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.

Solo innovation

Conventional wisdom has it that when the meteor struck the earth millions of years ago, the small early mammals survived because they could slip into underground holes and caves, while the larger dinosaurs, with nowhere to go, were struck down. Not to do overdo the analogy, but a series of innovations in solo and small-firm practice indicates to me we’re looking at mammals making contingency plans.

From the UK, where so much innovation is emerging these days, comes Get Solicitors, which Legal Futures describes as “an alternative to national, branded networks by giving solicitors the tools to market and build their own brands. … Managing partner Brian McKibbin said the focus is online marketing, along with relationship building to help firms become lynch pins in their local business communities. There is also practice management advice. ‘We don’t think the way forward is a homogenous legal brand,’ he said. The future for law firms is going to be in looking and feeling like a law firm, rather than like Co-operative Legal Services or RBS Legal.'”

From the US comes an even more attractive proposition: my friends at Solo Practice University have announced a creative new program called “Building Bridges to Professional Independence,” under which law schools partner with SPU to provide scholarships to some of their upper-year students and discounted tuition rates for other students and alumni. This weekend at the Future Ed conference co-sponsored by New York Law School and Harvard Law School, the first Bridges partner, New York Law School, will come on board. I know that SPU is speaking with other law schools about coming on board as well, but kudos to New York Law School for starting it off. (And while I’m thinking of it, don’t forget about Law21’s SPU scholarship contest.)

This is the way, it seems to me, that solos and small-firm lawyers will survive the deluge and thrive afterwards. GetSolicitors and similar services provide a practice management and marketplace foundation for small-firm lawyers, putting them in position to focus on their work. The Bridges program, moreover, is exactly what we need in this profession — a way for new lawyers to get the best of both worlds, a solid law school education and a practical introduction to what being a lawyer actually involves. While a few larger firms have set up excellent professional development programs, most seem to assume that their new lawyers will “pick it up” along the way to various degree. Solos don’t have that luxury, and that’s why it’s natural that this sector is taking the right steps forward.

Is the future of BigLaw smaller? Quite possibly — but the future of law generally is going to belong to whoever is first and best out of the gate these next few years, as the assumptions upon which we’ve depended start to fall away.

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.

Not wanted on the voyage

From the incumbent’s point of view, the only thing worse than a revolution that topples you is one that renders you irrelevant. You can mount a comeback from exile; you can’t mount a comeback from Nobody Cares. Law firms, pay close attention.

We’re now less than six months away from the implementation of the Alternative Business Structures (ABS) provisions of England & Wales’ Legal Services Act. This event has been forecast as law’s “Big Bang,” the equivalent of financial services deregulation in the UK in the 1980s, although I suspect this will be a long rumble of change rather than a sudden explosion. But as we get closer to October 6, signs are emerging that should be making British firms very uncomfortable and firms elsewhere in the world more than a little uneasy. It’s quite possible that the biggest change in legal marketplace history will pass law firms by.

The Legal Futures website reported last week that English and Welsh law firms are finally starting to take ABSs seriously and are becoming more amenable to external investment. The bad news: the investors may already have lost interest. “City solicitor Paul Harding, who heads ABS Advisory Partners, said he was ‘absolutely convinced’ that private equity firms were getting ‘cold feet’ because of the difficulties they foresaw from investing in partnerships. … Mr Harding said law firms do not really understand what an investor would require of them. ‘They’re thinking about creating capital value that they can buy and sell, and not looking any further than that. They’re in for a shock. If money is made available, they won’t like the terms.’”

Subsequently, at an ABS-themed conference sponsored by Legal Futures, Richard Susskind issued the same warning: most law firms will not be invited to this party. “Law firms hold few attractions to private equity investors because there is no obvious exit route and little profit, he said, predicting that external investment will be made exclusively in new forms of legal business: ‘These are the businesses that are growing; doubling, tripling, quadrupling every year. Of course they’re going to attract investment.'”

When you think about it, the idea that private equity will bypass law firms and roll straight into new business models makes perfect sense. As any managing partner will tell you, running a typical firm is a task that inspires mythic adjectives like Herculean or Sisyphean. Law firms resist corporate management the way cats resist baths. John Wallbillich at The Wired GC illustrates this perfectly by listing five reasons why law firms couldn’t adopt the Goldman Sachs model:

  1. They don’t hire the best and then invest in their development.
  2. They don’t honestly evaluate talent at all levels.
  3. They don’t make people leave who don’t perform.
  4. They don’t directly link pay with performance.
  5. They don’t accept downside risk for upside reward.

Savvy investors would balk at an operation that failed on one of these points; most law firms fail on all five. Why would investment firms take on the headache and heartache of trying to corral hundreds of independent lawyers who each insist on professional autonomy and consistently put their own interests ahead of the firm’s? Many law firm partners, if offered cash for an equity position in their firms, would likely take the money and run. Private investors are fully aware that six months after buying your average law firm, they’d be left with a logo, a lease, and an unfunded pension plan.

Much better, from the investment community’s point of view, to start from scratch. Finance a small greenfield firm where lawyers work efficiently, price by value and are committed to the cause. Alternatively, kick the tires on some of these virtual or distributed firms that deliver results without overhead and attitude. Better yet, never mind the lawyers: go find an LPO the way Thomson Reuters did, inject millions of dollars into its operations, and see what happens. Or throw your weight behind a document service company like LegalZoom or a small-firm franchisor like Quality Solicitors. In all these cases, investors will be looking for private companies that think and behave like private companies, not like country clubs with billable-hour targets.

The threat of irrelevance is not limited to either the UK or the ABS world: it represents a general marketplace shift away from the traditional providers of legal services and their bases. The Daily Business Review recently published an account of a conference where in-house counsel from Microsoft and Hewlett-Packard — not exactly lightweight clients — cheerfully described all the ways in which they were slicing millions of dollars off their annual legal spend.

But the Microsoft lawyer also threw in a statement that should make even the biggest and most “prestigious” firms shiver: “‘When I started,’ he said, ‘everything I did … all the regulatory work … was centered in Washington. Now the centers of power are Asia, Sao Paulo and Moscow. … All the complex legal issues these days are outside the United States.” In other words, complex legal issues — the ones that big firms pursue because they pay off so handsomely in money and prestige — are leaving the building. If you’re a US firm that stretches no farther than the continental 48, that’s a problem.

A year or so ago, I quoted a Seth Godin observation: “When the platform changes, the leaders change.” I think that process is now underway in the law: a shift in the marketplace environment that has a very good chance of deposing incumbents and producing brand new players. Twelve months from now, when the first ABS dollars start circulating through the system worldwide, we should start to see that shift manifest itself.

Law firms that want to survive this change could stand to do a lot of things, but they might be best advised to start with management. Specifically, they could junk a model where the owners manage the business, manage it according to their individual short-term interests, and treat the firm as a means to an end rather than an end in itself. The global legal market is about to hand down a verdict on that model: it doesn’t deliver what we need. It’s irrelevant.

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.

I get around

Time for another roundup of articles I’ve recently published elsewhere — a bit more extensive than usual — with the thought that you might find some of them interesting.

I’d like to start with a link to the newest edition of the Edge International Review, a semi-annual collection of articles from my partners in Edge. I served as editor of this issue and contributed an article titled: “The talent portfolio: where, how and by whom your work is done.” The Review will be mailed out this week to thousands of subscribers; if you’d like to be added to the subscriber list (or to receive Edge’s free e-newsletter, containing more exclusive articles by Edge partners), please drop me a line.

For the Canadian Bar Association’s National magazine, I wrote a cover story on the most recent round of mergers in the Canadian law firm marketplace. “Merger mania” featured lengthy interviews with the managing partners of Norton Rose, Ogilvy Renault, Miller Thomson and McMillan LLP. I think you’ll find their perspectives on the rapidly evolving law firm landscape to be illuminating.

For the CBA’s PracticeLink online periodical, I wrote an article titled: “How to use old media to access new media,” which talks about how social networks can help you raise your profile in the mainstream and legal press. I followed that up with a complementary post at Stem Legal’s Law Firm Web Strategy blog that added more pointers for joining old and new media in your marketing efforts.

Also for the Law Firm Web Strategy Blog, I welcomed new Stem client Harrison Pensa of London, Ontario, to the fold, and later highlighted the firm’s innovative new privacy policy generator. In addition, responding to a trend I’m seeing among law firms struggling to create original content, I wrote a primer titled: “Reluctant publishers: helping lawyers generate content.

For The Lawyers Weekly newspaper, I published two columns: one on the strategic management of legal talent, and the other on a subject I wish would get more serious attention in the legal profession. “Law firm diversity beyond the platitudes” cites the example of Nixon Peabody’s diversity initiative, which is the most demanding and the most pragmatic I’ve yet seen.

My regular column for Slaw, “Exploding some law school myths,” generated a remarkably large and intense amount of feedback. Read the article and review the provocative comments to get a sense of popular feelings about law school these days.

For Attorney At Work, I wrote two articles: “Create legal annual reports for your clients” received a very positive response to its idea of preparing yearly reviews and previews of clients’ legal health, while “Demographic business development” talked about generational change from clients’, rather than the lawyer’s, perspective.

Susan Cartier Liebel and her great team at Solo Practice University were kind enough to interview me for a two-part webinar on the future of the legal profession. (Note: if you haven’t heard about my SPU scholarship contest, check it out here.)

Finally, I was honoured to be interviewed or republished by some leading media outlets over the last couple of months.

A last couple of notes: April 1 finds me in Quebec City addressing the spring meeting of the Chambre des Notaires, the governing body of Quebec’s notaries, while April 4 brings me to Orlando to open the MasterMinds session at the 25th annual conference of the Legal Marketing Association. If you’re attending either of these events, please send me an email and let me know.

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.

The stratified legal market and its implications

An extraordinary conversation has emerged among multiple authors in the blawgosphere over the past few days. It revolves around a pressing question: in light of the huge changes in the marketplace, what will become of law firms? More specifically, given the increasing segmentation and stratification of the universe of legal work, how can law firms — traditional, inflexible, one-size-fits-all businesses that they are — respond to these changes and continue to thrive? Can law firms serve multiple segments of a newly diverse market simultaneously, and if so, how?

No fewer than seven articles by six writers have explored this subject so far, and I recommend you take 10-15 minutes and go read these pieces (if you haven’t already) before continuing:

Collectively, these posts represent a deep dive into a subject that should command the attention of law firm leaders in firms of every size, because they identify a fundamental challenge. The nature of legal work is changing, and when demand changes, markets require suppliers to change as well. Law firms must adapt to at least some degree; but how, and in what ways? Inspired by all these posts, here’s my assessment of where we find ourselves right now and whether and to what degree law firms can move forward from here.

When viewed from the perspective of clients (which, when you think about it, is the perspective that counts), there are three types of outsourced legal work (that is, work not performed in-house). This is roughly how clients would describe them:

1. Mission-critical.

This requires a lawyer.
It really matters who we use.
It doesn’t matter how much it costs.

“This is mission-critical stuff; if this doesn’t work out, the company takes a major hit and my job could be on the line. Conversely, though, if it works out, the company avoids a hit and/or makes a huge gain, and my star rises considerably. There’s no way we can pull this off ourselves — it’s too big. So we need to hire the best — that is, either the very best lawyers to get it done right, or the firm with the best reputation so that if it goes wrong, I can point to the firm’s rep and say, look, I chose the cream of the crop, so don’t blame me. I’ll pay whatever lawyers or firms like that cost.”

2. Ordinary course of business

This requires a lawyer.
It doesn’t matter who we use.
It matters how much it costs.

“This needs to get done, and it’s definitely lawyer work, and we don’t have the manpower in-house to do it. But it’s also the kind of thing that comes up pretty frequently in our business. And of course we want it done well, but a loss or a failure wouldn’t be fatal. ‘Good enough” is good enough here. Many lawyers and a lot of firms do this kind of work, so we’ll be well served no matter who we choose. But with the budget pressures I’m under, I’m going to make sure that whoever we hire has a good system in place for doing this work and bills below the median rate. I can afford to set some conditions.”

3. Commodity

This doesn’t require a lawyer.
It doesn’t matter who we use.
It really, really matters how much it costs.

“This needs to get done, but this is basic stuff and it’s the sort of thing that comes up over and over again. I’ll find a cost-effective outside solution that can process these matters rapidly, repeatedly and reliably: a professional staffing firm like Axiom, a freelance contract lawyer, or maybe an LPO. Unless we’re really lucky and can find a law firm to do it as well and as cheaply as these other suppliers (which I seriously doubt), I can’t justify asking a typical firm to do this — even their discounted rates are more than this is worth.”

(This division is inspired in no small part by John’s rate pyramid. It also helps to think of these three types of work as occupying, in declining order, the five stages of legal matters proposed by Richard Susskind: bespoke, standardized, systemized, packaged, and commoditized.)

Law firms have long supplied all three types of work to clients, invariably by way of the cost-plus billable-hour system. Clients, lacking both other options and the incentive to go look for any, went along. One market, one model. But now there are three markets: mission-critical, ordinary-course-of-business, and commodity. The universe of legal work has segmented and stratified. (One can argue that it was always segmented and stratified, but that the market mechanisms to recognize and process this segmentation didn’t exist till now, which I think is fair.)

The question before us is whether one law firm can still supply all three types of work, or even two of the three. More specifically: is it possible for a firm to do so, and then, is it feasible?

1. Is it possible? Yes, as my friends make clear in their blog posts. Ron and Toby point out that the hotel and banking industries feature companies that successfully serve different market needs through different brands. In a similar vein, Steve points to Toyota, a company that profitably produces both the Lexus and the Yaris. To those three examples, I’d add a fourth: shoe stores. Many people don’t realize that the five or six different shoe stores in your average shopping mall, each geared towards a different market segment, are often owned by the same company. Theoretically, there’s nothing preventing law firms from taking the same approach, adapting their offerings to the demands of each market segment.

2. Is it feasible? Here’s where it gets tricky. In practical terms, how would a law firm go about offering both mission-critical and ordinary-course-of-business services simultaneously, within the same enterprise? This raises problems that, on the whole, I see as insurmountable.

  • The structures for each tier (let alone for the commodity work) are very different and would require, at a minimum, separate facilities in different locations: Hilton doesn’t house Astorias and Hampton Inns in the same complex.
  • They would have to operate under different brand names: Cravath can’t start up an employment-law subsidiary under its high-end corporate name, for the same reason that Florsheim doesn’t sell basketball sneakers: the brand dilution is too strong.
  • And as Mary points out, support systems and infrastructure will differ too. Will one part of a law firm will suffer systematization and efficiency measures when other parts of the firm continue to happily bill by the hour? And could that even be managed financially?

But I think there’s a more fundamental challenge, which Mary also raises: “How do you handle the potential for income disparity and differing levels of respect for the lawyers in each practice?” To an extent, this is a problem in current full-service law firms, where some partners earn ten times or more what others make. But in an explicitly two- or three-tiered law firm, it would become intolerable, because there would be clear divisions in quality of work, level of pay, and inevitably, quality of lawyer, and that simply will not be borne.

Every lawyer considers himself or herself to be an exceptional talent, and if there are some within the firm who make more money, well, that can be an accident of economics, and if there are some who are clearly incredibly gifted, well, we all like to have a few superstars on board; but let’s be perfectly clear, we’re all excellent around here — we’re only talking about degrees of excellence. This is the fiction that all lawyers in a firm tell themselves, even when the hard truth is that, as Mark puts it, most lawyers are mediocre (I’d use the more charitable term “ordinary”). The politeness of collegiality (which some partners lack the manners to maintain) asserts this fiction of excellence because it makes everyone feel better about themselves and improves morale and unity of purpose. But a firm that publicly announces, “We have one set of lawyers for extraordinary work and another set for the basic day-to-day stuff,” abandons this fiction and  suffers the consequences. Firms hide this division today under the “full-service” label, but it exists and everyone knows it; keeping it hidden and unspoken is one of the things holding many law firms together.

At a certain point, the multiple divisions within a tiered firm would diverge so widely that they would  effectively become separate firms, bringing into question the point of the whole exercise. Could a law firm create a holding company to manage a fleet of separate legal enterprises? Within the right legislative environment, sure — but why would it want to? How could it be worth the hassle? It’s hard enough to manage a single law firm, and as Ron suggests, lawyers don’t possess a ton of management acumen or entrepreneurial spirit. Berwin Leighton Paisner’s Lawyers On Demand service, which Ron references, may be the only really successful example I’ve seen of a law firm operating two legal business models simultaneously — and even that service, which explicitly offers different types of lawyers serving different types of client needs, looks like it might be spun off into a separate entity.

For these reasons, I think it’s next to impossible, in practical terms, for a law firm to explicitly serve both the mission-critical market and the ordinary-course-of-business market: the requirements are too different and the cultural pressures too intense. A firm can position itself to offer ordinary-course-of-business services — Mark cites the example of a “big-firm quality at small-firm prices” brand that presents a sensible-yet-still-professional image to the market and allows everyone to save face. But that image can’t co-exist, within the same enterprise, with a “We’re the very best in the world and you’ll never get fired for hiring us” brand. Very few lawyers beyond their third year of call will voluntarily wear the “second-class status” discount tag with a smile.

So how will this dilemma be resolved? Legal work is segmenting and stratifying, and law firms can no longer profitably perform this work in a one-size-fits-all business model: mid-level work requires a degree of management and systematization, while the truly commoditized work requires full-scale business process re-engineering. But it seems to me that trying to operate two or three different business models under the same roof, name or brand will generate centrifugal forces too powerful to contain. How does this story end?

I think, inevitably, it ends with the breakdown of many of today’s large, full-service firms into smaller enterprises that serve these component markets:

Mission-critical work will go to a small cadre of firms with outstanding lawyers and outstanding reputations: they might be global, but they won’t be as massive as they are today, because they will require fewer lawyers on-site to carry out their work and will instead make use of the “commodity”-type enterprises described in #3 above to carry out the more routine work that associates and junior partners used to do. These mission-critical firms will retain the powerful names and brands that their best lawyers helped forge over the years. They will charge stunningly high rates and will likely operate much the same as today’s law firms do.

Ordinary-course-of-business work will be the province of large firms that have evolved the types of systems, procedures and philosophies that reflect the “Law Factories” Ron writes about. They will routinely make use of legal project management, automated document assembly, dynamic knowledge management, online service delivery and other innovations that reduce the cost and increase the efficiency of legal service delivery. Will they do good work? Of course! Competence is not an issue within any of these tiers. But the work will be less valuable to clients and will be priced more competitively, necessitating a frugal-innovation approach. These firms might very well employ lockstep partner compensation, since the corner-office gorillas will have decamped to the mission-critical providers. Some of these firms will be direct descendants of today’s big firms, with the same names and addresses; but many more will be entirely new creations, formed from the splintered remains of today’s big firms that found themselves caught in the no-man’s land between the high-end critical and low-end commodity markets.

Commodity work will, for the most part, have left the legal profession behind. It will belong to enterprises that resemble informatics providers more than law offices. Indeed, leading the pack will be companies like Thomson and its Pangea3 division, along with other financial, data and information companies like Bloomberg and LexisNexis (and maybe Google?). Legal process outsourcing companies will be players, some of them riding a wave of venture investment made possible by the Legal Services Act and its North American progeny. At the consumer end, look for outfits like Wal-Mart or CitiBank to offer as many basic legal services as regulations will allow. This is the work that has, in Steve’s words, risen up “through the floorboards” and is now, as Toby suggests with banks and check-cashing services, no longer lucrative enough to warrant lawyers’ efforts.

That, to my mind, is the near-term future of the legal marketplace: a wide-scale disaggregation of full-service law firms into smaller enterprises adapted to meet stratified market segments. If you think that sounds like a chaotic, messy and deeply upsetting experience for the legal profession, then I think you’re right. Law firms are complex business models of the kind Clay Shirky warns about, and when these models pass the point of maximum complexity, they don’t gradually disassemble themselves in an orderly manner: they simplify, quickly and radically. I don’t hope for that outcome. But it’s difficult to see another likely way for this to end.

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.

Mergers or acquisitions?

When Ogilvy Renault announced last fall that it was joining the Norton Rose Group, I went on record as saying I thought this was a watershed moment for the legal profession in Canada — that the world had finally arrived on our doorstep, more global firms were surely coming, and the law firm marketplace would never be the same. Some managing partners of Canadian firms were quoted as saying pretty much the opposite — that this was an interesting move, to be sure, but it didn’t fundamentally reshape the marketplace here.

Then, earlier this month, came a report in the British legal newspaper The Lawyer that not one but two more sets of UK-Canada law firm merger talks were underway. One was between Clyde & Co., a London-based firm with 24 offices from Riyadh to Caracas and points between, and insurance-defence firm Nicholl Paskell-Mede, a relatively young firm with offices in Montreal and Toronto. The second involved none other than the world’s biggest law firm, DLA Piper, and a large Canadian firm such as Heenan Blaikie (denied by the firm’s managing partner) or Fraser Milner Casgrain (neither confirmed nor denied by the firm’s CEO). I’m sticking with my original sentiments.

The legal trade press is always interested in merger talk, of course, and the last couple of years have seen a series of transatlantic tie-ups such as SNR Denton, Squire Sanders (Hammonds), and Hogan Lovells. Many law firms of all sizes are always a phone call or two away from proposing a merger or considering such a proposal themselves — size, as my Edge colleague Ed Wesemann points out in an article in the new Edge International Review, is something many firms reflexively pursue in the (often correct) belief it will make them more attractive to both clients and lateral hires.

The problem, of course, is that mergers are hard. They’re difficult enough to pull off in the corporate world, but they’re especially challenging in the law firm context, thanks in no small part to various cultural issues unique to our profession. There are as many examples of high-profile possible mergers that fell through (Orrick and Akin Gump, Reed Smith and Thompson & Knight, Proskauer and SJ Berwin) as there are successes, and many more such discussions never break the surface before sinking.

So I’m starting to wonder whether the immediate future trend is towards acquisitions more than mergers. Instead of two giant firms attempting to hook up (the analogy to dinosaurs mating is too good to ignore), we might start seeing more examples of very big firms expanding their presence incrementally, by picking up smaller firms or simply snatching the best lawyers and practice groups from rivals and using them to start up a local office. This is hardly a new tactic, of course, but it seems to me it’s been picking up steam lately.

Ogilvy Renault, for example, was just the 10th-biggest firm in Canada and it had a relatively small presence in oil country — but Norton Rose saw a cultural fit and that was more important. Deneys Reitz, Norton’s target in South Africa, was one of the smallest of that country’s Big Five firms. Clifford Chance, which has long had an interest in Australia, broke off merger talks with national firm Mallesons last year and instead, last month, acquired two small firms in Sydney and Perth with a total of just 14 partners to make their debut down under. Magic Circle giants Linklaters and Allen & Overy, The Lawyer reports, are making similar inquiries in Houston and may follow the lead of Latham & Watkins and Cadwalader, which set up their Houston headquarters by raiding lawyers from three established local firms.

That latter approach is one that should concern a lot of firms: it’s what the managing partner of one global giant calls “a rip-out.” Check out a firm, identify the star rainmakers and core practice groups, and make them an offer they can’t refuse. The most aggressive global firms likely don’t have a lot of interest in full-scale integration of other large entities — most such firms are too big and bloated to swallow comfortably. Many law firms, in truth, contain a lot of empty calories, and potential suitors would prefer to ingest as much protein and nutrition as possible while filling up on the least amount of starch. Rip-outs can achieve this effect, but they can be ruinous to the victimized firm.

The problem for many potential victim firms is that they won’t have a strong enough cultural gravity to resist the pull of an international giant. One of the drawbacks of making profit the foundation of your firm’s strategic purpose, as many law firms do, is that you attract people motivated primarily by money — and these people will be the first to leave when more money is thrown their way. Firms with a powerful cultural identity will still lose people to other firms — churn affects everyone — but they’ll lose fewer, and I wager that they’ll rarely lose those they want to keep. The firms I know with the strongest internal culture and clearest strategic direction are the ones that show up least often in the “Departures” section of the legal periodicals.

As for the predator firms — and I think we can reasonably call them that — they’re working not just to get bigger, but also better. Aric Press pointed out last month in The American Lawyer that a segmentation process is underway among the world’s largest law firms, by which a select few giants are separating from the pack and getting more of the very best, non-negotiable-fee work. Only seven firms, he noted, are among the 25 biggest and the 25 most profitable firms in the world, and none were the product of mergers. But each, it’s worth noting, has expanded its global footprint step by step.

So it’s quite possible that managing partners looking to get their firms involved in merger talks will be notified that their firms are in play — but it might not be via a phone call from a consultant or another managing partner inviting them to a working dinner. It might be a phone call from their own partners to report that most of the energy and infrastructure practice group is walking out the door to join a global firm.

The old saying is that there are two kinds of people: those who finish in the money, and those in whose money the others are finishing. I suspect we’re about to see that rule applied, with force, to law firms.

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.

Presidential CLE, ABA Annual Meeting, Toronto, ON

I’m honoured to be part of a Presidential CLE event, co-sponsored by the ABA Standing Committee on Technology and Information Systems and the ABA Center for Professional Responsibility, at the American Bar Association’s Annual Meeting in Toronto on Friday, August 5, 2011. The working title of the presentation is: “Modern Family & Modern Attorney: How Technology Is Changing The Way Attorneys & Clients Communicate and Collaborate.”