Playing the client’s game

Some years ago, when I was working for the Canadian Bar Association, real estate lawyers in Canada became deeply troubled about losing their lead role in residential real estate transactions. They complained that they undertook a great deal of work and expense to ascertain the validity of title, yet they made only a few hundred dollars per transaction, while realtors and title insurance companies did much less (in the lawyers’ view) and made much more. Many of the strategies drawn up to change this state of affairs aimed (ineffectively, as it turned out) to restore the lawyer as the “quarterback” of the real estate deal.

Maybe you're not quite right for this role.

Maybe you’re not quite right for this role.

My problem with that approach, as I expressed it at the time, was this: I don’t think lawyers are the quarterbacks in this market. Quarterback is the most powerful position in football, a big-picture strategist, personnel manager, and elite performer all rolled into one. But most lawyers are tacticians, not strategists, and they prefer neither to manage nor to be managed. More likely, I said, we’re the third-down fullback called on to blast through the line in a short-yardage situation, or the speedy wide receiver who goes deep on 3rd-and-22 to make a big play. We’re specialist performers who wait on the sidelines until we’re called upon to do one thing really well.

I was reminded of that observation this week when I read a column by Anthony Hilton in the UK’s Evening Standard with the galvanizing title, “Why their profession’s failures mean lawyers don’t win top City jobs.” Among his critiques of the commercial bar, Hilton had this to say:

[L]awyers have allowed themselves to be pushed further and further down the food chain, and away from the seat of power. In today’s commercial world, when there is a deal to be done, it is picked over by investment bankers, brokers and public relations consultants — all of whom have a share of the ear of the chief executive. Then when all the high-level stuff has been sorted by these experts, the package is tossed to the lawyer with instructions to sort it out and make it presentable. … 

[L]awyers have lost the glamour, the access and the special status that came with having opinions worth listening to. They have allowed themselves to be commoditised and to become the last port of call. They have allowed some of their best brains to move in-house as general counsel in the biggest companies, taking the interesting legal advisory work with them. … 

Now, when Hilton speaks of “lawyers” here, he means the private Bar, members of law firms engaged in private practice. But of course, “lawyers” are also working in-house, as the very corporate counsel he refers to here. They’re serving as the executive-level advisors and risk management experts in corporations’ corridors of power.

So it’s not a question of “lawyers” per se losing their power and value. It’s a question of where lawyers need to go these days if they want to develop real power and deliver real value in corporate affairs. Hilton suggests they need to go to the client side — and that, when you think about it, is an astounding turn of events. Remember when law firm partners would look down dismissively on those lawyers who “couldn’t cut it” in practice and had to take refuge in-house? It wasn’t all that long ago.

I don’t think there’s any question that power (and therefore prestige) is increasingly accumulating on the buyer’s side of the legal service relationship. How much power? Consider another column, this one by Alex Novarese of Legal Business in the UK, who was reflecting on whether anything in the legal market really posed a genuine threat to the world’s most elite law firms. He concluded that there was such a threat:

[I]t comes from those paying the bills, the clients. The sustained development of in-house teams means major bluechips already have legal teams that resemble global law firms in their breadth and resource. …  The drain of good people from private practice to in-house has become a feedback loop and a dangerous one for law firms as it remakes the legal industry. In the UK, more than one in four commercial lawyers works in-house. On current trends, it is not outlandish to imagine a 50/50 ratio in 20 years. What happens to the conventional buy/sell dynamic when the clients have as many providers in-house as externally? Why go to a law firm at all?

That last question is remarkable simply for the fact that it can reasonably be asked. And as the world’s largest legal buyers build more and more internal legal capacity, there’s no obvious answer.

Google’s in-house law department, for example, employs 1,000 lawyers to focus solely on legal issues, which is more scale and expertise than the vast majority of law firms can muster. But Google, like many other companies, also maintains a Legal Operations team, which handles legal technology, internal operations, and interestingly, “vendor management” — and the “vendor” category includes outside counsel. Law firms, increasingly, aren’t going to report to the General Counsel — they’re going to report to the Director of Vendor Management. What does that tell us about how power and prestige are shifting?

If you’re looking for the quarterback in the corporate legal market right now, I think you need to go visit Legal Ops. The skyrocketing growth of the Corporate Legal Operations Consortium suggests that Legal Ops will continue to take on more power and responsibility in the corporate legal services relationship. And as power continues to accumulate on the client’s operational side, a major change is occurring in how corporate clients view legal matters.

The ongoing trend towards insourcing legal work, and the consequent decline in the amount of work sent to law firms, confirm that corporations are now building up their internal legal infrastructure. But they’re not just adding more lawyers — that would amount to simply replicating law firms inside the corporation, which is not a smart way to go about it. Large corporations are instead re-engineering their legal infrastructure towards a new model, one in which Legal doesn’t seek to address every legal issue within the company (which is an impossible task in massive organizations). Instead, the new infrastructure aims to help the company and its people solve legal problems themselves — or better yet, anticipate legal risks and thereby avoid problems altogether.

That’s a significant strategic shift, because it re-envisions the role of “legal problems.” Law firms tend to regard legal problems as part of their inventory, providing solutions to those problems on an hourly basis. But corporations view “legal problems” as an obstacle to business continuity and corporate profit, and therefore as something to be minimized and eliminated. In this model, legal expertise reduces friction and therefore cost. It’s not something you buy, it’s something you integrate into your business to help it run better.

“There are no legal problems,” said Cisco’s Mark Chandler recently. “There are only business problems.” I don’t think that’s entirely correct. But it doesn’t matter what I think — it matters what the general counsel of one of the world’s largest corporations thinks. And he’s redefining legal issues away from law firms and towards the company’s legal infrastructure.

No, I’m not saying this is “the death of BigLaw,” obviously. What I’m suggesting is that the large, full-service law firm — the traditional business platform for private-sector lawyers serving corporate and institutional clients — is entering a period of existential crisis. What purpose will law firms serve in this market? Why will clients go to them at all? What do they offer that the buyer cannot either develop and deploy internally or acquire elsewhere at a competitive price?

I’ve heard it said that 80% of corporate legal work is going to either stay in-house or be directed to lower-cost third-party specialists, with the remaining 20% of high-end, high-stakes legal tasks (the “bespoke” work) delegated to outside counsel. But law firms developed as destinations for 100% of that work, and they have the size, overhead costs, and hierarchical structure to prove it. What does it look like when a supplier loses 80% of its business? How do you cope with that?

We’re entering uncharted territory here, and there are possibilities arising that we’ve not considered before. Maybe full-service law firms that performed every aspect of a legal matter, no matter how trifling or routine, were a temporary stop on the evolutionary road of legal services. Maybe such law firms are vestigial and will eventually fall away — to be replaced by smaller expert boutiques where legal shoppers go for occasional splurges, while the rote work that supported their predecessors is either claimed by software and systems or is performed by clients in the ordinary course of events.

Is that the future for BigLaw? Are large law firms destined to be simply a collection of third-down specialists, niche experts called in to perform a high-value task once in a while? And if so, is there necessarily anything wrong with that?

I really don’t know the answers to these questions. But what I do know is that law firms — at least, as they are currently owned, structured, and managed — are in the process of losing their status as the legal market’s power brokers. The center of gravity in this market is shifting to clients, and it’s not going back. The law firm is now just one more resource among many, a particularly fussy and expensive resource called in only when absolutely necessary. And someone else is going to decide what “necessary” looks like.

The last, ominous, word on this goes to Alex Novarese: “what your clients want is not always good for you. What your clients want can clean you out.”


How client succession is driving law firm consolidation

Maybe, as the President of the United States believes, the world needs more Canada. What we do know is that the world evidently needs fewer Canadian law firms.

It’s been a busy month in the Canadian legal marketplace. On Sept. 12, Norton Rose Fulbright completed its six-year-long Canadian expansion by acquiring Vancouver’s 95-lawyer Bull, Housser & Tupper. On Sept. 20, DLA Piper picked up Toronto IP boutique Dimock Stratton and 16 of its 19 lawyers. And just yesterday, the largest firm in Manitoba (Aikins, MacAulay & Thorvaldson) and the largest firm in Saskatchewan (MacPherson Leslie & Tyerman) announced their merger and the creation of a 240-lawyer western Canadian firm, MLT Aikins. Market watchers might also recall that global labour and employment law giant Littler Mendelson came to Canada last year by swallowing Toronto L&E boutique Kuretzky Vassos, among other recent consolidations.

Canadian lawyers celebrating another law firm merger.

Canadian lawyers celebrating another law firm merger.

There’s something going on here, and it’s not just limited to Canada. I’ll run through some of the local implications first before looking at the big picture.

The Norton Rose, DLA Piper, and Littler expansions are qualitatively different from the MLT Aikins merger (although the fashionable thing these days is apparently to call all such deals “combinations”). These first three deals are acquisitions, pure and simple — and the easy way to differentiate an acquisition from a merger is that in the former, the name of the acquired entity disappears completely. Norton, DLA and Littler are international firms with worldwide brands, and a major element of their value proposition is sheer size and geographic reach. Each of these firms grows by absorbing smaller firms (or in the case of Ogletree Deakins, which also crossed the 49th parallel earlier this year, by raiding an established large firm). Norton Rose says its shopping spree is done; I’d be surprised if the same were true for DLA or Dentons, or for other global firms that are probably in serious acquisition talks with smaller Canadian firms right now.

MLT Aikins is a different beast — it’s a good old-fashioned blockbuster merger, of the kind we’ve not seen around here for awhile. The two originating firms were about equally matched in size and reputation in their neighbouring provinces (it’s a coincidence, but a nice one, that two of western Canada’s largest potash companies also announced their plans to merge this month, creating a $36 billion behemoth). A Prairie law firm (MLT Aikins will have a robust presence in Alberta and a smaller one in British Columbia, but it will probably be dominant mostly in its home provinces) is a sensible idea, and an overdue one: look at Atlantic Canada, where a fleet of small provincial firms merged into regional powerhouses back in the 1990s. And while many people outside the country (and more than a few inside) might dismiss what they think of as Canada’s “flyover provinces,” there’s a lot of resource development and business innovation happening there. If the two firms can successfully merge their cultures and operations — and that, of course, is always a colossal “if” — than MLT Aikins could be a powerhouse.

But this trend isn’t limited to Canada. Altman Weil told us back in January that 2015 was a record year for US law firm combinations (there’s that word again). Look closely at the list, however, and you’ll see that most of these “mergers” were the absorption of smaller firms in myriad jurisdictions by global giants (Dentons in particular seems like it won’t be satisfied until it has an office on the moon).

The advantages to the acquiring firms in deals of this type are obvious: new locations opened, top lawyers acquired, cash and PPP infused, brand extended, and so forth. Not everyone would choose to make size and reach their market differentiator, but if that’s what your firm has decided to do, then these are the tactics you adopt. Managing a firm that far-flung and with that many people — most of whom belong to a profession that’s not exactly renowned for collegiality and esprit de corps — is going to be, shall we say, a challenge. But if this is the life you’ve chosen, then I wish you godspeed.

What’s a little harder to perceive are the advantages to the acquired firm. Name deleted, history ended, autonomy lessened, reputation slowly fading away as new brand replaces old — that’s not what you’d normally consider a loot bag of treasures. If the new name, brand, and reputation are superior to your old one, then great. And if the new platform is stronger, more technologically advanced, more efficient and productive than what you had before, then all the better. But it seems to me that few law firms secure in their markets and happy with their current status and future prospects would be rushing to make that trade. One does not normally submit to another’s terms from a position of strength.

Shortly after Altman Weil released its 2015 merger report, Edwin Reeser, one of the most perceptive analysts of the current BigLaw market, published his own commentary, which included the following observations:

We can expect more “merger” activity as long as there are buyers in the marketplace who are interested in the acquisition of revenue streams. Who are the sellers of these revenue streams? In many instances, they are going to be lawyers, typically smaller groups of lawyers, who have something worth selling. But why would they sell voluntarily if they have a good thing going? Typically because they have one or two fundamental problems associated with their sustainability as an enterprise. One is succession to leadership. Two, and perhaps more fundamentally, to continue generation of the revenue stream when one key partner retires. 

A “merger” into a larger firm with an established operating structure and breadth of talent can help preserve that revenue stream. The pricing for such a move to a larger firm usually involves: (1) a compensation cut for the acquired lawyers, a function of higher overhead and thus lower operating margins in many larger law firms; (2) the need for a profit for the acquiring firm to be derived from the work and revenue generated by the new addition; and sometimes (3), a deal feature that allows the acquired lawyers to monetize and harvest some of the built-up value in their firm that would otherwise be lost if they were to wind down.

I am not, emphatically not, applying the foregoing analysis to any of the firms mentioned in this piece. But the term “liquidating merger” has a lot of resonance to me in this current market, because it tracks with something else I’ve been noticing for awhile myself.

I’ve been saying to law firms over the last year that the “succession planning” train has just about left the station. The time to plan for succession in law firms, to begin transitioning client relationships from senior partners to younger ones, was five to seven years ago. Many of us in the commentariat tried to persuade law firms in this direction; not many firms tried, and few succeeded. Now, because succession planning didn’t occur, we’re entering a period of “succession management” — and you can read that in the same sense as “crisis management” or “disaster management.” This will prove to be a significant, and ultimately transformative, development.

All these matters will be lost in time ... like tears in rain ... Time to merge.

All these matters will be lost in time … like tears in rain … Time to merge.

Succession is going to happen in law firms, in the sense that when a client relationship partner retires, that relationship and the work that accompanies it will transition to another provider. But as we know, in most law firms, the partner has no interest in encouraging that transition. The last five years of his practice figure to be the most gloriously profitable of his career, the crown upon his decades of hard work, and he’s not going to let any other head wear that crown even part-time or on weekends. Pleas from the managing partner to “think of the firm’s future” and “leave a legacy” will melt some partner hearts, but not most. I’m not judging any lawyer who responds in this fashion, but that’s the reality in many firms, and it’s an enormous challenge.

But here’s the thing: that challenge is actually greater than most firms realize. Because while the firm’s leadership fumes and fulminates about “succession,” the client is over here waving its hand and saying, “Uh, I’m pretty sure I have some say in where my legal spend is going now.”

The problem with “succession planning” is the arrogance of the assumption that the firm will unilaterally decide who takes over the client’s work, perhaps by way of written notification: “Dear client, since Bill has retired, you will now be dealing with Bob, best regards.” Clients, as I’ve been saying for some time now, have options, and they are exercising them. They can choose the lawyers in this firm with whom they want to deal, or they can choose another firm, or an LPO, or a flex-time lawyer platform, or an employee doing insourced work, or a software program. I’m just guessing here, but I doubt that most clients enjoy being regarded as an asset to be passed on to the law firm’s next generation, like a sacred relic or a family heirloom. The days when the firm could simply assume the client’s continued patronage following a partner transition are done.

That’s why the real opportunity presented by “succession” is to open a dialogue between the firm and the client about how the client would like to be served following the partner’s retirement. I wouldn’t be surprised if many clients actually look forward to these retirements — not because they’re glad to see the partner go, but because it gives them an opportunity to reset and enhance the business relationship without the risk of compromising the personal relationship that had developed. But I don’t think most firms recognize this opportunity, or act on it if they do. They see only that a lawyer who “controls the client” is retiring, and they need to find another lawyer to “control the client” afterward. But they lack the cultural mechanisms and the leadership to pull that off, and even if they could, they’re missing the larger point about how the nature of client relationships has changed.

The upshot, in firms that are experiencing this phenomenon, is that the eventual or imminent departure of relationship partners will leave the firms with few prospects for their continued growth or even stabilization. Within the next five or ten years, most of their business generation and client relationship machinery is going to be sailing yachts around the Mediterranean. As Ed Reeser says, the firms are losing the means “to continue generation of their revenue streams,” and they lack ways to renew those streams or start new ones. The next generation of partners, seeing this unfold before them, starts eyeing the exits, and the junior lawyers get worried and restless. In those circumstances, why not pick up the phone when the big firm calls, so that the indignity and messiness of a gradual decline can be replaced by the savvy strategy of merging with a global giant?

The inability of many law firms to address the difficult issue of key partner retirements, or to take advantage of the opportunity they present to reset and strengthen their client relationships, has left the firms with few options for continued growth down the road. This has surely been increasingly clear to the leadership groups within these firms for some time. And now we’re seeing a marked rise in the dissolution of law firms through their acquisition by much larger firms, effectively pushing all the difficult conversations and decisions about the firm’s future onto the desks of strangers in another city or country. It might be a coincidence that these two developments are trending in parallel. But I’m not inclined to think so.

The ethics of innovation

Earlier this year, a legal periodical called me up and asked my opinion of third-party litigation financing. As you might know, my view of this particular innovation (detailed here on three previous occasions) is not a wildly enthusiastic one, and I said as much, at some length. Shortly after the article was published, I was contacted by a representative of a litigation financing company, who invited me for coffee to discuss the industry and exchange some facts and opinions about it. Since I’m partial to new perspectives and sworn to coffee, I agreed.

In the event, two people from the company met me at the local Starbucks, and we had what I think was a good conversation. They were sincere, well-informed and reasonable, and I came away more favourably disposed towards their company, given what they described as their careful evaluation of the kinds of cases they take on. I learned some things I didn’t know (for example, litigation financing emerged in Australia, where contingency fees remain prohibited). They shared my views on the shortcomings of our present litigation system and they cared about improving access to justice, so there was certainly common ground between us. (You can see the “But” coming, I’m sure.)

But, for all that, I don’t think either side managed to persuade the other towards its perspective, and I suspect much of that was down to the irreconcilably opposed premises with which we approached the subject. I have a baseline aversion towards the encouragement of litigation, as I think we should do what we can to discourage it; they believed legitimate cases should have the chance to be aired before the courts. I have philosophical and ethical objections to disinterested third parties financially supporting private litigation in exchange for a share of the proceeds; they did not. I feel that the proliferation of third-party litigation financing would put an end once and for all to public funding of access to legal services, as governments would come to say that “the private sector can address that”; they said the type of commercial cases they support wouldn’t be eligible for public funding. So while our talk was cordial and informative, there was probably never much chance our minds would meet.

But as we were gathering up our cups to leave, a thought occurred to me (much like Oscar Wilde, I often think too late of smart things to say). Over the course of our conversation, my interlocutors had consistently referred to litigation financing as a way to “level the playing field” between impecunious plaintiffs and rich defendants. And of course, that’s a powerful concept, and who could argue with it? But something about it had been nagging at me, and I finally figured out what it was.

“What would happen,” I asked them as we stood to leave, “if third-party litigation financing was used not to level the playing field between two unequal parties, but specifically and intentionally to imbalance the playing field between two otherwise equal parties? Is there any reason it couldn’t be used for that purpose?” If we’d had another hour, we might have taken that thought in interesting directions, but time was pressing and we didn’t have the chance to explore it further.

A few weeks after this conversation, a man named Terry Bollea won a defamation and invasion of privacy lawsuit in Florida against a company owned by a man named Nick Denton. You might know the case better as Hulk Hogan’s $140 million verdict against Gawker for publishing sex-tape footage featuring Hogan in 2012. What became apparent soon after the verdict was that Silicon Valley billionaire Peter Thiel had financed the litigation as part of a feud stemming from Gawker’s outing of Thiel as gay in 2007. “It’s less about revenge and more about specific deterrence,” Thiel told The New York Times. Denton has since declared bankruptcy and Gawker has shut down.

I know it's hard to believe, kids, but Charlie Sheen was once a bankable movie star.

I know it’s hard to believe, kids, but Charlie Sheen was once a bankable movie star.

Now, there’s a lot to unpack here. I’m pretty much the last person who’ll defend the kind of “journalism” practised by Gawker, especially in its later years, when it seemed to lose any sense of what it was trying to accomplish beyond embarrassing people (I’m inclined towards Jeff Jarvis’s views on that subject). But it’s hard to escape the reality that a billionaire used the courts to kill a publication, not in a case that personally involved him, but in a case to which he had no connection other than sharing the plaintiff’s animus towards the defendant. There wasn’t even a financial return behind the “investment”: Thiel has been quite clear in interviews that Gawker’s destruction was not a side effect of the litigation, but its purpose. (And Thiel is now helping launch a litigation finance company himself.)

If you have any kind of rooting interest in a free press unafraid to uncover important things about powerful people and institutions, the Gawker case should thoroughly unsettle you. Gawker makes an easy villain; but suppose a local paper is pressing a powerful property developer a little too hard, or an online industry watchdog learns about a history of sexual exploitation by a major celebrity. Or go beyond media: if incredibly wealthy people can pursue personal vendettas by leveraging our dysfunctional litigation system to ruin someone’s life, and succeed, then I think we’ve completely lost sight of why we even have a litigation system in the first place.

But my larger point is this: we need to remember that every innovation is a double-edged sword, with the potential to do a lot of good and at least as much harm. We’ve always understood and accepted this in theory, but now we have to grapple with two additional, very practical considerations.

The first is that when considering any new innovation, no matter how highly sung its praises, we always have to ask ourselves: “What if bad people use it? What if reckless people use it? What if it were put to its least valuable and most destructive uses?” Because the worst case is going to happen — in law just as in the world at large. And we have to decide if, and to what degree, we’re morally ready to live with the consequences of that worst-case scenario — especially because we won’t always be the ones on whom those consequences will be visited.

I’m not looking to make litigation financing companies wear the goat horns for Thiel’s perversion of the justice system (from which they’ve striven to distance themselves). But I’d like to think the Gawker case would give the industry serious pause, and encourage it to reflect on whether it really is helping “turn the courts into casinos,” as its critics charge. If the industry chooses not to do that, then it will have missed a major opportunity and created significant future risk, not just for itself, but for a whole lot of other people.

And the second consideration is that innovation in the legal market has now progressed to the point that, in addition to principled arguments on these subjects, we now also have access to test cases. We can now start to see what the real thing looks like, and it’s not always pretty.

I don’t think most people in the litigation finance industry foresaw the Gawker case or would welcome it if they had, but there it is all the same. I doubt most of us who supported the ability of law firms to seek public financing foresaw or welcomed the smoking wreck of Slater & Gordon, but there it is all the same. I wrote, in that linked article, that the lesson to be drawn from Slater & Gordon’s catastrophic flameout is not to ban non-lawyer ownership, but to closely and carefully study its example. Conduct a thorough examination of both the first great success and first great disaster of public ownership, and learn whatever lessons are necessary to help the next firm to try this innovation get it right. I think we need to adopt that approach across the legal innovation spectrum.

I believe that selling shares in law firms should be allowed, because the ethical challenges have so far proven manageable (Slater & Gordon’s failure was caused by a business error, not an ethical one), and because law firms will need access to deeper pools of cash than partnership equity alone can provide. I also think that third-party litigation financing should be strongly discouraged, because at the end of the day, it’s really just an investment vehicle whose operating principle (give everyone equal access to enough cash to pay lawyers and continue litigating) would permanently entrench in the legal system its worst fault, the paramount and perpetual indispensability of money to any hope of obtaining justice.

Now,  I could be right or I could be wrong about both these things. I’ve had the arguments before and I’ll surely have them again. But we don’t have to debate this only in theory anymore. Let’s look at what’s actually happening and make whatever adjustments that honest and serious reflection demands.

I’m willing to take that approach to public financing of law firms after Slater & Gordon. I hope advocates for third-party litigation financing are willing to take that approach following Gawker. And I’d like to urge you, regardless of the legal innovation you favour, to do the same. “What’s the worst that can happen?” That line is usually read as a joke. Ask yourself that question in all seriousness — and in all seriousness, answer it.

Some light summertime reading for you

Even though Law21 was offline for the first half of 2016, I was still busy writing a number of articles and contributing columns to several publications worldwide. Now that they’ve all been published, and since, let’s face it, August is not a month generally conducive to either producing or consuming huge tracts of original content, I thought I’d share the links with you today.

It's a little early for a clip show, don't you think?

It’s a little early for a clip show, don’t you think?

Back in January, I wrote a column for Bloomberg Business Of Law about the fact that “Consolidation is Hitting the Canadian Legal Market.” Among my observations:

I’ve been saying for awhile that although Canada is not over-lawyered, it is “over-firmed.” There are too many large firms for such a modest population and capital base. Combine all that with the development of truly sharp and businesslike management in a small but growing number of aggressive law firms worldwide, constantly on the lookout for expansion opportunities. The end result is a situation where, regardless of the local fiscal weather, the underlying economics and demographics of Canada’s legal sector suggest that consolidation and reorganization are right on time.

Then in March, I contributed an item to the Spring 2016 edition of Law Matters, the newsletter of the Canadian Bar Association-Alberta, titled “9 Emerging Truths About Legal Service Delivery.” Here’s #2:

Lawyers will ultimately benefit from a multi-provider market. In truth, we’ve been punching below our weight for some time now, devoting our immense talents to tasks that are essentially clerical, transactional or procedural in nature. Others will take that work from us — and in the long run, we’ll thank them, because we will be freed to apply our highest and deepest skills to more important and valuable needs and opportunities.

Shortly afterwards, Lexpert magazine published a column in its April 2016 issue with the slightly aggressive title “Lawyers: Accountants are eating your lunch.” Here’s one of the reasons why:

The Big Four prioritize the client relationship: they learn everything they can about the challenges, risks and opportunities facing the companies they serve, and they constantly look for ways to help their clients achieve their goals. They streamline their processes and systematize their operations with technology, in order to make their costs of production lower and more predictable. They promote their brand above their individual professionals, not the other way around.

In June, after already having recorded a podcast with Sam Glover, I wrote a column for Lawyerist called “What Makes Uber Tick, and What Lawyers Can Learn from It,” in which I said, inter alia,

The lesson for lawyers, especially those in sole practice and small firms, is this: the many new competitors in our market are not beating us on quality. They’re beating us first on service and convenience, and then on price. We’re not being out-lawyered in this market. We’re being out-customered.

And finally, just this week, I contributed one of several entries in SmartLaw: Expert insights for the future of law, a free downloadable e-book published by HighQ. My entry was titled, “Move your feet,” about mobilizing your law firm:

Instil not just a sense of urgency among your equity owners and employees, but also an ethic of continuous responsiveness. Help your people understand that this isn’t a one-time crisis, but an ongoing process of market adjustment that requires fluid, real-time reaction. Don’t just wait to see what other firms are doing so you can copy them. Be the firm others try to copy — and do it so well that they don’t stand a chance.

I hope the foregoing constitutes some light summer reading for you (in reality, I hope you have access to much lighter summer reading than that), and I’ll be back with a new post later this month.

The endangered partner

Last time out, I wrote at some length about the coming obsolescence of law firm associates. So it now seems only fair to turn the spotlight onto the other category of lawyers within law firms: partners. (Equity partners, that is — I’m not bothering with the transparently profiteering holding pen of the “non-equity partner,” a term that still makes about as much sense as “non-lawyer attorney.”)

A good place to start this inquiry is with a simple question: why do law firms even have “partners,” anyway? What’s the value proposition that the role of partner offers, both to the firms that create this position and to the lawyers who fill it? All law firms believe they ought to have partners, and many lawyers believe they ought to become partners. Why is that?

Partnership was a lot more fun and engaging back in the '80s.

Partnership was a lot more fun and engaging in the ’80s.

Well, there’s only one reason why law firms have ever sought out partners, and I’ll get to that reason later on in this post. But equally, there’s really only one reason why lawyers have ever wanted equity partnership in law firms. Lawyers seek law firm partnership, if you’ll allow me to be blunt about it, because they want power. And partnership has long promised lawyers power, in several dimensions:

  • The power of control over your own work, to be the assignor rather than the assignee of files — which usually means pushing down the dull stuff and keeping the best and most lucrative, high-client-contact work for yourself.
  • The power of influence over the firm’s direction and strategy — theoretically so that you could guide the firm’s development, but certainly to create an environment more conductive to your own satisfaction and career advancement.
  • The power of prestige — being able to hand out that little white business card with the raised-type gold-leaf “Partner” to your family, your friends, and especially that one law school classmate who was always such a tool. And of course,
  • The power of money — because let’s face it, the profitability of many law firms throughout the last few decades has reached levels so astonishing that an entire generation of associates has expended extraordinary effort just for a chance to access it.

Lawyers love control, influence, status, and money. Partnership has always offered the keys to each of those kingdoms, and it has always delivered on that offer — or at least, it used to. The actual nature of law firm partnership today, however, has become something else entirely.

One of the legal profession’s most cherished myths is the autonomy of the law firm partner: you’re an owner now! You’re an independent shareholder who can dictate the terms of your relationship with the firm! But the reality that greets most lawyers upon accession to partnership is a little different. You still have all the billable-hour requirements of associateship, but now you’re also responsible for bringing in new business, getting more hours out of your subordinates, and taking on myriad unpaid management roles. And unless you’re part of the firm’s tight inner circles of leadership, you have little practical input into strategy or direction: you’re informed of the firm’s changes, not consulted on them. You might as well still be an associate, a mere employee.

What’s worse, however, is that increasingly, partnership in a law firm actually reduces your autonomy, binding you tighter to your firm and narrowing your options. The capital contribution you made to secure your admission to partnership immediately disappeared into the firm’s operating account, and the odds are good that you’ll never see it again. The same applies to lateral partner arrivals who fall for what Edwin Reeser calls one of the “honey traps” that capture and financially strap the partner to the firm. At firms with large spreads in partner compensation levels (that is to say, virtually all of them), junior partners are effectively being leveraged like associates. And if you try to leave the partnership, your signing bonuses could be clawed back and any return of your capital could be strung out over several years to discourage your departure. For many law firm partners, the brass ring has transformed into a pair of handcuffs.

I don’t think this is all down to avarice on the part of senior law firm lawyers (although avarice seems to occupy the co-pilot’s seat in quite a number of firms). What this really suggests to me is that the partnership model for law firms — or at least, for any firm whose equity shareholders can’t fit around a standard boardroom table — has run its course. “Have we reached the end of the partnership model?” asked the ABA Journal last year, and as the article illustrates in vivid detail, I think the answer is yes. The operational, cultural, and ethical contortions through which many law firms have put themselves in order to maintain the benefits of the partnership system tells me that that system simply doesn’t work well anymore.

This is becoming clearer to potential law firm partners every day, and there’s plenty of anecdotal evidence that fewer associates are interested in becoming partners at law firms than in the past. That may be just as well for them. As partner cohorts get older and thinner, and as the eventual day of reckoning draws closer, the payload of risk that partner status represents grows ever larger. Many law firms today seem to be run as if they expect to wind down operations and cash out their equity shareholders in about five years’ time, leaving leadership voidsunfunded retirement plans, and unmet mentorship needs behind them. If your name is on an equity partnership agreement at one of these firms, you do not want to be the last one left to turn out the lights.

Bonus points if you even remember who these guys were.

Bonus points if you even remember who these guys were.

Partner status, in short, is becoming more of a burden than a blessing for a lot of lawyers. Many firms will accordingly find that when older partners do eventually retire, their positions won’t always be replaced and the partnership ranks won’t be fully replenished. That is a serious problem for law firms, for one reason — and that reason is the answer to the other question I raised at the start, where I asked why law firms even seek out partners. Law firms seek out partners because they need capital.

The defining characteristic of equity partnership in a law firm is “equity.” Regulations in every common-law jurisdiction (except Australia, England & Wales, and the District of Columbia) are adamant that equity in law firms may be held only by lawyers. If your firm needs capital, it needs lawyers to pony it up. I sometimes suspect that at least a few law firms have made and continue to make partners of some lawyers not because of the lawyers’ intrinsic merit, but because the firms need the money. Law firms need lawyers to invest their own money simply so that the firm can carry on business.

So what happens when you start running short on equity partners? You start running short on equity, and that’s a problem. Law firms can incur debt from banks to help maintain operations, sure, but no bank will lend to a firm without sufficient capital of its own. Borrow from future accounts receivable? That’s a very dangerous game. Dip into the trust fund? Enjoy your disbarment hearing. Nothing can really replace cold, hard capital, and firms are slowly losing access to their sole source of it.

And by an ironic confluence of events, law firms are going to start hurting for capital right around the time when they’ll need capital more than ever — when their market positions are under threat from staggeringly well-financed competitors.

The growing army of alternative platforms and rival providers, emerging and competing with law firms in the legal market over the next several years, will bring with them financial resources an order of magnitude beyond what lawyer-only equity can provide. The gross revenue of the entire AmLaw 100 in 2015 was $83.1 billion. The Big 4 accounting firms’ revenue alone in 2015 was $123.5 billion. Throw in legal technology providers financed by colossal Silicon Valley venture funds, and the still-distant but inevitable entry into law of corporate giants like Google and Amazon. Law firms, as currently structured and financed, are going to be massively outgunned in the coming market, just as their sole source of capital with which to fund competitive efforts starts dwindling.

And that, among other effects, is what’s going to finally change the legal profession’s rules around non-lawyer ownership of law firms. Today, lawyers and bar groups are doing everything they can to oppose the legalization of non-lawyer law firm ownership. Within ten years’ time, they’ll be the ones leading the effort to authorize it, simply in order to level the playing field and keep lawyers and law firms alive in a marketplace full of richly financed providers. The days when lawyer capital constitutes the sole permissible type of law firm equity are drawing to a close.

In the not-distant future, therefore, law firms will have alternative sources for capital other than lawyers. And by that time, an entire generation of lawyers will have been raised to view the position of equity partner with a certain skepticism and even suspicion. In that kind of environment, the role of “law firm partner” inevitably is going to be very different than it is today.

No longer the firm’s sole provider of equity, no longer the automatic ambition of young practitioners, no longer the promised land of power and profits — what will partnership represent? Will firms even maintain the category of “partner” anymore, or will they find some other title — “director,” “principal,” “stakeholder,” whatever — to identify the firm’s most important members, regardless of their seniority or their connections or whether they own a law degree? Will law firms finally get around to doing what they should have done years ago and separate the roles of owner, worker, and director into discrete positions, rather than forcing lawyers to wear all three hats at once? Will they finally accord their “non-lawyer” professionals the respect, power, and equity status they deserve for their contributions to the firm? These are just some of the possible routes forward, and at least a few of them will come to pass.

“Partner” and “associate” were perfectly adequate categories to describe the two classes of lawyers in 20th-century law firms, back when these were the only classes of people that mattered. Neither of these categories fits easily or functions well in 21st-century law firms and the new market in which those firms will compete. More categories of key personnel — in management, marketing, professional development, technology, knowledge, pricing, process, procurement, customer service and more — will be needed. Neither these personnel, nor the firm’s financiers, will require a law degree.

That’s going to be a whole new ballgame. And it’s the structural and organizational reality for which today’s law firms, if they would like to also be tomorrow’s law firms, need to start preparing now.

The obsolete associate

As red herrings go, you will not find a fish more scarlet than Cravath, Swaine & Moore’s recent announcement that it would raise its starting salary for first-year associates to $180,000 per year. Now granted, it was great fun watching many other AmLaw 100 firms trip over each other in their haste to match the raise. Had these firms all issued press releases titled, “Cravath Is The Firm That Matters: We Play Follow-The-Leader Because We Possess Neither Gumption Nor Initiative,” they could scarcely have communicated their own positions and vindicated Cravath’s move so well.

But while the predictable grumbles were reported shortly afterwards from corporate law departments, I have a hard time imagining that it’s this particular straw that will shatter the camel’s vertebrae. Clients have enough serious complaints about outside counsel that this probably would register mostly as a stinging but still fairly trivial annoyance.

Cravath’s $180K announcement looks to me primarily like a marketing play — a reminder to clients and competitors alike of the firm’s alpha-dog status: “We decide how much we pay our people, and if you don’t like it, do something about it.” Until such time as other firms decide to stop playing Cravath’s game, or its clients decide they’ve had enough of rate increases for lower-value work, nothing much will change.

But it’s important to note that whatever Cravath’s $180,000 announcement was meant to achieve, it wasn’t about “attracting the best talent,” regardless of what the firm might claim. For one thing, if a firm really wanted to own the market for new lawyers, it would raise starting salaries to $300,000 or more. That’s how you clear the field of competitors: either they match you dollar for dollar at significant expense, or more likely, they drop out of the race and concede victory.

But $180,000? Pfft. In the context of how much these firms make, a $20,000 annual increase is chump change, a painless way to generate some publicity, assert market leadership, and maybe get a few more students clamouring for OCIs. Do we really suppose there were top-ranked law students who weren’t angling to land a spot at Cravath before now — who were just waiting around for that $20K pot-sweetener?

"A 12.5% salary increase? Where do I sign?"

“A 12.5% salary increase? Where do I sign?”

But there’s another, more significant reason why Cravath’s salary move wasn’t really about attracting new associates: because new associates mean less and less to law firms all the time.

There are only two reasons why a law firm employs associate lawyers: to breed future partners and leaders, and to provide leveraged labour. The first reason is not especially compelling to many law firms these days, as they’re either busy poaching partners from other firms or de-equitizing the partners they already have. Promoting promising talent from the minor leagues, although it should be a priority, often isn’t.

The second reason is far more important for most firms: they developed a tournament system in which attrition would eliminate 80% to 90% of an associate class in its first ten years, while these associates churned out backbreaking amounts of billable work to fuel the firm’s profitability engine. That function has become the overriding raison d’être for associates in law firms.

But throughout the last five to ten years, this rationale for employing associates has weakened dramatically. First, work gradually began moving off the desks of junior associates, largely because clients no longer trusted the competence of first- and second-year associates and resisted paying (or refused to pay) their billed hours. That work found its way to “non-equity partners,” superannuated associates who could bill at higher rates but weren’t otherwise that productive, and equity partners themselves, who needed the hours to meet the perverse demands of their own compensation systems. Associate leverage, which was once 3-1 and 4-1 in most large firms, fell to 1-1 or even less in many places.

Then, as the post-crisis economic situation became bleaker and the mood of the legal market darkened, the supply of associate-level work dropped significantly. Law departments began insourcing straightforward legal work, tired of paying a 50% premium for the efforts of law firm lawyers. Layoffs and hiring freezes at many law firms, occurring both in the immediate financial crisis and during the malaise that followed, contributed to a growing pool of unemployed and under-employed young lawyers and recent law graduates. And that created a new presence in the legal market: companies and agencies that offered the services traditionally performed by law firm associates at lower prices.

“There aren’t as many law firm jobs for graduating students anymore,” Integreon’s Caragh Landry told Corporate Counsel last summer. “There’s a trend toward large pools of contract attorneys who have great degrees, they have maybe done some practicing and they’re looking for jobs.” What we once called “law firm jobs” increasingly are being provided by companies like Axiom and United Lex, which appear more and more as if they’ll supplant large full-service firms as the primary provider of entry-level lawyer experience.

That short-term contract and temp lawyer situation has now blossomed into a long-term project and flex-work legal talent market into which law firms themselves are dipping (and not always nicely).

  • More than half of the firms surveyed by Altman Weil this past spring reported that they’re using part-time and contract lawyers to meet demand, including 75% of firms with 250 or more lawyers.
  • Several large law firms around the world —  Fenwick & West (US), Blake Cassels (Canada), Simmons (UK), and Corrs (Australia), to name just four examples — are establishing their own flex-time, contract, or project lawyer divisions.
  • DLA Piper even partnered with agile-law pioneer Lawyers On Demand rather than create its own division.

Nor is this entirely being driven by the firms: the emergence of secondment and project lawyer agencies is proving attractive to millennials. Lawyers On Demand’s new Spoke service is reporting immense interest from lawyers. Essentially, law firms are outsourcing a growing amount of their “associate work” to freelance lawyers, saving themselves pension, benefit, management, training, and overhead costs in the process.

And it increasingly appears that whatever hasn’t been outsourced will soon be automated. In a survey last October, says The American Lawyer, “35 percent of law firm leaders said they could envision replacing first-year associates with law-focused computer intelligence within the next five to 10 years. That’s up from less than a quarter of respondents who gave the same answer in 2011.” Deloitte estimates that 100,000 legal roles could be automated in the next 20 years. In this respect, law is simply experiencing the same job squeeze that many other industries have gone through: thousands of US manufacturing jobs that have been automated out of existence simply aren’t coming back.

Leverage this.

Leverage this, Your Honour.

The connection between more automation and fewer associates is pretty clear. “It is easy to imagine a world where partners rely on machines instead of associates to do work that is already being done,” Casey Flaherty wrote recently. “It is much harder to configure a future where the machines have taken on those tasks while leading to employment of additional associates to perform higher value work that (a) no one is currently doing and (b) the capable machines, who replaced the associate in the previous work, cannot handle.”

All of this helps explain the stubbornly high levels of unemployment experienced by US law graduates over the past several years, numbers that have mostly held steady despite an historic drop in the number of law school applications (and in Canada, too). Associate hiring among the National Law Journal 350 largest US law firms was flat in 2014, the most recent year for which I can find a report, while “MidLaw” firms of 11-100 lawyers rarely hire new lawyers at all. The number of salaried positions offered by law firms for lawyers for their first few years of practice is at a standstill, and it’s inevitable that these numbers are going to start sliding backwards very soon.

What we’re seeing, as I predicted a few years ago, is the accelerating diminishment of the law firm associate. Certainly, law firms still compete hard for the “best and brightest” new lawyers to become their future leaders and rainmakers, and perhaps that’s what will eventually drive us towards $300,000 first-year salaries at the largest and richest firms.

But law firms are no longer sifting through each year’s graduating law classes searching for raw sources of leveragable labour. Instead, firms are finally going to join other businesses in other industries by getting most of their leverage from software and systems, rather than from humans. As a class of lawyers within law firms, associates are becoming obsolete: there’s just not going to be much need for them anymore.

This development represent a profound shift in the nature of law firms and legal work, and as it continues to unfold over the next several years, it will have equally profound effects throughout the legal market.

  • Law firms’ new lawyer classes will become permanently smaller, as firms focus on fewer candidates and conduct far more intensive assessments to see which of them will become future rainmakers and practice leaders.
  • Law firms will no longer be the career launching pad for so many new lawyers as they’ve been in the past, meaning other entry-level lawyer platforms will have to emerge (and competence training will become a more acute need)
  • Law firm pricing will slowly be transformed, as productivity will be measured less in billed work hours and more in products and services generated by both external talent and internal systems and software.
  • Law schools will have to reconfigure their curriculum to produce fewer general-purpose plug-and-play law firm associates (which is what the current system seems geared to produce) and more lawyers ready to provide value to law firms through technology, systems, and knowledge management skills.

I have a hard time seeing how law firms will ever return to the days when associates outnumbered partners and served as the primary source of leveraged revenue generation. The original strategic purposes and business functions of the law firm associate don’t really fit this market anymore. And there’s at least a little irony in the fact that those original purposes and functions are frequently traced all the way back to a law firm named Cravath.

The intangible law firm

Remember all those ludicrous predictions you kept hearing about how law firms were someday going to invest heavily in intelligent technology that could do legal work? Funny thing about that: someday is today.

Here’s what’s actually happening, right now, with advanced technology in law firms:

This is only a recent sample of law firms’ technological commitments: consider Ron Friedmann’s Online Legal Services list for a more complete picture. And it’s not just happening in the US, either.

  • Berwin Leighton Paisner is using “AI-type solutions to carry out standard legal processes hundreds of times faster than traditional methods that use painstaking human labour.”
  • Mishcon de Reya’s new ten-year strategy includes a plan to “drive the automation of everything that can be automated, whether it’s legal or process,” including the establishment of  “an internal laboratory to vet artificial intelligence initiatives in a bid to make the firm an ‘early adopter for new technologies.'”
  • Australia’s Gilbert & Tobin has filed several patent applications to cover new computer applications it has built: “Rather than take 20 hours, some tasks can now be done in two hours,” said a G+T partner.
"She tripled the firm's productivity." "Burn her anyway!"

“But she tripled the firm’s productivity.”
“Burn her anyway!”

Talking openly and on the record about eliminating billable hours in a law firm has traditionally been regarded either as heresy or a sign of mental instability. “Burn the witch” would also have been a standard response to a lawyer who advocated spending real money on anything that could be described as artificial intelligence. But the facts are what they are: major law firms are actually building systems to do some tasks that previously only lawyers could do, at the expense of some of the firm’s hourly-billed inventory.

But that’s not all. Law firms are also adapting to the emerging imperative of process improvement, finding ways to introduce efficiencies and enhance the quality of outcomes through better procedures and workflow systems.

  • At Seyfarth Shaw, the process improvement gospel of Seyfarth Lean has become part of the firm’s core culture.
  • Process is just as important as technology for Littler Mendelson programs such as CaseSmart and Compliance HR.
  • Clifford Chance launched its Continuous Improvement program back in 2014 in a search for “the best approach to carrying out a piece of work.”
  • Gowling WLG talks about its acquisition of expertise in “non-legal support components of service delivery” such as project management and pricing.

You can expect to hear more of this from law firms in future. “Something like 90 percent of the RFPs we receive ask us about our [legal project management] capabilities,” said one respondent to a Jomati Consulting survey. “We get RFPs that not only ask us if we do project management, but also our specific methodology, and how many matters we have under administration,” said another. This is not a temporal anomaly: law departments take process improvement seriously, and they expect outside counsel to do the same. Some law firms are outpacing their own clients in response.

These are all signs, to my way of thinking, of a fundamental shift in the nature of law firms. Specifically, law firms are changing from entities composed almost entirely of tangible assets to entities composed increasingly of intangible ones.

The conventional wisdom on law firms has always been that “all their assets walk out the door every night” — and that the firms could only hope those assets walked back in the next morning. Suppose they didn’t come back? Take the lawyers out of a law firm; what have you got left? Reams of documents, files, and transactions — but no one to read, write, or process them. Capable and professional support staff — but with no one to support. Libraries full of case law and regulation, shelves lined with texts and CLE binders, filing cabinets crammed with precedents — but nobody to apply legal skills and expertise to convert them into actionable outcomes of value to clients. The law firm machine would stand idle, because its engines had disappeared.

Just as importantly, all these non-lawyer assets differed hardly at all from firm to firm. Law libraries were mostly indistinguishable in their collections; precedents varied so little as to be virtually copies of one another; workflow and operational procedures were standard across almost every type of firm. The only features of a firm that could legitimately be said to be exceptional, standing out from other firms, were its individual lawyers. Many of them were pretty general-issue as well, to be sure, but most brought at least some unique value to the table, and a few brought an enormous amount. So in the absence of lawyers, law firms would be true commodities: offering basically the same thing to everyone in the market, bereft of any valuable distinction.

This state of affairs has contributed greatly to the individual lawyer’s longstanding dominance of law firm strategies, priorities, and practices. More than three years ago, I wrote about the existential battle inside every law firm between individual lawyers and the law firm as an enterprise — one that the enterprise has been losing since the day battle was first joined. Law firms continue their mad pursuit of lateral partner acquisition strategies, and go to absurd lengths to retain the services of highly skilled lawyers, because lawyers have always held such enormous importance to the firms’ survival and competitiveness. When your enterprise has only one type of asset of value to the market, you don’t own that asset — that asset owns you.

It seems to me that it’s precisely this state of affairs that all these foregoing efforts will change. What these law firms are building, through their investment in technology and processes and non-lawyer sources of value, are intangible assets. These assets can provide legal answers or deliver legal outcomes of value to clients in some circumstances, thereby giving firms a second type of option for serving those clients. But unlike lawyers, these assets won’t leave the office at the end of the day, and they don’t ask for raises or demand larger offices or threaten to join the firm down the street — they serve the firm, not themselves. By building these assets, firms give themselves leverage over their lawyers, and they’re going to use it. These are the new engines of the law firm machine. And they’re going to multiply with astonishing speed.

Is there an Echo in here?

Is there an Echo in here?

The role of these process and technology assets is not to replace lawyers — most of these resources require lawyers to program or monitor them on an ongoing basis — but to reduce lawyers’ indispensability to the firm. An “indispensable employee” sounds like a great idea, until you have one. I once managed an indispensable employee, and it didn’t take me long to realize that I needed to make him “dispensable” — for the good of the organization, and ultimately, for his own good as well. I trained other people in the work that he did and had them develop relationships with his key contacts. The point wasn’t to get to a place where I could fire him; it was to get to a place where, once he eventually left the organization for better things (as it was always clear he would do), the organization carried on and he could go without feeling guilty about leaving us in the lurch. Law firms need to make their lawyers more dispensable, for everyone’s good.

The other important goal that law firms accomplish by investing in intangible resources is to start building firm-specific assets. Littler’s CaseSmart system exists only at Littler, Seyfarth Lean is unique to Seyfarth, and so on. Other firms likely will create similar programs and systems in due course, but what they create won’t be exactly the same, and rightly so — these assets will be native to each firm’s culture and structure. Building firm-specific assets is about creating “a resource that will produce its highest economic value only within the specific firm,” Prof. William Henderson wrote last year. “If a lawyer leaves, the underlying resource remains, with the result that client loyalties flow primarily to the law firm, rather than the lawyer.”

This is a significant point. Partners will continue to leave law firms, perhaps taking junior lawyers and important clients with them; but they won’t be able to take these intangible assets along for the trip. And the existence of those assets, if they make lawyers’ work easier and firms more productive and their deliverables more valuable, might well prompt some of those juniors and some of those clients to stick around. The expertise that firms generate around these assets is specific to the firm and can’t be applied directly anywhere else, making retention easier and, eventually, making recruitment of talent and acquisition of clients easier as well.

The rise of the intangible law firm will be aided and abetted by more sophisticated law firm marketing and branding efforts, too. Traditionally, law firms often defaulted to lawyer-centred marketing: hire us, because we have all these great lawyers! Every time a firm promoted a star lawyer in its marketing material or trumpeted the poaching of a key partner from another firm, however, it was actually undermining its own institutional brand — it was giving clients yet another reason to say, “I hire the lawyer, not the firm.” The rise of intangible assets will strengthen firms’ efforts to market themselves as enterprises whose value and identities are independent of their lawyers. The goal is to have clients routinely say, “I hire the firm” — full stop.

I’m not saying that individual lawyers will soon be irrelevant to a law firm’s value proposition; this isn’t an either-or proposition. Firm-specific, technology-enabled, intangible assets aren’t an attack on lawyers; they’re a means to eliminate a longstanding, unhealthy imbalance in the relationship between the law firm as a commercial institution and the lawyers who deliver value inside it. The best lawyers, especially the immensely skilled ones on whose efforts clients bet their existence, will always be able to name their price and choose their platform. But that’s not the kind of work that’s going to dominate the legal market from now on. The dominant type of work will not be “bet the company,” but “run the company,” and the firms best positioned to win this work will be those with the kind of consistent, reliable, immovable, and uniquely valuable assets that clients can confidently count on.

Take a quick inventory of your own firm’s assets. How many are tangible and how many are intangible? How many walk out the door and how many stay overnight? And how prepared are you to compete for talent and business in a market where you can’t afford to let your lawyers walk, but your rivals can? Because that’s the market that’s unfolding in front of us right now.

Why law firms should focus on adaptation, not disruption

In a post last month, Ron Friedmann poured cold water on the notion that large law firms were anywhere close to being “disrupted” — to losing the commercial legal services market to high-tech NewLaw raiders. Disruption? More Like Incremental Change for Big Law, he said, and it’s hard to argue.

Many commentators claim that tech, especially artificial intelligence (AI), will do something to Big Law. I disagree. Tech more likely will do something in it: incremental change. …

By the late 1980s, a few law firms had most of their lawyers using PCs. The market did not reward these early adopters. Nor did it punish late adopters. The same pattern played out for email, the Internet, and social media. Tech did disrupt legal secretaries. But that took an economic crisis and 15 years. Tech has enabled change – for example, the rise of boutiques and clients using alternative providers – but that has not disrupted lawyers or law firms.

An even bigger event than tech – the 2008-10 economic crisis – also failed to disrupt Big Law, notwithstanding widespread layoffs and a few dissolutions. In the aftermath, Big Law faces price pressure and more competition, but not disruption. Even with tech, with price pressure, and with clients bringing more work in-house, Big Law prospers as reported by recent Am Law 100 and Altman Weil surveys.

With this history, I just don’t see how the new technologies today will be any different than the past.

The book actually wasn't that great. Better than the movie, though.

The book actually wasn’t that great. Better than the movie, though.

“Disruption” became a flashpoint term in the legal community a couple of years ago, when Clayton Christensen’s groundbreaking 1997 work The Innovator’s Dilemma belatedly reached the legal market and the “Reinvent Law” boom was at its loudest. Ron’s post suggests that it’s time we take another look at this concept and begin to parse the difference between disruption theory and on-the-ground practice in the legal world. Let’s do just that.

All market activity, obviously, requires two parties: a source of demand (purchaser) and a source of supply (seller). Market disruption requires the presence of a third party: a new, alternative source of supply that can appeal to the source of demand in ways that the primary supplier can’t. The alternative’s appeal lies in its ability to provide value to the purchaser to a degree or in a dimension that the incumbent supplier has overlooked, ignored, or believed to be impossible. The alternative supplier can generate this value because it has adopted a means of production profoundly different from the incumbent supplier’s, one designed to produce deliverables (in dimensions such as affordability, timeliness, convenience and quality) better aligned with what the source of demand really values.

Now, disruption theory states that given all these circumstances, the alternative supplier will steadily grow its market share — starting from the edges of the market and its least complex and lowest-value needs, then gradually working its way up and in to higher-value sectors as it develops and matures — until at a certain point, the established supplier fades away and the challenger becomes the new incumbent. The circle of life, and all that. Christensen cites numerous examples of this pattern from steel, computer chips, and many other industries. So how about law?

It seems to me that we have all the pieces in place right now, in the corporate/commercial legal market, for this kind of disruption to occur. (As George Beaton points out in a comment on Ron’s post, this process is further along in the consumer legal market.) We have demand on an enormous scale — several hundred billion dollars spent every year, by an increasingly irritable and cranky corporate client base. We have traditional supply — incumbent law firms with little imagination — by the hourly-billing boatload. And now we’re finally approaching a critical mass of the third ingredient: alternative sources of supply. You could group these options into three distinct categories.

  1. Alternative Options for Lawyers’ Services. It used to be that if you needed to buy a legal service or solution, you had to go hire a lawyer. Today, demand for some legal services can be met by viable substitutes for lawyers. These are primarily technology solutions (including ODR systems, e-discovery software, contract analysis programs, advanced document assembly software, expert applications, predictive analytics, and various cognitive reasoning systems), which can perform some tasks or achieve some outcomes that previously only lawyers could manage. The result: some legal work never makes it to a lawyer, going instead to a viable lawyer substitute.
  2. Alternative Platforms for Lawyers’ Services. Suppose that for your particular need, however, there is no viable substitute: you must have access to a lawyer. Well, it used to be that if you needed to hire a lawyer, you had to visit a traditional law firm (including solo practices) to find one. Today, demand for lawyers can be met by alternative platforms for lawyers’ services: project and flex lawyer companies, managed legal services providers, the legal divisions of accounting firms, and various self-identifying “NewLaw” firms, among others. The result: some “lawyer work” never makes it to a law firm, going instead to a viable law firm substitute.
  3. Internal Options for Addressing Legal Needs. The ultimate alternative to an external legal solution of any kind, though, is to remove the need for the external solution altogether. Corporate law departments have expanded their internal productive capacity — increasing lawyer headcount (insourcing), developing their legal operations (“legal ops”) capacity through software installations and process improvement techniques, and (to take another of Ron’s observations) “doing less law” and eliminating some legal demand altogether. The result: some legal work stays in-house and never gets shipped to any external provider, period.

It’s nothing short of fantastic that buyers can now access all these options. Kudos to them all. But so far, these alternatives have captured just a tiny sliver of the entire commercial legal market. A few worthy exceptions aside, large corporations and institutions haven’t significantly changed their legal buying patterns. That’s not because the alternative sources of supply have proven inferior to the incumbent suppliers — in fact, by most indicators of cost-effectiveness, quality, and value to the buyer, the opposite is true.

The real cause is that most front-line purchasers of corporate legal services (in-house lawyers) care more about what traditional suppliers (law firms) can offer them (strong personal relationships, a reliable brand, routine buying processes, and a familiar culture) than what they can offer the enterprise. Lawyers who buy legal services are just as conservative, risk-averse and change-resistant as the lawyers who sell them — probably more so — and they define “value to the buyer” much more narrowly and individually than their company does. Purchasers of commercial legal services, to this point, operate in a very different corporate environment than purchasers of steel or computer chips or other commodities. Their cultural influences and individual incentives reward low-risk decisions and prioritize personal relationships over enterprise results. The impact on buying patterns shouldn’t surprise us.

Now, corporate procurement personnel are currently hard at work infiltrating and influencing legal purchasing, either by persuading the legal department to exercise its buying power differently or commandeering that power altogether. Take the lawyers out of the equation, and maybe you start getting somewhere. But so long as lawyers are buying legal services from lawyers, and especially so long as both sets of lawyers emerged from the same type of law firm culture, there’s little reason to anticipate imminent change. While it still appears inevitable to me that commercial legal purchasing will be transformed — and with it, the entire commercial legal market — I’ve personally grown tired of its stubborn evitability. “Waiting For Procurement” is not a performance I feel like sitting through multiple times.

We need to talk about Godot’s productivity.

The larger point, though, is this: “Disruption” is a means to an end, not an end in itself. It’s not a goal towards which anyone in the legal market should be bending his or her efforts. It’s simply a process by which other goals — chief among them, a more effective legal market that serves its customers better — can be achieved. Disruption will come when it comes, and there’s not much more to say about it than that.

The more interesting and important question, I think, is how the traditional incumbents will react to the high-tech upstarts in the meantime. What law firms do in response to the market’s emerging “NewLaw” options will determine the long-term success of both groups.

It should be pretty apparent that the longer the “disruption” process takes, the more difficult life becomes for most of the innovative alternatives. The builders of better mousetraps can wait only so long for the world to beat a path to their door — eventually, the venture capitalists who funded the traps want to see some Return On Mice. A drawn-out disruption period is especially hard on smaller upstarts, who either run out of money or become ever more vulnerable to acquisition and consolidation by rivals with larger footprints and deeper pockets. And of course, if market resistance to innovative new options is strong enough and lasts long enough, there’s a chance that the whole concept of viable alternatives to traditional suppliers will fall out of favour altogether, and the revolution will be stopped before it can begin.

For all these reasons, you’d think that traditional law firms would have every incentive to prolong the “steady state” of the old legal market, with its toothless demand and monolithic supply, as long as possible. But if anything, the danger to law firms here is more acute than to the upstarts.

The longer disruption takes, the more comfortable life will seem for the incumbent suppliers, and the more likely that they’ll be lulled into a competitive slumber. But whether it arrives tomorrow or next year or ten years from now, change is gonna come. The value proposition of alternative suppliers is too strong, and the well-publicized process of adjustment is already underway within some of the biggest sources of legal demand (including Shell, Cisco, Honeywell, AIG, and Capital One). Just as importantly, the alternative suppliers that do survive will get bigger and stronger by the day, growing and consolidating into truly formidable opponents. Law firms that fall asleep will be shaken awake to the realization that the waters kept on rising while they slept, until the levees eventually gave way.

So for law firms, the concept they should be focused on isn’t disruption, but adaptation. How will they adapt to changing market demand? How will they adjust their offerings and rework their operations to compete against powerful rivals for the attention of sophisticated and aggressive buyers? Will they try to destroy high-tech providers, or integrate them? Will they ridicule process improvements, or adopt them? Will they keep trying to “out-lawyer” everyone or, as I’ve argued, start trying to out-customer them?

The more that law firms accept these realities and adapt to these new alternatives, the less business they will lose, and the less these new alternatives will advance: by co-opting their rivals’ best features, they will improve their own productivity and value and maintain their dominant market position. There’s no shortage of examples in this regard among established incumbents (including Wachtell, DLA Piper, Norton Rose FulbrightDentons, Baker Donelson, Littler, AkermanAshurst, Mishcon de Reya, Gilbert + TobinMcCarthy Tétrault, and Stewart McKelvey), but you’ll also find some alternative providers going the same route (including Deloitte, LegalZoom, Riverview Law, and Lawyers On Demand).

Conversely, the more firms resist the advancement of substitute providers and stick to their old ways of doing things, the more time they’ll grant their most fearsome competitors, the more ground they’ll lose to them, and the faster the disruption process will proceed. For every day law firms fight adaptation, that’s another day in which the alternative platforms receive an extended lease on life — and that’s a dangerous game for law firms to play. If you give competitors with a better way of doing things enough time and oxygen to grow, then grow they will.

So this is a key moment for law firms. Viable substitutes to law firms have established themselves on the margins of the market, offering a genuinely better option for at least some legal services to (what is currently) a skeptical and conservative community of buyers. Most law firms seem to be betting that the market will remain skeptical and conservative — that the odds of real demand in market change are so small that the substantial payload of the corresponding risk can safely be ignored. That’s not a bet I’d care to place right now.

Disruption has not reached the commercial legal market, and maybe it won’t for a long time. But adaptation is here, right now. And for law firms, adaptation is by far the more pressing and important matter. Law firms can afford to put off worrying about disruption for the foreseeable future. I don’t see how they can put off thinking about adaptation one day longer.

Well, I’m back

Since I took the title of my sign-off post 18 months ago from the last album by my favourite band, I figured I’d take the title of this return post from the last line of my favourite book. Because in times of great change and upheaval, it’s dated pop-culture references that will hold us all together.

Take the "Baggins" off the nameplate, Rosie. From now on, it's Gamgee LLP.

Take the “Baggins” off the nameplate, Rosie. From now on, it’s Gamgee LLP.

I’m sincerely glad to welcome you back to Law21 and to finally make my return to the blawgosphere. (Are we still calling it that?) I put this blog on hiatus back in December 2014, partly because I was edging towards burnout after six years of blogging, and partly because I wanted to write a book and I needed to clear the decks completely to make that happen.

I assumed, at the time, that since I wasn’t blogging, law firms wouldn’t call me about speaking engagements so often and I could devote enormous amounts of free time to writing. I also assumed that authoring a book was pretty straightforward, something I could knock off over the course of a few solid months. These turned out not to be the soundest assumptions I’ve ever made.

In the event, I’ve been kept busy over the past 18 months giving presentations (including to law firms, state bars, in-house lawyers, the ABA, CBA, LMA, NALP, and a few other groups) on the accelerating rate of change in the legal market. As well, I’m very happy to say, I’m close to completing the final draft of my book, and I anticipate a publication date sometime within the next few months. And as you’ve probably noticed, I’ve redesigned Law21 itself, expanding it from a blog to a full-scale platform for my business and a resource centre to which I’ll be adding free downloadable materials in the coming weeks. (A grateful shout-out to Rob Wilson of Stem Legal for the website build and to Mark Delbridge of Delbridge Design for Law21’s new logo).

I’ve also been fortunate to have had several report writing opportunities come my way over the last 18 months, and if you’re interested, you can find a selection below:

But what I’ve really missed during my lengthy sabbatical is the opportunity to write for you, here at Law21, about the changing legal market. So you can look for two new posts later this week and two more the week after that, because it sure seems like there’s a lot to talk about in the legal market right now. Just in the last few months, for example:

  • Artificial intelligence has taken over the legal profession (judging from breathless media reports, anyway),
  • Non-lawyer ownership of law firms has become radioactive (thanks so much for that, Slater & Gordon)
  • Gigantic accounting consultancies are about to consume the legal market (directed by Michael Bay, in theatres Friday),
  • Legal Ops are rewriting the entire in-house counsel playbook (directed by, I don’t know, let’s say M. Night Shyamalan)
  • Someone in New York thought it was a good idea to start paying first-year associates $180,000 a year (<eyeroll emoji>).

Human sacrifice! Third-party litigation financing!

The funny thing is, though, that while it might look like the apocalypse out here, it doesn’t really feel much like it — at least, not judging from the lawyers and law firms I’ve been speaking with recently. I don’t see nearly as much denial and detachment as I have in the past — lawyers clinging to the belief that these are all just “isolated incidents” or “temporary conditions” or whatever other coping mechanism they developed to deal with all this craziness.

Instead, I’m meeting more and more lawyers who’ve developed a remarkable degree of sangfroid about legal market change and an admirable readiness to just start dealing with it already. Law firms are still making questionable tactical decisions for nakedly self-serving reasons, of course, but that’s a more or less permanent condition of the species. What’s different, from my perspective, is that there’s a growing consensus within the profession that the market really has changed for good, and so we might as well just accept it and start moving forward. It looks to me like lawyers are finally treating legal market upheaval the best way they know how: as a problem to be understood, addressed, and solved.

Altogether, this just seems like an exceptionally timely and opportune moment to get back into blogging about the law. So I really hope you’ll join me, up here in the cheap seats where the ushers rarely venture, as we try to make some sense of it all in the months and years to come. And thanks, very much, for holding my seat until I got back.

…famous last words

And thus, at last, I fulfill a long-held goal of using an album title from my favourite band in a blog post.

You can always tell when a blog is nearing the end of its natural life: the author starts making apologies for not having posted in so long. I’ve seen enough defunct blogs in my time whose last post, after several quiet weeks, reads like the start of that letter to the distant cousin you met on the previous summer’s family vacation: “I’m sorry for the lengthy delay in writing back to you….” After that post comes the long silence, and inevitably, one day, the 404 message. I’ve always firmly intended to avoid that sort of outcome, which is why we’re here today.

Be assured, I’m not shutting down Law21. But I am putting the blog on hiatus for the next several months, and when it returns, this site will look very different. If you’re a regular reader (and I truly am grateful if you are — especially if you were here back when the blog looked like this), you’ve surely noticed the drop in my posting frequency this year: this is just my 14th post of 2014, and it’s no exaggeration to say that in Law21’s earliest days, I sometimes wrote that many entries in a month.  My first post this year didn’t arrive until mid-April.

These long pauses and sporadic entries have surprised me as much as anyone, because I sure don’t feel like I’ve run out of things to say or interest in saying them. I’ve tried to figure out the causes for this, and in true Law21 fashion, I’ve ended up with neatly bulleted list.

  • Work keeps taking precedence. I didn’t start this blog so that people would ask me to come speak to them about the legal market; but that’s been the happy result, and now I’m travelling once or twice a month to meet with groups of lawyers, law students, or legal professionals somewhere out of town. Whenever I do find myself with enough breathing space to start crafting a new post, it’s usually 4 pm on a Friday and the kids are home from school. But that’s dangerously close to making excuses, to being the delinquent correspondent: you’re working hard too, and kids are always and forever coming home from school.
  • I’ve written a lot. I mean, a lot. I’m closing in on 450 posts and 400,000 written words here at Law21, not to mention dozens of articles and posts elsewhere, and I’m getting close to crossing that line where I’m repeating myself just for the sake of saying something. (You might be inclined here to channel Jed Bartlett telling CJ Cregg, when she asked him if she was crossing a line: “Look behind you.”) One of the standards I set for myself when I began blogging was that if I didn’t have something I felt was original or important that was worth your time to read, I wouldn’t post just for the sake of posting. I’ve really tried to stay true to that.
  • There are many more voices now. When I wrote my first Law21 post in January 2008, there weren’t many people talking about change in the legal marketplace. Today, market upheaval is on everyone’s agenda, and not only the blawgosphere, but also law firm conference rooms are now bursting with conversations about it (not to mention social media, which barely existed back then). I’m hardly claiming causation or even correlation; I’m just saying that my burning desire to spread the word about change and the need for lawyers to respond is now shared by many others, reducing the need for me to be always yapping away here.

I can feel the cumulative effect of these forces and others pulling me away more and more often from this space, to the point where I risk people no longer knowing whether or not Law21 is still a going concern. Hence this post, which is meant to make some assurances:

  1. Law21 is a going concern, because change in the legal services market is only just getting started, and I intend to hang around doing as much play-by-play and colour commentary about it as possible.
  2. Later in summer 2015, I’ll have a brand new website at this location, which will include a re-energized blog, downloadable slide decks, law school lesson plans, and yes, information about a full-length original book.
  3. I’ll still be an active participant (and will lead whenever I can) in conversations about the legal market, principally on Twitter, at Edge International, at Stem Legal, and in your local legal periodicals.

I usually end each year at Law21 with a summary of where market change has taken us in the last 12 months and where we can expect to go next. Given the circumstances, I’d rather end this year, and this stage of Law21’s evolution, with the following thoughts for the legal profession:

We have a once-in-a-lifetime opportunity to re-conceptualize what it means to be a lawyer. The underlying fundamentals of the legal market — clients, competitors, tools, regulations — are changing so quickly that a new climate now surrounds us, a new landscape has emerged under our feet, and even greater upheaval is on the way. In the very near future, we will find that we’ve adapted how we run our businesses, how we deal with our clients, and how we feel about being lawyers. That’s the end game, regardless of how happily or willingly we get there.

The only real question is whether these adaptations will be forced on us, involuntarily and painfully, or whether we will start the adaptation process ourselves, and thereby maintain some degree of influence over the lawyers we will become and the market in which we will practise. I urge lawyers, as I’ve urged so many times here in the past, to take the second path.

It might feel like we’re powerless in the face of change, but that’s simply not true: we have the ability, and the unprecedented opportunity, to redefine the contours of lawyering, before impersonal market forces do it for us, and to us. Take control of your professional destiny, by accepting the things we cannot change and moving swiftly in the direction of those we can.

Here’s the three-part process I recommend to get us there. Make three columns on a piece of paper or a computer screen, and do the following:

1. In the first column, make a list of everything you love about being a lawyer: what inspires you, excites you, interests you, gets you out of bed and into your office every day because you look forward to the opportunity to do it. This is the best of being a lawyer: it’s also, very probably, the parts of a legal career least susceptible to automation and outsourcing, the parts most closely associated with actual people and actual service.

2. In the second column, make a list of everything you really don’t like about being a lawyer: what bores you, discourages you, upsets you, gets put off or rushed through because the thought of facing it makes you question your career choice. This is the worst of being a lawyer, and while some of it might be unavoidable, much of it is not. And I’ll bet that a great deal of it really is amenable to change, systematization or outsourcing to more appropriate providers.

3. In the third column, make a list of everything you wish you could do as a lawyer, but that circumstances seem to prevent: the help you’d really like to provide, the people you really wish you could serve, the insights and assistance and improvements you would love to be able to facilitate. These are the new possibilities of being a lawyer, and for the first time, these possibilities can be translated into reality. Change is fluid and dynamic, and it can flow from all directions, including from you.

Take the first and third columns, synthesize them, and make the resulting integrated activities and characteristics the foundation of a different and better legal career for you and your colleagues. Take the second column and look for ways to move these items off your desk and ideally, out of your practice altogether, into the waiting arms of a growing array of specialists who will do them for you, and do them better than you.

This process — call it reinvention, re-engineering, reconfiguration, reconceptualization, or any similar concept with a “re”- prefix attached to it — would not have been possible 30 years ago, or 15 years ago, or even 10. It was just barely possible in January 2008, when I started blogging here; but not only is it possible today, it’s also necessary: it’s the key to a viable, worthwhile, meaningful legal practice. Take this post home over the holidays and tinker with these ideas. Bring back your three columns in the new year and show them to both your work partners and your life partners, and see what they think.

Make 2015 the year you decide not only to accept the things you cannot change, but to be the driver of the kind of change you actually want to see in your own practice and your own world. This is your opportunity, and this is your time. Make it happen.

Jordan Furlong says, quite simply, thank you very much.