Legal outsourcing’s AFL moment

It’s July, we’re in the middle of a record-breaking summer of heat, and the major-league baseball trade deadline is just days away. So naturally, I’m going to talk about football.

This isn’t entirely a propos of nothing: the National Football League lockout recently ended with a 10-year collective bargaining agreement, and a frenzy of free-agent signings has followed. But I actually want to go back several decades and tell you about an upstart operation in the 1960s called the American Football League, because the AFL has something to say about a legal process outsourcing (LPO) industry at a crossroads.

Here’s a brief summary of the AFL’s short but extraordinary history, from Wikipedia:

The American Football League (AFL) was a major professional football league that operated from 1960 until 1969, when the established National Football League (NFL) merged with it. The upstart AFL operated in direct competition with the more established NFL throughout its existence. Though downplayed by the NFL as inferior, the AFL signed half of the NFL’s first-round draft choices in 1960, including All-American Billy Cannon, perennial All-Star Johnny Robinson, and Hall of Famer Ron Mix. Overall, AFL teams signed 75% of the league’s draft choices that first year. It continued to attract top talent from colleges and the NFL by the mid-1960s, well before the Common Draft which began in 1967.

A merger between the two leagues was sought by the senior league and announced in 1966, but was not finalized until 1970. During its final two years of existence, the AFL teams won upset victories over the NFL teams in Super Bowl III and IV, the former considered one of the biggest upsets in American sports history. When the merger took place, all ten AFL franchises became part of the merged league’s new American Football Conference (AFC), with three teams from the original 16-team NFL (the Pittsburgh Steelers, Cleveland Browns, and Baltimore Colts) joining them. The remaining 13 original NFL teams became the inaugural members of the National Football Conference (NFC). The AFL logo was incorporated into the newly minted AFC logo, although the color of the “A” was changed from blue and white to red. The NFL retained its old name and logo and claims the rights to all AFL products including the eagle logo.

This tells most of the story, but the key learnings lie in the details. The AFL originated with the NFL’s rejection, in 1959, of attempts by eager would-be owners to add expansion franchises and share in the growth of a prosperous league. Undaunted, these entrepreneurs started their own league, and despite shaky beginnings (and lower-quality offerings), persevered to the point where the NFL was forced to take the upstarts seriously. The AFL succeeded by entering markets overlooked by the NFL (such as Kansas City, Houston and Buffalo) and by raiding the NFL of talent: first by drafting and outbidding college players previously bound for the NFL, then (by mid-decade) poaching established players (especially quarterbacks) from NFL rosters. Striking a lucrative TV contract also gave the AFL access to outside capital it needed to compete with the incumbents. Eventually, in order to control runaway salaries and stem the talent bleed, the NFL agreed to a merger with a league barely six years old.

You can probably see where I’m going with this. The legal process outsourcing industry shares a remarkable number of characteristics with the 1960s’ American Football League: reacting against established providers who refused to allow new competitors, they start up their own business catering to under-served markets with lower-budget offerings. But then they start making talent inroads, first with raw recruits and eventually with respected veterans. The real break comes with access to outside equity that allows them to fully compete with the incumbents, and eventually, head-to-head competition proves the quality gap isn’t so great after all.

But there’s more. The AFL didn’t just force its way into an established league: it changed the way that league did business. The NFL was never glamorous or especially exciting, whereas the AFL went out of its way to market itself that way; today, excitement marketing is the foundation of the NFL brand. Even by the time the merger took place, many of the AFL’s innovations (arguably including the Super Bowl itself) had spread to the NFL:

  • Players’ names on the backs of their jerseys
  • Stadium scoreboard clocks to track the official time
  • A 14-game schedule (up from the NFL’s traditional 12)
  • More colourful uniforms
  • More passing attempts per game (though not as much as legend would have it)
  • And perhaps more importantly, more black players

Real agents of change don’t just disrupt the marketplace position of incumbents: they change the nature of what that market provides. This is the opportunity, and the challenge, that lies before outsourcing companies in the legal market right now. If all they intend to do is offer the same basic services in the same basic way as law firms, but at lower prices, these companies will have a very short lifespan. The key to LPO’s survival is not just to evolve upwards from the traditional law firm model, but to be so successful that law firms have no choice but to adopt their innovations.

We’ve seen very small degrees of innovation and adaptation from lawyers in private practice, and even smaller responses from lawyers in corporate law departments, and it’s not enough. Law firm and in-house lawyers are, for the most part, trapped in the same closed, cyclical eco-system, perpetuating an unsustainable business model out of short-term self-interest. Only an outsider can break that system, and only by coming at it with sufficient force and from the correct angle. The best opportunity for powering real change in the legal marketplace today lies with LPOs — and behind them, with the business and corporate entities awaiting the arrival of Alternative Business Structures in the UK — ready to do things differently and better.

But the critical questions are: will they decide to be pioneers, or merely opportunistic entrepreneurs? Will they come up with enough crowd-pleasing innovations to attract financial support within and outside the legal industry? Will they build a better model, one that law firms eventually will have to adopt simply to safeguard their own livelihoods?

Those are the three strategic challenges that outsourcers and other would-be change agents need to answer. How they respond could very well determine the nature of the legal marketplace for decades to come.

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

Losing the quality wars

There are days when I feel optimistic that lawyers can rise to the challenges before us and take the lead in the new legal marketplace now emerging worldwide. And then there are days like today.

Three data points for you. The first from a friend who sent along this item from the 2010 ACC/Serengeti Managing Outside Counsel Survey:

Slightly more than 40% of in-house counsel believe that the value of the work performed by at least some of their outside counsel declined during 2010. About 55% of in-house counsel provided some specific suggestions to their outside lawyers as to how the quality of services could be improved.

The second, from an outstanding article by USC Law School’s Gillian Hadfield:

Surprisingly, the complaints I hear focus far more on the value of legal work than on the cost. This focus is surprising because during the last decade or so, the cost of legal services and procedures has soared. One recent industry survey concluded that law firm prices had increased 75 percent since 2000, far outstripping a 20 percent growth in non-law firm costs. … But the cost problem only sharpens the sting of complaints about value: Clients feel that they are paying more and more for legal work that helps them out less and less.

The third, from a LexisNexis Martindale-Hubbell survey (as reported by the AmLaw Daily) about law firm “efforts” to solicit and implement feedback from clients:

More than 70 percent of law firms responded that client feedback affects the way their lawyers conduct business … yet fewer than half (48 percent) formally solicit client critiques and just one-third communicate the feedback to lawyers. … Corporate counsel report that one of their biggest frustrations is giving feedback that is neither properly fed back to relevant parties in the firm, nor acted upon. … 56 percent of firms reported that their lawyers were either “ambivalent” or “not enthusiastic” about any attempts to actively communicate with clients.

Folks, it’s one thing to be defeated by superior forces with a better product or service. It’s another to lose before we begin because we couldn’t even be bothered to show up for the fight.

It should be clear enough by now that client work is segmenting into a small number of mission-critical matters and growing piles of ordinary and commoditized tasks. It also should be clear that highly efficient and systematic competitors from outside the profession have targeted those piles and are on a mission to own them. We are getting beaten up on both price and convenience because we don’t take either of these pillars of business success seriously. None of this, unfortunately, is new to lawyers.

But the one thing we could always fall back on, the foundation stone of our professional edifice, is that we deliver high-quality legal work when it counts. Competitors without our training, expertise and ethics might take away all that basic low-margin commodity work, what with their relentless focus on efficiency and customer service. But no computer, no paralegal, no foreign attorney will ever be able to replace the high-quality legal solutions we deliver to our clients. That belief lies at the heart of what I can only call our continued widespread complacency in the face of extraordinary market change.

And that’s fine. But if high-quality legal solutions are the foundation of our offering, then the three points listed above should strike fear. Because if we lose our clients on quality — if clients come to perceive, and a disturbing number already do, that the quality of lawyers’ services is declining and that we don’t seem to care — then we are in serious danger. Clients will always pay us whatever we charge for one thing: high-quality services that deliver verifiably high value. If that foundation crumbles — if our quality suffers and our value, already questionable, declines further — what do we think is going to happen next?

I want to see the legal profession win the coming battles for the lion’s share of the legal marketplace. But if it’s not asking too much, could we at least arrive at the battlefield on time and give it our best shot?

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

The new capitals of law

A minor parlour game for BigLaw cognoscenti is the question of which city will be the next world capital of law. New York has held the unofficial title for many years, although London made a powerful case throughout the 2000s. Down the road, who knows? Maybe Hong Kong or Shanghai, possibly New Delhi or Mumbai; real outliers might include Singapore or Rio De Janeiro. And of course, don’t count out London or NYC retaining the crown.

Allow me to suggest, however, that some of the future capitals of law have already been nominated. Here are seven worth considering, in alphabetical order:

  • Belfast, Northern Ireland
  • Carrollton, Texas
  • Dayton, Ohio
  • Fargo, North Dakota
  • Hamilton, Ontario
  • Overland Park, Kansas
  • Wheeling, West Virginia

These seven cities, of course, are home to low-cost law offices or legal outsourcing facilities, many of which have just opened or are in rapid growth stages. More specifically:

These law firms and companies are choosing these locations not just because of lower costs, but also because of good-quality legal talent in the area and proximity to transportation hubs. Skeptics who complain they’ve never heard of Carrollton or Overland Park should remember that no one used to know where Bentonville is, either. If our clients are in smaller regional locations, why shouldn’t we be there as well?

This is by no means an exhaustive list, of course — many Indian cities host legal outsourcing operations, and similar entities can be found in South Africa, New Zealand and Australia. But two factors in particular are marking many of these operations as a whole new animal. The first is closer physical proximity to law firms’ national headquarters — “onshoring,” if you like, as opposed to “offshoring.” This approach to outsourcing has long had political and public relations benefits — opening plants in Tennessee rather than Tianjin pays numerous dividends — but as wages in previous outsourcing hotspots start to rise, the cost gap is narrowing and other non-financial factors are coming into play.

The second element, though, is more interesting. Increasingly, these outsourcing centers aren’t just low-cost “drudge” work outposts — they’re growth engines. Orrick’s Wheeling office has increased from 75 people to 350 in the last two years alone, while Allen & Overy aims to have 50 fee earners join 250 support staff in Belfast by 2014. Pangea3, as this New York Times article points out, is busily hiring lawyers in the United States, which is more than a lot of U.S. law firms can say. These cities look like new magnets for legal talent in the 2010s and maybe beyond.

These legal jobs are for so-called “second-tier associates,” but the reality behind that insulting label is this: these jobs do work that isn’t extremely challenging and needn’t be performed in global financial centers. These jobs and their lower salaries are perfectly calibrated to the value of the work they produce. They aren’t based in New York or London because, as firms have been painfully learning the past few years, clients won’t pay the rates required to sustain mid-range jobs in high-priced locations. (And as the grim statistics make clear, new lawyers are paying the price for this change.) These jobs are in Dayton and Wheeling because that’s how much they’re worth, and there’s nothing the least bit wrong with that.

What we’re looking at here is the unbundling of law firms: the disassembly of the once-mighty law firm talent block into discrete groups of lawyers and para-professionals based in various locations to carry out several types of legal work in ways better aligned with its value. Law firms and legal enterprises are heading towards a hub-and-spoke model: small but focused strategic headquarters in a major financial center, revenue-producing satellites in a variety of lower-cost locations worldwide. Soon enough, we’ll look back and wonder why on earth a law firm ever kept all of its partners and all of its associates inside the walls of its major downtown office buildings.

It bears repeating: this is not a temporary, stop-gap response to tougher economic times and partner profitability demands. This is the beginning of a fundamental change in how law firms carry out the work their clients send them. Ron Friedmann, in a wide-ranging post that takes in both these developments and the emergence of a “Top 23” in the AmLaw 100 (related developments, Ron thinks, and I agree), puts it plainly: “As more work moves to an AFA basis, firms will have to examine how the work itself is done: they will need to minimize time spent on matters to protect and grow profits. Wasting time on repeatable, wheel-reinventing matters simply makes no economic sense.”

This isn’t really about outsourcing, although LPOs have played an invaluable catalytic role in this process. This isn’t about new lawyers getting stuck in low-paying jobs, although my heart goes out to law school graduates caught in the breakdown between the old system and the new one.  And this isn’t about partners being greedy — or at least, no more than it ever was and no less than should be expected and encouraged from equity shareholders in a business enterprise. This is about how legal work is priced and delivered in a newly competitive marketplace. That’s the prism through which you should examine almost everything currently happening in the law, including the emergence of some unlikely new capitals.

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

What I’ve said and where I’ll be

Time for my regular roundup of what I’ve written in other locations recently, along with a quick itinerary of my upcoming speaking appearances.

1. I’ve been especially busy at Law Firm Web Strategy, the blog of Stem Legal, with three recent posts on social media:

2. My most recent column for The Lawyers Weekly sparked a lot of feedback: Do what you do best and outsource everything else kind of sums up my assessment of the current legal marketplace and how firms should respond to it.

3. My latest column at Slaw looked at a different question: why are some of the most influential people in law firms also the least pleasant to deal with? The importance of being nice makes the case that collegiality has a business purpose.

4. My newest entry for Attorney At Work reached back to law school to discuss the potential benefits of private knowledge management: Revive your law school study group.

5. My first entry for Small Firm Innovation, a dynamic new blog sponsored by Clio, won’t appear until early next month, but I’m proud to be both a contributor and a member of the advisory board. Check out SFI today for practical first-hand accounts of small-firm success.

In terms of my travel plans, here’s where you’ll find me over the next several weeks.

These and other engagements will take me through the summer, so I’m now booking appearances for the fall. If your law firm or practice group is organizing a retreat or your organization is hosting a conference and you’d like to learn more about my presentation packages, please drop me a line. Look for more information about retreats and presentations in an upcoming Law21 redesign as well!

Finally, I want to make one last pitch for your firm, department or organization to submit an entry to the 2011 InnovAction Awards, sponsored by the College of Law Practice Management. The deadline for entries is now just one week away, and based on inquiries and entries already received, I’m anticipating a banner year for submissions; yours should be among them.

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

Law schools and the law of supply and demand

If law schools were publicly traded companies and you held some in your portfolio, I would be strongly advising you to sell. Fast.

Here’s a quick review of some recent news concerning the US legal education industry and the legal profession it is purportedly preparing its graduates to enter.

I don’t know about you, but I look at these and similar accounts and I see a bubble just waiting to pop, or a system on the verge of a crash. This isn’t about the recession or the financial crisis anymore; this is about a serious misalignment between the industry that trains new lawyers and the marketplace that employs them. (Canada, by the way, is headed merrily in the other direction, with three new law schools set to open shortly; whether this is a sprint towards a cliff is a subject for another day.)

What we’re seeing here is the law of supply and demand applied to the law. The future legal marketplace is going to require fewer, differently skilled lawyers than it has during the past several decades, so this market recalibration should really come as no surprise. The market is telling law schools: we don’t need all these new lawyers, and we definitely don’t need the skill sets you’re giving them. Law schools aren’t listening, because they can’t: the production of traditionally credentialed graduates has become the reason for their existence and the core of their business model. Companies whose products are no longer in demand either find new products or go out of business. I see extremely few law schools capable of changing their product lines.

That’s one side of the coin. Here’s the other: shrinking demand for lawyers is not the same thing as shrinking demand for legal services. If anything, the overall legal services market seems poised for strong growth over the next decade or so. This isn’t only because an increasingly global, complicated and cross-connected world will have an equally increasing need for legal help to navigate it successfully. It’s also for two other reasons:

  • Many legal tasks that no longer justify the expertise of a lawyer to do them must still be accomplished, but at better-aligned prices.
  • The latent legal market, left untapped by generations of lawyers and law firms, is ready to explode, as the DIY law trend illustrates.

This is real demand, and it can be met by low-cost lawyers, foreign lawyers, quasi-lawyers, para-professionals, corporate providers, and automated systems. At the moment, there is a relatively limited supply of these entities. But just as the changing market is punishing old suppliers like law schools, it will reward new suppliers such as virtual law firms, legal process outsourcing companies, freelance and contract lawyer organizations, e-discovery specialists, automated document assembly programs, consumer-friendly legal kiosks and outlets, and many other options still at the embryonic stage. These are the directions in which the investment funds triggered by the Legal Services Act will flow, not (for the most part) into law firms and most certainly not into law schools.

Historically, demand for legal services has meant demand for lawyers, and the legal education industry evolved to reflect that. In future, demand for legal services will be met by a greater diversity of providers with different training and new skills, crossing previously sacrosanct lines of status, geography and even technology. That’s what’s really going on here: an old supply chain is breaking down, and a series of new ones are rising to replace it. Place your bets accordingly.

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

Countdown: it’s time to enter the 2011 InnovAction Awards

Lawyers are supposedly averse to innovation. Apparently, someone forgot to inform these law firms and companies.

These are just some of the most innovative developments in the legal marketplace over the past year — this short list doesn’t touch on the increasing use of alternative fees in law firms, the development of low-cost non-lawyer service providers, and the continuing evolution of legal process outsourcing providers. Innovation in the legal market is real, and if you’re not actively pursuing innovations of your own, you’re in danger of missing out on a critical period in the profession’s history.

But if you’re currently pursuing or have implemented innovations in your law firm (or law department, law school, startup company, etc.), then you have less than three weeks left to submit a nomination for a 2011 InnovAction Award, sponsored by the College of Law Practice Management. The InnovAction Awards, of which I’m proud to serve as Chair, recognize outstanding innovation in the delivery of legal services, the managing or marketing of a law firm, or the conduct of client relationships.

This year, as this Inside Legal announcement explains, the Awards have slightly altered their criteria. No longer is it required that winning entries do something that has “never been done before” — we recognized that innovation is too widespread and too viral in the marketplace to continue to require absolute lack of precedent. Instead, we’re now applying a more nuanced four-part criteria:

  • Disruption: Does this entry change an important element of the legal services process for the better, and marketplace expectations along with it?
  • Value: Is the client and/or legal industry better off because of this entry, in terms of the affordability, ease, relevance or its effect on legal services?
  • Effectiveness: Has this entry delivered real, demonstrable or measurable benefits, for the provider, its clients, or the marketplace generally?
  • Originality:  Is this a novel idea or approach, or a new twist on an existing idea or approach?

If you’ve undertaken and accomplished an innovation within your enterprise within the last three years that fits these criteria, I strongly encourage you to seek out the peer recognition you deserve. More details and an entry form are available at the InnovAction website, and I’m available anytime to answer any questions you might have.

It’s time to go innovate. If you’ve already done so, it’s time to come collect your reward.

Why do law firms exist?

What is the point of a law firm?

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

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

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

Companies exist, therefore, because they:

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

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

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

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

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

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

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

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

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

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

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

Legal Marketing Association Toronto Chapter’s Luncheon Seminar, Toronto, ON

I’m looking forward to addressing the Legal Marketing Association Toronto Chapter‘s Luncheon Seminar on June 23, 2011, at the Toronto Board of Trade. I’ll be speaking about the implications of the waves of change in the legal marketplace, with an emphasis on the Canadian market and the incursion of global law firms.

Please note that this event was postponed from its original May 26 slot — my sincere thanks to the LMA-Toronto for rescheduling!

A changing of the guard

Legal historians might look back at the spring of 2011 and judge it the time when the old law firm model began to pass away and a new one began to take its place. Specifically, they might contrast last month’s dissolution of Washington-based global firm Howrey LLP with today’s announcement by 300-lawyer Irwin Mitchell LLP (the first by a major UK firm) that it intends to convert to an Alternative Business Structure under the Legal Services Act.

Personally, I was sorry to see Howrey go, especially since I’ve written about several worthwhile initiatives the firm undertook these last few years, including Howrey University, merit-based associate compensation, and joining the short-lived associate apprenticeship trend. Whatever else it did wrong, Howrey did or tried to do a number of things right.

But the process by which it sank deserves further examination. Most of the Howrey post-mortems identified some common causes of Howrey’s fate: too-rapid international expansion, an increasing numbers of conflicts, an over-reliance on contingency litigation that suffocated cash flow, low-cost non-lawyer competition for process work, and eventually, a growing loss of confidence in leadership. Some of that holds up, and some of it doesn’t. But if it sounds to you like these factors are not unique to Howrey, but in fact could be shared by a number of other law firms, you’re right.

Yet an even more important factor, also shared by several other firms, lurks behind the collapse: a culture too weak to withstand all these pressures. An article about Howrey in CPA Global’s New Legal Review included this observation from legal consultant Brad Blickstein: [T]his firm had been on the cutting edge for a long time. Attorneys, however, do not tend to embrace change. For a firm to be “non-traditional”, its attorneys have to believe. The firm grew so quickly through the merger that many partners did not grow up in this culture. When times got rough, they did not have the fortitude or desire to continue being non-traditional.

Writing in the Washington Post, Steven Pearlstein drew a similar conclusion: Howrey … was not a strong partnership. Over the past 20 years, it had more than tripled in size by luring away lawyers from other firms and setting them up in offices that had little traffic with each other, or with the lawyers back in Washington. For the most part, these were lawyers willing to switch firms because of the prospect of earning more money and attracting more clients, and for many years, it worked out just that way. But then, suddenly, it didn’t, for one year and then a second, without any clear indication of when or whether things would finally turn around. And it was then, by last autumn, that it began to be clear that the personal roots were not deep enough, the bonds of loyalty not strong enough, to hold Howrey together.

There’s more Howrey in many law firms today than those firms would like to admit. Firms built primarily (if not entirely) on the foundation of partner profitability shake and totter whenever that foundation is threatened. Think back to the financial meltdown and to the massive associate and staff firings that followed: they were done solely to preserve profitability levels and prevent the kind of crisis of confidence and partner desertions that marked the beginning of Howrey’s end. If there’s nothing keeping partners within your walls beyond their annual draw — and that’s the dominant modern law firm model — then a Howrey-style disaster is always going to be one string of bad results away. That’s a risky and stressful way for a law firm to live.

At the same time, from England & Wales, comes the first sign of a different approach. Here are some excerpts from the news that Irwin Mitchell, a full-service firm with an affinity for personal injury work, has retained an investment bank to guide it through the ABS process:

All options are up for consideration, with the aim being to raise a war chest to fund future growth. Managing partner John Pickering said: “Conversion to an ABS will broaden our access to capital and enhance our funding flexibility as we execute our strategic growth plan, while ensuring that we can continue to provide the very highest standards of service to our clients. … The Legal Services Act will create exciting growth opportunities for strong, well-financed legal services businesses to accelerate their growth plans. Irwin Mitchell intends to be at the forefront of these changes and we have therefore taken the decision to seek external investment to further our ambitious plans for the business.” …

In preparation for the conversion, Irwin Mitchell is to restructure into a two-tier business, with the creation of a corporate vehicle. The firm will continue to operate as a limited liability partnership (LLP) and the new holding company is intended to become the controlling member of the LLP. Irwin Mitchell has a strong personal injury base and in recent years has invested in its affinity business to build up branded consumer-focused products. This has been part of a long-term strategy to build up a series of branded goods that could be offered to the consumer market. In March last year, the firm signed a deal with the Daily Telegraph that enabled it to offer legal services to the national newspaper’s readers.

I noted last week that law firms, as compared to non-lawyer legal businesses, likely will have a tougher time attracting equity investment (for an excellent illustration why, check out John Wallbillich’s fictional law firm IPO). So it might be that Irwin Mitchell will fail to find a backer to its liking.

But it’s clear that the firm has been preparing for this move for quite some time, carving out a commoditized services section on its website. At a time when small-firm franchisor Quality Solicitors is about to open legal service kiosks in British bookstores, consumer and small-business legal work seems to be leading the revolution. More interestingly, recall that the world’s first law firm to acquire outside investment, Australia’s Slater & Gordon, was also a personal injury firm that floated shares on the stock exchange and proceeded to go on a massive and profitable law firm buying spree.

But most interesting of all might be a common reaction, in reader comments and Twitter posts, that a public offering or other equity investment in Irwin Mitchell will quickly result in a number of senior partners cashing out and leaving everyone else behind. “ABS is just money for old men. Prepare for the senior associate exodus,” says one commenter at The Lawyer. Steven Harper echoes that thought: Many of those in big law who already take a short-term economic view of their institutions would leap at the opportunity for a one-time payday that discounted future cash flows to today’s dollar. In fact, a big lump sum will tempt every equity partner who worries about next year’s annual review.

But I wonder whether for some firms, that would be less a fatal flaw than simply part of the plan. It’s possible Irwin Mitchell may have decided that what it offers is more important than who offers it. It may have decided that in the future legal marketplace, lawyer-critical work — major assignments that only a very few lawyers are trusted to handle — is a diminishing asset, whereas ordinary-course-of-business and commodity work is set to grow rapidly.

It may, in fact, have recognized the problem common to law firms everywhere — that rainmakers and other heavyweights exercise an unhealthy degree of influence over a firm’s fortunes — and responded with a strategy that lessens the risk and impact of that problem. It may envision a law firm model where the firm’s overall profitability, not each partner’s individual profitability, is the driving force. A firm like this might be only too happy to see some partners cash out, because the firm has bigger plans than simply being that partner’s most convenient current platform for generating profit and can do without the risk of his or her abrupt departure.

It’s still very early days, of course. But it’s possible we’re seeing the sun start to set on one law firm model and start to rise on another. Howrey illustrates that the fundamental purpose of the traditional law firm — to maximize profit annually for its partners — damages and can fatally undermine its culture, and is unacceptably prone to the risk that panicking partners will make a run on the bank and leave. Irwin Mitchell suggests that an alternative model — deliver legal services systematically, efficiently and effectively to generate a reliable firm-wide profit, minus the risk that partner defections could sink the whole enterprise — might catch the attention of both the purchasers and funders of legal service businesses. If both of these are true, then we might currently be watching a changing of the guard.

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

Nova Scotia Barristers’ Society Annual Meeting, Halifax, NS

I’m very happy to be co-presenting “Back to Law School: Strong Traditions, Fresh Ideas,” the annual meeting of the Nova Scotia Barristers’ Society in Halifax on June 11, 2011. I’m particularly pleased that my co-host will be Matt Homann of St. Louis, leading legal innovator and founder of LexThink LLC.