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.

The recession, so far

Surely by now you’ve heard the great news that that the recession is over. That’s a relief, huh? It’s good to know things can now start getting back to normal, especially in the legal marketplace — all this talk of major change was making us nervous.

I don’t know about you, but the relentless good cheer of the imminent economic recovery (in North America, at any rate) feels a little forced to me. Most of the people talking about “green shoots” either badly need you to start spending money on their stuff again, or compulsively need to believe that everything’s going to be okay in order to maintain their day-to-day composure. The outlines of our self-reassurance industry have rarely been more clear.

Technically, a recession occurs when GDP declines for two or more consecutive quarters. By that definition, the current recession may indeed be ending, as consumer spending slows or even stops the rate of economic deceleration in some jurisdictions. But the opposite of “recession” is not “prosperity.” When economists use the word “recovery” to describe the immediate future, think of it the same way you’d think of recovery from heart surgery — long, slow, gradual, and prone to the risk of painful setbacks.

That risk is magnified in our current situation, because the bulk of recovery so far has come from an unprecedented amount of government spending that will end shortly, at which point consumers and businesses will be on their own. And lest we forget, consumers (especially in North America) are still saddled with enormous amounts of debt and have switched their focus from spending to saving. Not only are we not out of the woods yet, I’m not convinced we’ve even begun heading out of the forest.

It’s against this backdrop that we need to interpret reports such as this one: a study by Hildebrandt that “suggests law firm economics may be stabilizing.” An index that tracks demand for legal services, lawyer productivity, billing rates and direct and overhead expenses at large and midsize US law firms moved upwards slightly in the second quarter of 2009. That sounds great, until you look more closely at the results and see that, in the words of Buzz Lightyear, we’re not really flying; we’re falling, with style.

Demand for legal services and productivity both remained weak during the second quarter compared to one year earlier but those drop-offs were not as large as they were during the first quarter. For example, productivity was down by 11.5 percent during the first quarter and just under 9 percent during the second quarter. Demand for transaction work including corporate, mergers and acquisitions and capital markets was still far below where it was during the second quarter of 2008 but was flat or slightly up compared to the first quarter of 2009.

These are not results to set one’s financial heart racing. So if demand is still mostly flat or down, how is that law firms’ economic outlooks are improving? Here’s the rub:

The biggest element helping law firms compensate for low billing rate growth, slow demand and low productivity was that their cost-cutting measures were paying off, according to the report. For the first time in the four-year history of the index, both direct expenses and overhead expenses at law firms declined. Direct expenses, which primarily refers to compensation, were down by nearly 2 percent compared to the second quarter of 2008. “Much of this has been achieved through headcount reduction along with adjustments in compensation structures,” the report said.

So law firms’ fiscal fortunes are rebounding primarily because they fired a lot of people and froze or cut the salaries of those who remained. That’s not what I’d call a green shoot.

I just got back from a week in Dublin,  and I can tell you this: in Ireland, and in much of Europe generally, no one’s talking about recoveries and buying opportunities. The recession there is bad: institutions, businesses and individuals are all hurting, and there aren’t many signs of a turnaround. While in Dublin, I picked up the August 2009 issue of the IBA’s International Bar News, and read an article about law firms titled “Survival of the fittest”:

Jonathan Fagan, director of Ten-Percent Legal Recruitment, believes that while ten per cent of solicitors and legal executives in the United Kingdom have been made redundant already, ‘another five to ten per cent are under threat of redundancy, or have had their conditions changed or hours reduced’. He adds that ‘the headline figures produced by the media are probably inaccurate, as most of the cutbacks are with the smaller players on the high street, rather than the big boys in London and other cities’. …

Figures produced by the Solicitors Regulation Authority also show that smaller, community-based firms, including legal aid firms, are particularly vulnerable in the economic downturn. Plans by the UK government, for example, to make small firms bid for legal aid contracts, and the requirement for contracts of a stipulated minimum size, are likely to cause further harm, particularly in such areas of law as housing, mental health and debt.

This underlines what I think is an overlooked aspect of the economic situation: consumer legal spending, which is the backbone of most lawyers’ practices worldwide, is extremely vulnerable right now. Heavily indebted households likely will put off even low-cost legal purchases, banks in still-questionable health will lend to people less frequently, and government support for legal aid programs will continue to shrink. The corporate world is farther advanced in the deleveraging process than is the consumer world, but both have a whopping amount of debt still to unwind, and purchasing lawyers’ services does not top anyone’s priority list.

We’ve heard talk of recessions shaped like U’s, V’s, W’s and L’s, but I’m inclined to think this recession will look more like a square-root symbol: a sharp drop, a slight rise, then a long plateau well below the previous high-water mark. If the word “malaise” springs to your mind, that’s not a bad description of what’s likely to come. It might be wise to temper your expectations of the economic environment, and of the likelihood that lawyers can “get back to normal” anytime soon.

And remember: the recession didn’t cause all this upheaval in the legal services marketplace — it just exposed, magnified and accelerated it. Whenever and however the recession ends, “normal” for the legal profession is already gone.

Just in case

“Stuff expands to fill the space available.” If you’ve ever owned a closet, basement or garage at some point in your life, you know how true that is. The corollary, of course, is that the less space you have, the less stuff you find you really need. I once moved six times in the space of 4 1/2 years, and by the last move the contents of my life could fit comfortably in the back of a small van. What it comes down to is that we’ll always make room for the essentials, and that we’ll cram any remaining room with as many non-essentials as we can get.

Two interesting posts about knowledge management by Mary Abraham and Greg Lambert got me thinking about this. Greg’s article described the futility of capturing all knowledge available to you —  you’ll end up with so much data that you’ll inevitably lose something important, or you won’t be able to find a key item as easily as you assumed you would. But because storage is so easy and so cheap — cheaper, in some cases, to store the data than to have it destroyed — we end up collecting far more knowledge than we’ll ever really need. “I’d wager that 90% of the emails, electronic documents, or paper documents we keep, we do because we are implementing the ‘CYA’ rule.” Mary expands upon Greg’s post by pointing out that “the first step to organizing stuff is — get rid of what you don’t need.”  She questions the longstanding lawyer habit of filing everything away in the event it’s needed down the road. Not even Google, she notes, indexes everything.

I think both Greg and Mary are right, and their points touch upon a larger issue within the law — that deadly combination of perfectionism and risk-aversion that has made lawyers afraid to overlook or throw away anything. I still recall, as an articling student, opening a client file deeper than it was long, rifling through copies of memos, faxes, pink phone-message sheets, document drafts, etc., and thinking: Is all this stuff really necessary? I spent a summer working as a library archivist and came away from it both with an appreciation of acid-free paper and plastic paper clips, but more importantly, with a sense of the needlessness of preserving the irrelevant. And that was in the antediluvian days before email. What percentage of emails archived the world over are simply replies with the one word “Thanks”?

So I think the rise of “good enough,” already well underway in the client realm, could and should be transposed to the law firm world as well.  We don’t need to search for, locate, bring back and keep everything, or even close to everything. Is it possible that an unturned stone or a discarded file could be the key to winning a case or defending a malpractice claim? Of course. It it even remotely probable? In most cases, no. There’s a cost-benefit analysis at play, and lawyers need to look seriously at the benefits of exhaustiveness before continung to incur its costs.

What concerns me, though, is that we’re actually headed in the opposite direction. And ironically, the source of the problem is in the very innovations that are introducing such efficiencies into the rest of the legal services industry. New developments like automated document assembly and offshore lawyers are lowering the costs of carrying out routine legal functions. And while that’s good for clients (and down the road, will be good for lawyers), one negative side effect is that these routine tasks are becoming more affordable by the day. And the cheaper something is, the easier it is to order up huge batches of it — just in case we need it.

Greg and Mary point out that the approaching-zero cost of storage means that there are almost no upfront cost penalties associated with filing something away. The same could start to apply to, say, due diligence and document review: in an increasingly frictionless cost environment, neither clients nor lawyers have much incentive to streamline, discern, or otherwise cut back on the types of things lawyers have traditionally done for clients. When costs are so low, benefits don’t have to be much higher to surpass them.

This is a significant issue for innovation in the law, because many existing innovations have come about in large part because the cost of doing things the old way was becoming prohibitive. If trials had remained concise and affordable, relative to what they are today, would the entire ADR system, which meets many more human needs than litigation, ever have developed?

We’re used to thinking that lower costs breed efficiencies, expand access, and generally serve as a force for good. And in many cases, they do. But they can also stall the natural process of reform by which all our legal institutions move forward. Near-infinite storage capacity has not made us wiser or happier — it’s only given us more stuff to keep track of. As the cost of routine legal work also continues to plummet, we could be in danger of a similar outcome for the law and lawyers: a legal system more cluttered, more complicated, and more weighed down by trivia than it needs to be.

Tr.im and the risks of social media

Shortly after starting this blog in January 2008, I copied-and-pasted my first ten posts and emailed them to my parents, who were not blog-friendly but who were very interested to see what I was writing. (Are parents great, or what?) The next month, I emailed another bunch of posts, and from then on, it became a regular thing. By the tenth or eleventh email, I realized that I was inadvertently creating a complete backup of my blog.

Right now, everything I’ve written at Law21 is also stored on Sympatico’s email servers somewhere. I’ve also saved all those messages into a Word file, which is stored on my hard drive and therefore on Carbonite’s backup system too. Later this month, I’ll probably copy that Word file onto a thumbdrive as well. (Printing out all 180,000 words on the blog would require more than 400 pages, so I think I’ll stop short of taking backup to that extreme.)

The reason why I take all these steps was amply illustrated yesterday when URL-shortening service Tr.im shut down with no advance warning. All of the stats it was tracking have disappeared, and all the links it created could be gone by Jan. 1, 2010. If you’ve been following me on Twitter, this could be problematic, since I’ve been using tr.im links for a few months now. (I switched from tinyurl.com and eventually from bit.ly simply because tr.im bought me one extra character to play with,vital in Twitter’s 140-character universe.) It’s a bigger problem for me, though, because I’ve been using Twitter as a micro-publishing tool, so I’ll now need to go back, click on all those tr.im links I posted, and resave them using some other method. That’s assuming, of course,  Twitter keeps my old posts — Robert Scoble, for one, isn’t sure they even exist anymore.

Tr.im’s sudden demise is a wakeup call to every lawyer who blogs, twitters, or otherwise employs social media as marketing, communications, publishing or client relationship tools. (Not to mention those who use URL shorteners for legal citations, as this engaging conversation at Slaw demonstrates.) We all learned this lesson the hard way back in the late 1990s and we may be about to learn it again: the online ecosphere is incredibly fragile.

Massive platforms that appear ironclad-strong from the outside can be hollowed out or ripped up on a moment’s notice. Look at Bloglines, the first and only feed reader I’ve ever used — Michael Arrington notes today that it could be on its last legs. Or look at Friendfeed, which has its devotees among lawyers — it was bought by Facebook yesterday and could quite easily disappear within Facebook’s gigantic digestive system. Twitter itself was taken down with alarming ease last week by a hacker attack aimed at just one blogger (and Facebook didn’t fare much better). WordPress is and has been a fabulous platform for this blog — but if it disappeared tomorrow, what would happen to Law21?

Lawyers are constantly advised to use these new online social tools, as well they should. But it’s easy to forget that Facebook, LinkedIn and Twitter are not permanent features of the landscape — especially since none of them has yet come out with a sustainable business model. You do take a risk when you invest time and money in them. In no way is that risk big enough to justify giving up on these tools and platforms — but neither should you regard them as failsafe. As Scoble says, “whenever you put your data in other people’s, or other company’s, hands, you are taking a pretty significant risk.”