The rise of the responsible client

At its recent annual meeting in Boston, the Association of Corporate Counsel dropped a minor bombshell by announcing it had created a law firm rating system. In-house lawyers can now rate their outside law firms on six criteria: understanding of objectives/expectations, legal expertise, efficiency/process management, responsiveness/communication, predictable cost/budgeting skills, and results delivered/execution. Even if these weren’t excellent criteria, which they are, it’s refreshing to see firms ranked on terms that signify value to clients, rather than by how much money they make or how well they score on the latest “Best Employer” survey.

But there are a couple of twists to this system. Larry Bodine points out the first: the ratings are only accessible by ACC members, not by the law firms themselves. That strikes me as counter-productive: a law firm can hardly be expected to improve upon ratings it never sees, so this doesn’t seem like a useful tool to motivate change. But I’m actually more interested in a second aspect of the ratings: they can be made anonymously.  It’s up to the reviewing in-house lawyer whether to divulge his or her identity when delivering the law firm critique. To me, this is more problematic, and it illustrates a flaw in the growing client-rating movement.

We supposedly live in an age of internet-enabled consumer empowerment. Instead of relying solely on what a company tells us about its product or service, we can seek out the collective wisdom of other users. And if the matter at hand is a low-value proposition like whether a pizza place or iPhone App is worth trying, then great: you can afford to look just at the average number of stars out of five bestowed by unidentifiable computer users. But if the purchase has anything more than fleeting value, then you want some weight attached to the review in question — you need to know something about the reviewer. A lawyer review submitted anonymously, whether positive or negative, doesn’t have nearly enough weight to be meaningful. I raised the same objection to anonymous client reviews when Avvo debuted a while back.

Proponents of anonymous reviews could point to wildly successful peer-review systems like Amazon, where users don’t have to use their real names when reviewing products. But even if you post as your cat on Amazon, the system still links to all your other reviews, from which a reader can build a sense of your history, knowledge and biases and decide whether your assessment is worth any attention. Reviews by themselves are just opinions — they only become useful when you know something about the reviewer, when you can critique the critic. That’s the real benefit bestowed by widespread online access: not the power to evaluate, but the power to evaluate those doing the evaluating, to go behind the judgment to the judges. If you can’t do that —  if you don’t know who’s saying great or terrible things about a given lawyer — then you can’t derive much value from what’s being said. People tend to be a lot more circumspect when their opinions are accompanied by their identity.

But the question of anonymous lawyer ratings points up an even larger issue — the fact that clients’ growing power needs to be matched by an equivalent acceptance of responsibility. Clients stand at the threshold of unprecedented choice and power in legal representation — they can hire a lawyer from anywhere they want, order a legal task to be completed by any of a growing number of innovative methods,  demand to be billed in certain ways and up to certain financial limits, and so forth. And it’s all great fun and very empowering for the client, until the ramifications sink in: now they have to work a lot harder to choose their legal services providers and manage their legal affairs more closely.

Clients need to develop sophisticated and defensible systems for selecting and commissioning legal services providers — they can’t just outsource the whole thing to an outside law firm and dust their hands of the details. They need to demonstrate why a particular law firm was chosen over others, or why a law firm is doing a given task at all. They need to understand how legal tasks are unbundled, assigned and workflowed at least as well as their law firms do, and they need to come up with systems to monitor the progress of these tasks and how well they’re proceeding against various time, budget and effectiveness milestones — the process revolution in legal services is underway, but as Rees Morrison points out, many in-house counsel are no better trained at project management than their outside counsel are. Clients will discover that the price of having more choice is the requirement that the choice be exercised justifiably and managed systematically, and that neither will be a picnic.

It’s not so easy to rate a lawyer when your name is attached to the rating, and it’s not so easy to complain about intransigent outside counsel when the question of your own transigence is brought into play. So while it’s true that it’s becoming a lot harder to be a lawyer, I’d also argue that it’s about to become a lot harder to be a client.

The solution or the problem?

Last week brought news of three innovations that, each in their own way, aim to increase access to justice. It’s noteworthy that none of them came from lawyers.

First is a report that for the first time in Canada, a third-party litigation funding company, BridgePoint Financial Services Inc.,  persuaded an Alberta trial judge to allow it to provide funding to the representative plaintiff in a class actionHobsbawn v. ATCO Gas and Pipelines Ltd. The judge’s reasons aren’t known because the ex parte order was sealed, and Alberta’s class actions costs regime is a little different than other Canadian provinces’, but this is still a potentially pivotal ruling. It could remove the chilling effect of brutal costs penalties for would-be plaintiffs, which nominally should increase access to justice. It also gives rise to substantial ethical concerns, and I’m on record as having serious misgivings about treating a civil action as an investment. But there’s no denying it’s innovative, and that it should make it easier for people to get to court.

Also making inroads in Canada is legal expense insurance, as the local arm of worldwide provider DAS inches closer to approval of its offering by the national superintendent of financial institutions. Already popular in Quebec, legal expense insurance could become widespread throughout the rest of the country if DAS is given the go-ahead. For an annual premium of $500, policyholders receive indemnification of up to $100,000 in legal costs for matters like wrongful dismissal disputes, tax problems and personal injury claims — but not, significantly, family law matters, the most common source of access problems. Legal expense insurance also raises the question of who makes the decisions about how a legal matter is conducted: the policyholder or the insurer? But again, it’s hard to argue that this offering leaves potential litigants worse off than they are under the current system.

And finally, shifting gears and hemispheres, comes word from Australia of what is so far a successful family law initiative called Family Relationship Centres. This excerpt from the story summarizes the project better than I could:

Everyone who walks through the door, or calls the toll-free line, is entitled to three free hours of help every two years, whether it be on-site counselling and mediation or off-site specialized services. After that, costs are based on ability to pay. Walk in the door of a Family Relationship Centre and you are greeted by a “parenting counsellor” rather than a wall of pamphlets. Their job is to get a sense of your personal situation and how it’s playing out for your family, and to assess what help you need to start moving ahead.

The centres are meant to act as triage units for ex-partners who may be hobbled by mental health issues and addictions, or children acting out because of prolonged family conflict. “They will not close that file until they are certain that person has got the help they need,” says Parkinson. Mediation is a mandatory first step, a move aimed at making the costly and adversarial court system a “mechanism of last resort.” The last of the centres opened last year, and already Australia has seen an 18 per cent drop in court filings.

These Centres are part of a massive and very expensive state overhaul of the family law system in Australia, and so far they seem to be working very well. But like the other two advances noted previously, this project apparently developed with little if any leadership from the legal profession.

We seem to be ceding the innovation ground in law to private companies, which by definition are primarily interested in turning a profit, and to government, which has a different set of priorities than either lawyers or their clients. Last month, the very first InnovAction Honourable Mention handed out by the College of Law Practice Management went to the Practical Law Company; last year, an InnovAction Award went to Novus Law LLC — both private companies. I doubt they’ll be the last winners from outside the practicing bar.

So why aren’t lawyers, law firms, or lawyer regulating bodies leading the way in developing innovative legal service delivery solutions? Part of the reason lies in the profession’s singular resistance to initiatives that involve risk or an entrepreneurial spirit. But part of the reason, it seems to me, is also the fact that the solutions these entities are providing are to problems the legal profession helped create.

In most cases where plaintiffs shy away from using the legal system, it’s because the cost of the trial is both disproportionate to the potential award and completely out of reach of the great majority of individuals. And the cost of a trial is largely within the control of lawyers, because lawyers’ fees are by far the single biggest component of litigation costs. Who else bears responsibility for how much we charge? Yes, there are other factors inflating trial costs — better funded courts could reduce backlogs and delays, and discovery can be difficult to predict and control. But if there’s a case to be made that someone or something other than the price of lawyers’ services bears the majority of responsibility for litigation costs, I’d like to hear it.

Most innovations in the law these days are devoted to making the legal services delivery process more streamlined, more efficient, and more affordable to more people. A good number of these solutions come from individual lawyers and law firms, which is extremely encouraging. But as a profession, we should be concerned about the extent to which other solutions are emerging from outside our walls — and the extent to which they’re aimed at solving legal cost problems for which I think lawyers bear primary responsibility.

Charting a new course

There’s big news at Law21 today — some major announcements that I hope you’ll find as exciting and energizing as I do.

After more than ten great years with the Canadian Bar Association, I’m stepping down next month from my position as editor-in-chief of National magazine and executive editor of CCCA Magazine. This was anything but an easy decision, because the CBA has been a fantastic employer and my colleagues have been terrific since day one. I’m immensely grateful for such a valuable experience with one of the world’s best bar associations. But after a decade editing the CBA’s and CCCA’s magazines (and two years prior to that editing The Lawyers Weekly newspaper), I’m ready for new challenges — and here they are:

I’m joining global advisory firm Edge International as a partner. I’ll be offering both strategic and tactical advice to lawyers, law firms and legal organizations, centered around my very clear vision of a legal service marketplace undergoing massive and irreversible change. It’s an extraordinary opportunity to work with world-renowned colleagues like Gerry Riskin and Robert Millard, and we’re looking forward to the services we can offer together.

I’m also joining the dynamic team of rising stars at Stem Legal as a senior consultant and principal of our new Legal Media Strategy service,  providing media and communications advice to lawyers and law firms across the U.S. and Canada. It’s going to be a tremendous experience working with the talented Stem team and with one of the leading thinkers about the emerging science of lawyer SEO, marketplace identity, and client communication in the online world: Stem founder Steve Matthews.

Throughout all this change, I’ll continue to post here at Law21 and outline the unfolding nature of the new legal profession. I aim for Law21 to be even better in the months and years to come, thanks in no small part to my new colleagues and the new client opportunities to come. I’m excited and incredibly positive about what the future holds — and I’m looking forward to sharing it with you.

Breaking the big firm

My strongest, greatest fear by far, if it’s not too soon to look to the “other side” of this financial system meltdown and general economic interregnum, is not that things in law-land will look overly different when we emerge, but that they won’t look different enough.

That observation comes from Bruce MacEwen of Adam Smith Esq., and I share his concern that false confidence will lead too many large firms to believe that everything’s going to be basically okay. For large firms, everything is emphatically not okay.  The past couple of weeks have delivered a series of examples that demonstrate one thing: the ways in which large law firms have operated over the past few decades are coming to an abrupt end.

First, consider this this Legalweek report that two major international firms, Mayer Brown and Reed Smith, are jumping onto the fixed-fees bandwagon. Mayer Brown is readying itself to offer fixed fees for all its transactional work, as well as to make more frequent use of abort agreements and success fees. Reed Smith, meanwhile, plans to use fixed or capped fees in its financial industry group, in its corporate and real estate practices, and for transactional work.

What brought about this sudden departure from the easy-and-profitable billable-hour system? The firms’ leaders cite client relationships first and foremost, which is nice to hear. But perhaps equally instructive are two other articles linked from that Legalweek story: 55 job cuts at Mayer Brown in March, Reed Smith hiring a restructuring consultant in July. Few firms undertake changes of this potential magnitude unless the outside pressures exerted on them have made things very uncomfortable. (It’s worth noting, as Jim Hassett’s webcast does, that these are not the first AmLaw 100 firms to  climb onboard this train.)

Even more revealing are the contents of a leaked strategy memo from O’Melveny & Myers that appeared on Above The Law. The firm plans to “adopt a single rate card by FY2012, with volume and ‘investment’ discounts and appropriate alternative fee arrangements … becoming the leader in providing high-end legal services on a fixed fee basis, reducing costs to clients and achieving superior economic performance through practice management oriented toward cost effective client service.” Especially noteworthy are plans to reduce associate leverage to as low as 2-1, a ratio that’s positively Canadian.

Fixed fees, if done right (a big if), are demonstrably better both for the client and the lawyer. The question is whether large firms constructed on billable-hour pyramids can really adapt their culture and systems to make such a monumental change. Many big firms still think the key to flat fees is to take the last ten bills issued for this kind of work, average them out, add 10% for contingency, and present the final figure with a flourish. Fixed-fee veterans in smaller firms are skeptical, to say the least. Here’s Valorem’s Patrick J. Lamb on these big firms’ moves:

The essential element of alternative fees that actually work is that they shift risk to law firms, meaning the value changes from leverage and body count to experience and fewer bodies.  More brain power, less body count.  So a goal of reducing leverage “in some practices” to “as low as” 2 to 1 will make anyone experienced with alternative fees laugh out loud.  O’Melveny might as well take out a full page advertisement saying it really won’t be changing a damn thing.

I’m prepared to give O’Melveny’s initiative the benefit of the doubt, actually — every journey has to start somewhere, and I want to encourage every green shoot of innovation I see. But man, is this a long journey — changing a law firm’s fee and billing structure is like re-engineering your DNA, and the best will in the world won’t make it any less difficult. And for every large firm that is finally acknowledging that the horse they’ve ridden for years has died, ten more are still clinging on to the saddle.

The O’Melveny memo states at one point: “In the very recent past, our business model, as a whole, has yielded disappointing financial and practice growth results. … [O]ur litigation clients are looking for rate and fee reductions, and we expect that mindset will continue into the next good economy and beyond.”  That understates the size of the challenge. It’s not just litigation clients — a lawyer at a large firm confirms to me that the pressure for lower and/or more predictable costs is intense and is coming from across the client spectrum. This is the new reality, and large firms will struggle to make the sort of fundamental changes needed to adapt.

Let’s look at another key element of law firm success: personnel. The results of a survey published in The American Lawyer are interesting, if not surprising: associates in large firms are measurably more unhappy than their counterparts in smaller firms. Not only that, but graduates of the “elite law schools,” from which so many big firms insist on drawing most of their recruits, are the unhappiest of all when compared to their colleagues from “less elite” schools. (It doesn’t help that, as Ron Fox points out, law schools of every rank tend to funnel their graduates towards large firms and away from opportunities to serve ordinary consumers in smaller practices.)

You can probably guess the advice that the study’s authors offer big firms as an antidote: recruit outside your usual law school boxes, and make life for your new lawyers a little less punitive. It’s advice unlikely to be accepted, says Aric Press, editor-in-chief of American Lawyer: “I fear that we will look back at the exuberant spree of the last few years as the high-water mark of nonelite law school hiring. … This leaves an opportunity for the firms wise enough to seek first-class talent no matter what brand is on a diploma.” But how many firms will risk the CYA comfort of consistently recruiting from “the best and the brightest,” let alone make substantive changes to the overall associate model?

The study’s authors note that big-firm attrition is particularly frequent among women and minorities. Underlining that concern is this account of an event celebrating Working Mother magazine’s 50 Best Firms for Women Lawyers. Many of last year’s winners didn’t make the cut this time — in part, perhaps, because despite wishful thinking to the contrary, leaner times at big firms have made it harder, not easier, for women to advance and succeed:

It’s optimistic to believe that most large law firms are rethinking the work/life balance equation during these hard times. Frankly, most firms today are focused on survival and on a need to bring in more business — they are not, it seems, focusing on the larger questions of the meaning of work and job satisfaction. From where we sit, covering women in the profession for almost a decade, we don’t see a revolution on the horizon.

So: profits are dropping fast, more firms are getting ready to change the basic business model, the young talent is alienated, and diversity has been back-burnered. But that’s not the worst of it for big law firms. Because all this time, solos, small firms and midsize operations keep picking up all the opportunities that the large firms keep dropping.

While big firms allow women to walk away, one small firm encourages its employees to bring their children to work — not to an on-site day-care, but into the office, all day long. While big firms burn through their young talent, innovative companies like DirectLaw offer new lawyers reduced pricing to start up a solo virtual law platform — with 90 days’ free tuition to Solo Practice University to boot. While big firms set up committees to consider fixed fees, small firms have long since figured it out and will even tell you, as Jay Shepherd does, how they set their prices. All the momentum in the legal services marketplace today favours small, adaptable, innovative, client-focused, value-oriented, business-savvy providers. Most large law firms answer to immobile, traditional, self-centered, profit-oriented, and business-challenged. It’s not hard to pick the winner here.

Every marketplace, even one as artificially stunted as legal services, operates according to the law of supply and demand. The demand is changing, irrevocably. The suppliers that change with it will survive; the ones who don’t, won’t. Some more large firms are waking up to this fact and doing their best to change — but I’m concerned that 2009 is simply too late to be starting the change process.

The electric law firm

“Electric” as an adjective has kind of a dated feel, harking back to the 1970s when it modified Horseman, Company, Mayhem and Light Orchestra. But electric cars still retain a 21st-century buzz, keeping the momentum they developed during the recent oil shock as a serious alternative to gasoline-powered vehicles. The Economist recently devoted a special section to what it calls the electrification of motoring, and it makes instructive reading for lawyers. The legal profession could take some lessons from how some key innovations are completely redefining  the basic assumptions of the automotive industry.

Battery-powered cars operate on a different set of rules than gas-powered cars, not just in a mechanical or engineering sense, but also in paradigmatic terms. What you use your car to do, how far you can drive it, how fast you can accelerate, where and how you acquire your fuel — all these considerations and more are very different with battery-driven vehicles. For example, one electric car manufacturer is looking to create “electricity stations” where drivers can trade spent batteries for new ones, something made possible by selling — or renting — the battery separately from the car itself.

Separating ownership of the battery from ownership of the car changes the economics of electric vehicles. If you rent the battery rather than buying it, that becomes a running cost (like petrol) and the sticker price of the car drops accordingly. … Better Place, indeed, plans to go further. It will charge for its services (battery and electricity) by the kilometre travelled. The cost per kilometre will be lower than for petrol vehicles, and if you sign up for enough kilometres a month, it will throw in the car for nothing.

This isn’t completely new, of course — cellphone providers have been practically giving away the devices themselves, making money instead off the service plans. It’s the basis of the Free economy that Chris Anderson writes about, launched by King Gillette’s realization that he could give away razors but sell the blades. More and more manufacturers now make products available at no cost while charging customers for the service that makes the product useable and/or valuable. But for all that, it’s still shocking to think about getting a car for free in exchange for renting the fuel.

Law firms obviously don’t sell shavers, cellphones or cars. But what they do have in common with many modern manufacturers is that their tangible work product is becoming more commoditized, less differentiated, and more susceptible to low-priced, non-lawyer competition. Forms, contracts, simple wills, divorce papers and other basic documents are now available from kiosks and websites operated by courts, non-profits, and the non-lawyer private sector. The difference in quality between a document drafted by a  lawyer and one drafted by one of these alternative services is rapidly narrowing, and with it will narrow the premium that lawyers can charge above what these rivals charge (which in some cases is $0).

So how might a law firm give away products while selling services? Jeff Carr has observed that lawyer work falls into four categories: content, process, judgment and advocacy. The first two are well on their way to commoditization; the latter two remain the high-value and near-irreplaceable purview of lawyers. The day might soon arrive when firms publish and automate their legal knowledge, document assembly and document review process free of charge, over the internet, to anyone who wants them — but will charge a monthly retainer fee for the personal judgment, advice and representation that animates those documents and processes and provides real value. Wilson Sonsini’s term sheet generator is a step in this direction, but so are child support calculators and PCT calculators. The tangible product is the giveaway; the value, and the profit, are in the service.

To take another example: putting a battery in a car means taking out the internal combustion engine and its associated plumbing and wiring. That, in turn, means you suddenly have not only a whole lot more space under the hood to work with, but also the opportunity to completely reconfigure the space itself.

[O]nce the engine block and the gearbox are gone, the game of car design changes.  …  A number of carmakers and component companies are, for example, looking at getting rid of drive trains, and fitting electric motors directly into cars’ wheels. With wheel-mounted motors that mix motive power, braking and active suspension, more of the things conventionally fitted to a car become unnecessary. Because a gearbox, clutch, transmission and differential unit are no longer needed, and springs and other suspension items will probably go, too, vehicles could assume all sorts of shapes and sizes.

In the law firm context, we’ve long assumed that some elements, like extensive law libraries, were permanent physical fixtures. But while I hardly recommend tossing away all your texts, the fact is that many firms have streamlined their expensive premises by downsizing and computerizing their knowledge resources. But the electric car example offers many other possibilities. What if most of your administrative and secretarial support were outsourced to lower-cost jurisdictions or different time zones? What if telecommuting and telepresence became so affordable (as they almost certainly will) that your lawyers didn’t need to congregate in one place five days a week? Then you suddenly have the opportunity to rethink  your physical plant altogether. If you don’t have law books or legal secretaries or law firms, what does your law firm look like? Does your physical premises become less important than your website? Good questions, and they’ll need answers.

The Economist has long boosted electric cars, but even the magazine acknowledges that internal-combustion engines will rule the roads for some time to come. In the same vein, traditional law firms will continue to be the norm for a while yet. But we have the opportunity now to realistically picture what comes next.

Think of all the longstanding features of a law firm we take for granted — up-or-out partnership tracks, hourly billings to clients, billable-hour-based compensation for lawyers, powerful rainmaking partners, annual partnership draws, exclusive lawyer ownership, and on and on. Then loosen or remove even one or two of them, and consider the multiplicity of variations that result — the possibilities just keep unfolding. Next time you’re trying to picture the future of law practice, give some thought to the electric car.

My podcast with Charon

I had the great pleasure this morning of recording a podcast with Mike Semple Piggot, better known as Charon QC, the well-known UK-based lawyer, law professor, raconteur, and indispensible member of the blawgosphere. I’ve listened to many of Charon’s podcasts with lawyers I admire, so it’s an honour for me to be asked to join that club. We had a great time during our 40-minute conversation, which touched on private equity in law firms, fixed-fee billing, legal education, outsourcing to India, and other subjects.

You can  hear the podcast at the Insite Law Magazine page, or connect to it through the Charon QC blog. My sincere thanks to Mike for the invitation — I hope you enjoy the podcast as much as we enjoyed recording it.

The apprenticeship marketplace

Critical mass, like the famous definition of obscenity, is one of those things you can’t necessarily define but that you know when you see. We’re approaching a critical mass of discourse on the necessity of change within the American law school system, and when we reach that point, the focus will switch overnight from necessity to inevitability. The latest step in that direction comes courtesy of a National Law Journal article with the suggestive title “Reality’s knocking.” It details efforts underway at numerous law schools — including Washington and Lee, Dayton, Northwestern, Indiana/Bloomington, UCLA, UC Irvine, and the latest entrant, Duke — to integrate market-readying client-focused training into their programs.

[A] growing number of law schools are emphasizing teamwork, leadership, professional judgment and the ability to view issues from the clients’ perspective. “I think we are at a moment of historical change across the landscape of legal education,” said Washington and Lee Dean Rodney A. Smolla. “When we look back at this period in five to 10 years, we will mark it as the time when the whole mission of law schools made a fundamental turn.”

The thrust of these changes — whether shortening the law degree by one year, supplementing traditional coursework with legal skills instruction, simulating law firm environments (complete with client relations and billing), or introducing professional values training in the first year — is to accelerate law graduates’ development into full-fledged lawyers. By doing so, these schools hope to improve relations with the private bar (an increasingly important source of funding), better compete with other school for the most promising pre-law candidates, and (one would like to think) better serve the long-term interests of their students. By and large, these are very welcome developments, and there’s no doubt in my mind we’ll see a lot more of them in the next few years.

What especially caught my interest in the NLJ story, however, was a nearly-throwaway paragraph illustrating the kinds of pressures schools are feeling from the private bar:

The legal labor market is saying that it’s no longer willing to pay top dollar to recent graduates who lack work experience. Law firms including Washington’s Howrey and Philadelphia’s Drinker Biddle & Reath recently announced apprenticeship programs wherein starting associates earn less and spend a significant amount of time training and shadowing partners.

I’ve written about these programs before — Frost Brown Todd, Strasberger and Price, and Ford Harrison have followed suit — and I hope to put together a much more detailed treatise on this subject down the road. Under these initiatives, the law firms pay their new associates much less than the market rate and require far fewer billable hours from them; associates spend most of their time in apprenticeship, training and shadow programs with experienced lawyers, with (unbilled) client contact and observation opportunities where possible. These firms have heard their clients complain about paying to train new lawyers unprepared by three years of law school, and either to mollify these clients, to stake a marketing advantage, or (one would like to think) to actually better serve both their clients’ and their lawyers’ interests, they’ve responded with this new approach.

But what’s most interesting is that these innovative new programs at the law firms don’t really differ in any substantial way from the innovative new programs at the law schools. Both are focused on providing new lawyers with the practical training, skills development, and professional awareness that a traditional law degree and most bar admissions processes fail to deliver. Both aim to reduce the steep learning curve that new lawyers have always had to climb, making them readier to serve clients and generate billable work than they otherwise would be.

What this means is that for the first time, law schools and law firms are providing the same service — apprenticeship training. And when two or more providers offer the same basic service, you’ve got yourself a marketplace. Very good things can happen in marketplaces — intense competition to improve offerings, constant pressure to innovate, a diversity of ideas and approaches, continual erosion of barriers to entry. All of these developments work to the ultimate benefit of that marketplace’s consumers — in this case, new lawyers and (ultimately) the clients whom they’ll serve. The more schools and the more firms that enter this marketplace, the better and faster the results will flow.

I can’t wait to see what a lawyer apprenticeship marketplace might produce over the next several years. But there’s a potentially major problem with this playing field: one of these providers charges its consumers an annual tuition to receive this service, while the other pays its consumers an annual salary. That’s no contest, and in the long run, it will mean that this is a service you can’t charge students to receive — or, more radically, one that new lawyers won’t earn a salary to obtain.

Why change is so hard

Last week’s New Yorker column by James Surowiecki talked about health care reform in the United States, but it has something important to say about change in the legal profession too. Surowiecki noted the sudden remarkable rise in the number of Americans who say they’re satisfied with their current health coverage. Among other factors, he puts this down to people’s deep-set psychological aversion to give up what they’ve got in favour of something new:

Most of us, for instance, are prey to the so-called “endowment effect”: the mere fact that you own something leads you to overvalue it. A simple demonstration of this was an experiment in which some students in a class were given coffee mugs emblazoned with their school’s logo and asked how much they would demand to sell them, while others in the class were asked how much they would pay to buy them. Instead of valuing the mugs similarly, the new owners of the mugs demanded more than twice as much as the buyers were willing to pay….

What this suggests about health care is that, if people have insurance, most will value it highly, no matter how flawed the current system. And, in fact, more than seventy per cent of Americans say they’re satisfied with their current coverage. More strikingly, talk of changing the system may actually accentuate the endowment effect. Last year, a Rasmussen poll found that only twenty-nine percent of likely voters rated the U.S. health-care system good or excellent. Yet when Americans were asked the very same question last month, forty-eight per cent rated it that highly. The American health-care system didn’t suddenly improve over the past eleven months. People just feel it’s working better because they’re being asked to contemplate changing it.

Compounding the endowment effect is what economists dub the “status quo bias.” Myriad studies have shown that, even if you set ownership aside, most people are inclined to keep things as they are. … Some of this may be the result of simple inertia, but our hesitancy to change is also driven by our aversion to loss. Behavioral economists have established that we feel the pain of losses more than we enjoy the pleasure of gains. So when we think about change, we focus more on what we might lose, rather than on what we might get. Even people who aren’t all that happy with the current system, then, are still likely to feel anxious about whatever will replace it.

That sounds to me like a neat encapsulation of what’s happening to a legal profession facing unprecedented pressure to change. The outside forces attacking the industry’s status quo (technology, competition, client sophistication and generational shifts) grow stronger every year. In addition, there’s more dialogue than ever before within the profession about changing billing practices, law firm structure, talent management, technology usage, billable targets, client relationships, etc. And by most measures, a remarkable number of lawyers aren’t really that satisfied with their work or their careers. In theory, change should be rolling like a river through the profession right now.

But those of us in the change camp remain perplexed by the steady and growing levels of resistance we still encounter — not just among lawyers and law firms, but also among clients, law schools, and others. It seems like the harder we push, the more tightly lawyers grip the familiar features of their current system. And Suroweicki’s article presents a plausible explanation — the very act of advocating change increases lawyers’  resistance and their belief that the status quo is just fine, thanks.

So I’m coming to think we’ve been taking the wrong approach. Many of us, and I’m as guilty as anyone, tend to dismiss lawyers’ opposition to change — change that would make for a profoundly better legal system — as being grounded in selfishness, short-sightedness, and bloody-minded traditionalism. And I still think these factors do play some part.  But if we look at the situation through less jaundiced eyes, and take into account these natural and largely inescapable human tendencies towards preservation of the familiar, we can come to understand the resistance more clearly, and judge the resisters less harshly. The way things are, even if they’re not that great, still seem self-evidently good and preferable to the cost that change might exact.

So how can change be effected in an environment psychologically programmed to over-value the status quo? Here are three possible approaches:

1. Question the permanence of what people already have. Surowiecki suggests that Americans’ health coverage is far more tenuous than they think it is, and that therefore “the endowment that insured people want to hold on to is much shakier than it appears. … The message, in other words, should be: if we want to protect the status quo, we need to reform it.” Lawyers have been warned about the unsustainability of the current system and how much they stand to lose if wholesale reform from outside the profession sweeps away their privileges. But lawyers don’t frighten easily, and many have an unrealistic picture of their irreplacability in the greater scheme of things. This approach could yield more success as the upheaval inevitably gets rougher down the road, but probably not before.

2. Demonstrate the great advantages of change over the status quo. People may not want to sell that free mug for less than twice its value. But offer them a titanium thermos with built-in GPS and they’ll trade up in a hurry. Resistance to change springs largely from overestimating both the benefits of what you now have and the costs of what you would get, so headway may depend on showing that change is overwhelmingly positive: you will make more money, get more clients, have more free time, be happier, by taking a different approach. So we need to highlight (and reward) as many huge success stories of innovative lawyers as possible. We need more projects like Legal Rebels, showing off all the benefits to be derived from abandoning the status quo and embracing better ways of being a lawyer. It won’t convince everybody, but it will push us closer to a watershed.

3. Make the change as incremental as possible. People are usually more amenable to change if they don’t think of it as something wholesale and irreversible. So instead of advocating fixed fees across the board, maybe you isolate one or two small clients or practice  areas that could serve as laboratories. Rather than abandoning lockstep compensation altogether, maybe you start by adding some merit-based criteria to the existing salary structure. Once these small innovations take hold, you can press forward with more. Over the years, I’ve found that terms like “pilot project,” “test case,” “private launch” and so forth are remarkably effective in getting lawyers to lower their guard and try something different. Minimizing the risk and playing down the possibility of permanent change might undermine the overall case for innovation, but in practical terms it could deliver better results.

There’s at least one big difference between the US health-care debate and the upheaval in the legal profession. To a great extent, the health-care consumers themselves control the process of change through the electoral system, so if they decide they want things to stay the same, they will — at least until the system breaks down someday. Lawyers, by contrast, don’t control any of the factors that are causing or, like the recession, accelerating the change in the legal services marketplace. We can ignore the tsunami all we like, but the waves are still coming in regardless.

That makes it all the more important that resistance to change within the profession — natural and understandable as it is — be overcome. Most lawyers are either comfortable with their existence or don’t ask too much from their careers, so they automatically defend the current system without asking themselves: Is it really all that great for me? Couldn’t I do a lot better? What, exactly, am I fighting so hard to preserve? Getting lawyers to ask — and then answer — these questions will be more than half the battle.

The real impact of private equity

It’s coming to the attention of many North American lawyers that our overseas colleagues are or soon will be selling equity interests in their law firms. Earlier this summer, American Lawyer profiled the progress of pioneering publicly traded law firm Slater & Gordon in Australia. More recently, Bloomberg News announced that at least three UK law firms are willing to accept private equity investment starting in 2011, when radical measures introduced by 2007’s Legal Services Act take effect. Neither of these developments will be news to regular readers here, but many other lawyers newly faced with these prospects are hitting the books to figure out how to respond.

Often, the first book they pull out is their code of professional conduct. Objections to outside investment in law firms tend to cluster around the twin assertions that shareholders would demand maximized return over professional and ethical considerations, and that outside investment would create too many opportunities for disqualifying conflicts of interest. On the second point, when you think about it, conflicts arising from external investors aren’t really qualitatively different from conflicts by current investors — i.e., the other partners in the firm. And in any event, not every conflict of interest is a disqualifying conflict that undermines the lawyer-client relationship. More complicated to manage? Quite possibly. Irreconcilably difficult? I’m much less sure of that.

On the first point, it seems to me that we’re confusing two different types of obligations. There’s a difference between a binding ethical obligation owed to a client — to do your best work to further the client’s interests, in complete confidence and loyalty — and the general corporate obligation to return a profit to a shareholder. The first should and will trump the second, always. And really, when you get down to it, these obligations dovetail more than they conflict. A good lawyer who acts ethically in his clients’ best interests is by definition maximizing the value of the firm and the return to the shareholder. It won’t serve an investor’s interests to encourage behaviour that would wreck the law firm’s reputation for trustworthiness and ethical conduct  — it would be a surefire way to ruin the value of the investment.

Now, the ethical waters around non-lawyer equity interests in law firms do run deep, and I’m not the captain to ply them. At the moment, I’m more interested in the defensiveness that talk of outside investment generates in many lawyers. Although I accept that many lawyers’ objections on ethical grounds are sincere, I suspect that many other lawyers object because of the threat non-lawyer influence presents to two foundational elements of lawyers’ lives: change and control.

When you look closely at the discussions around non-lawyer investment in law firms, it becomes clear that such investors actually have very little interest in the work lawyers do for their clients — they’re really not that into what we do. Their interests are entirely profit-based, and they view law firms through the single lens of revenue generation. From the Bloomberg article:

“Law firms are pretty attractive investments as they have stable cash flows, long track records of business operations and increasingly are much better run,” said John Llewellyn-Lloyd, executive director of Noble Group Ltd., a London-based investment bank. “You would expect them, like any professional services business, to provide a pretty good return.” Alan Hodgart, a law firm consultant at H-4 Partners in London, said investors are expecting “fairly high returns, in excess of 15 percent.”

So law firms are attractive because they’re a steady, reliable investment. Nothing new there — partners have been comfortably aware of that happy fact for years now. But there’s more to it than that. Your average law firm isn’t just a reliable investment — in many cases, it’s a vastly underperforming one. Investors look at the short-term, narrow-focus, seat-of-the-pants way most firms are operated, and they salivate at the thought of what even a basic injection of systemic discipline and workflow reform would do to already-fat profit margins. Again from Bloomberg:

Lyceum Capital, the London-based buyout firm, is interested in investing in the legal industry, with a “focus on new business delivery models, not traditional law firms,” Hand said in an e-mail. … Lyceum Capital wants to invest in ways to reduce legal costs and make some types of legal work cheaper and more efficient.

Further along these lines, consider what consultant Joel Henning predicts about the impact of outside investment on law firm management:

The result might be very different service delivery, billing and compensation systems, minimizing individual performance and maximizing team, practice and firm performance. Investors would bring to bear a more contemporary suite of tools and techniques for managing the delivery of legal services. They would be astounded by the enormous duplication of efforts at law firms.

If we allowed businesspeople to invest in and join the leadership of our law firms, I suspect that more and better smart systems and processes would be developed and refined on an accelerated basis, systems that would accomplish many legal tasks beyond drafting and researching, reaching even to some problem solving. If this were to happen, the billable hour and the lawyer compensation systems grounded upon it would largely become anachronisms. Savvy outside investors would find that too many smart lawyers and too few smart systems currently inhabit our law firms.

And here’s Altman Weil’s Tim Corcoran on what would happen in a law firm where business decisions aren’t left to lawyers alone:

Fundamentally altering the firm’s recruiting strategy?  Establishing true associate training and apprenticeship?  Re-designing compensation systems to drive collaborative behavior?  Which Biglaw partner wants to raise his hand and dive deeply into these issues?  …

If a PE firm purchases a significant stake in a large law firm, rest assured that the investor representative they install on the management committee, whether this is a COO, CFO or some derivation, will be able to do the math justifying why process improvement will lead to substantially better returns — for the investors, for the partners and, oh yes, for the clients.  This isn’t rocket science, and cost containment programs based on ROI, investments based on NPV and even formal business process improvement programs like Lean Six Sigma are really not much more than common sense ideas backed up by math and a governance structure which places the good of the firm above the desires of individuals.

Of course it will be hard.  But the PE investors who truly want to unlock the value embedded in Biglaw will understand the potential return on delving into the tough issues.

That, I think, is the key selling point for potential investors in modern law firms. They see the enormous value that’s hidden away under layers of wasteful processes, poor client communication, and amateurish management. They’d love to get their hands on and polish up these rough diamonds. Lawyers say they object on grounds of professionalism; I say there’s nothing unprofessional about running a business efficiently and effectively. In fact, experienced business management that does away with internal inefficiency will reduce costs, thereby making it possible to lower prices, which absolutely serves clients’ interests. Outside equity investment as a tool to improve access to justice? I think it’s more than just arguable.

Lawyers could continue to object that equity investors wouldn’t pass these cost savings on to clients — they’d simply pocket the difference as extra profit. I find that enormously funny, because how is that different from what many law firms already do now? If there’s any difference, it’s that outside investors — motivated to take a longer-term view than partners, whose vision usually extends only as far as this year’s draw — have an incentive to build the business for future success, which would encourage any measures that would make the business more appealing to clients and boost market share.

At the heart of it, I think this is what motivates a lot of opposition to outside equity investment in law firms — the knowledge that the new people would do things a whole lot differently. They’d change the way lawyers do their work, which for many practitioners is the most sacred cow of all. Non-lawyer shareholders wouldn’t tolerate some of the stuff law firms get away with now, and the lawyers know it. So it’s about change, and it’s about loss of control — two things lawyers really don’t like.

Equity investment in or outside ownership of law firms will be neither a panacea nor an unalloyed good — mistakes will be made, lines will be crossed, abuses might well take place. No innovation arrives perfectly safe and sound. But what such investment does offer is something the legal services marketplace has needed for too long: law firm management singularly driven to improve efficiency, effectiveness, and above all, client satisfaction, because it makes business sense to do so.