because then she knows that she will be personally penalized for her own innovations.” Innovations reduce law firms’ inventory, the billed hours of their lawyers. But equally, innovations are inescapable. You can see where this is heading.

Technological automation, process management, and operational efficiency will all be essential to the ability of large firms to be profitable in the years to come. But virtually every new tool or system that increases a firm’s productivity reduces the time spent to complete a task, and “time spent” is the lifeblood of lawyer compensation systems. And as I wrote years ago, the traditional law firm simply can’t function without counting and maximizing hours; it’s built into their financial and cultural DNA. De-emphasize or remove time as a factor in productivity, and you remove the one card holding up the whole house. So law firms that hope to be both functional and profitable will have to find new, non-hourly ways to remunerate their people. I don’t know of a single BigLaw firm that’s even close to that point. Something’s got to give here — but it’s not going to be the market forces driving change. It never is.

The rise of colossal competitors. The legal market is at the precipice of unprecedented regulatory upheaval. Most everyone knows about the Legal Services Act and the licensing of more than 300 Alternative Business Structures in England & Wales over the last couple of years. Not everyone realizes that among the legal entities that have been authorized there are law firm businesses owned by a giant insurance company, a telecommunications provider, and a financial and consumer services company. Most significantly, three of the Big 4 accounting firms have considered or (in the case of PriceWaterhouseCoopers) already received an ABS licence. These are all entities that traditionally have retained large law firms or have referred work to them. Non-lawyer law firm ownership, already approved in Australia and Great Britain, has been endorsed by the Canadian Bar Association and will likely be considered by Canada’s largest legal regulator next spring. Sooner or later, at least one US jurisdiction will follow suit, and the world’s largest legal market will be changed forever. This is the future competitive landscape that BigLaw needs to start anticipating today.

Take a closer look at the accounting firms, because if there’s any potential new player in the market that should keep BigLaw’s managing partners awake, it’s this one. “Accountants aren’t kidding with ABS this time,” wrote The Lawyer‘s Catrin Griffiths earlier this year, and she zeroes in on exactly why BigLaw should be watching very carefully: “The accountants are after bread-and-butter commercial, employment, mid-level corporate, immigration, outsourcing and IP; it may not be bet-the-company stuff, but they create deep relationships with clients that can be leveraged.” It can be argued that the likes of Parabis and Co-Op and Slater & Gordon are focused on the consumer market and therefore safely distant from BigLaw’s hunting grounds (although Parabis evidently aims to move into the corporate market); the same can’t be said for “Big4Law.” Lawyers struggle with value billing; accountants advise their clients on it. A tiny handful of the world’s largest law firms generate $2 billion in revenue a year; as Catrin points out, PWC alone clocks in at $32 billion. If a fight does break out in this sector, it won’t be a long one or a fair one.

The emergence of client self-determination. In some respects, this might be the most significant new challenge for BigLaw to unravel, because it goes to the heart of law firms’ work supply chain. Many lawyers have already experienced a reduction in work and revenue from corporate clients, and the biggest reason has been insourcing: clients keeping a growing chunk of work inside the law department. “Over the past decade, the number of in-house lawyers has doubled in the UK. Now, one in five lawyers practises in-house. Over time, private practice has lost up to 20% of its market share to its clients,” writes Reena SenGupta in Legal Business. “Few private practice partners can pre-empt problems in the way their in-house counterparts can. … Where will their value be in the future? Outside of specialist legal knowledge that does not reside in the internal legal team or the ability to marshal bodies for a major matter (and the necessity for the latter is in question), where is their value-add?”

I wrote recently about how clients will become lawyers’ biggest competitors, and nowhere does this apply more than with corporate, commercial, and institutional clients. They have the unique combination of a strong impetus to manage their legal affairs better and the financial assets with which to make that possible. They are re-positioning themselves in their relationships with outside counsel, viewing BigLaw as just another resource rather than the default sourcing option, and they’re placing themselves at the centre of a new risk management ecosystem. Large firms, for the most part, have no idea what to do about this. They find it difficult to look at the world through clients’ eyes; they lack the necessary empathy. They know how to receive and perform legal work, not how to develop and manage the complex client relationships that produce work. This is an institutional skill, one that can be learned — but it’s much tougher than installing new software or even initiating legal project management.

BigLaw has seen and has begun to respond to shifts in the legal market, and kudos to those firms that have done this the best. But I want to make it clear to them that this process is not over, but rather is just beginning. Fundamental assumptions about their business models, their competitive environments, and their client relationships are all poised to shift dramatically over the next ten years, and it will require extraordinary effort, resilience, and leadership for them to adjust accordingly. Many firms have found it exhausting just to get this far, and I’m not sure how well they’ll respond to what’s coming.

It would be foolish to write off BigLaw, even given the enormity of these challenges: recall what I said earlier about what size, smarts, and money can accomplish. But, man — this is not going to be easy. Welcome to Level 2.

Jordan Furlong is a lawyer, consultant, and legal industry analyst who forecasts the impact of the changing legal market on lawyers, clients, and legal organizations. He has delivered dozens of addresses to law firms, state bars, law societies, law schools, judges, and many others throughout the United States and Canada on the evolution of the legal services marketplace.



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