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.”

The firms of the future

“Does the future belong to virtual law firms?” That question was posed by an American Lawyer article earlier this week that focused on Virtual Law Partners, a growing firm nominally based in Silicon Valley but in fact operating, well, wherever its lawyers are. Virtual firms — two others, FSB Legal Counsel and Rimon Law Group, are also cited — consist of partners who operate independently, charging rates well below what they would require were they (still) at large firms and profiting by the huge savings in overhead and other costs.

The lawyers operate remotely, but they tap into a larger infrastructure with centralized billing, IT support, marketing, and recruiting efforts. They also share work frequently, communicating through video chat or e-mail as needed. Technology companies and startups were early converts, but the firms have added lawyers with varying expertise, including employment, real estate; FSB has even started a litigation practice.

Answering the article’s eponymous question in the negative was Patrick J. Lamb, who operates a bricks-and-mortar but nonetheless highly innovative firm at Valorem Law. He suggests that virtual firms suffer by comparison to boutiques thanks to one key difference.

The difference?  The ability to aggressively collaborate. Even with the best communication hardware, there is something lost when you can’t go next door and bounce ideas off someone who may have nothing to do with the case but who is vested in its outcome. I’ve experience firsthand the accelerated evolution of ideas from really good to extraordinary when several experienced minds combine their talent and judgment and work through a problem.

Speaking for myself, it’s not clear to me how a partner in a virtual law firm differs meaningfully from a well-connected high-tech sole practitioner. Both run their own practices in a highly personalized and streamlined environment, often rely on cloud-based infrastructure to manage their practices, set their own rules for client relationships, and operate with an unusual degree of autonomy. I think virtual firms aren’t cyberspace versions of traditional law firms so much as they’re loose aggregations of like-minded solos under a common banner that happens to be hung on the internet.

So I don’t think virtual firms are the future. But I do think they’re a future. More specifically, they’re one of a growing number of law firm models that will all be able to flourish in the next couple of decades. That’s because what we’re really seeing here is the demise of the traditional cookie-cutter law firm as the default setting for legal service enterprises.

One of the great things about the current upheaval in the legal marketplace is that the old expectations and parameters of law firms are losing their iron grip on the profession. Look, for example, at FutureFirm 1.0, a two-day competition this past April to take a tired traditional law firm called Marbury Madison LLP and overhaul it for the 21st century. Hosted by Prof. William Henderson at the University of Indiana Maurer Faculty of Law, FutureFirms attracted some of the most innovative minds in practice, the corporate world and academia. The event produced a blueprint for redefining large law firms that includes alternative fees, merit-based compensation and risk-sharing with clients — and they’ll do it again next year.

Or take a look at a forthcoming article in the CBA’s National magazine (which, full disclosure, I edit) titled “2020 Vision,” written by lawyer and Legal Post blogger Mitch Kowalski. It looks back from the year 2020 at the development of a very different (and hugely successful) law firm called BFC Law Professional Corporation that abandoned most of the trappings of the traditional firm. Of particular note for our purposes is the future firm’s “hub-and-spoke” approach to its physical premises:

The Hub
We maintain meeting room space downtown (the Hub), equipped with staff, computers and the like. This space also contains hoteling niches where lawyers have workspace and telephone/internet access. Remember, all our systems are cloud-based, so lawyers and staff can work anywhere. Office management handles all boardroom and hoteling niche bookings.

The Spoke
BFC’s day-to-day legal work is done at a public transit-accessible location outside the downtown core (the Spoke). Not only is rent much cheaper there, our staff and lawyers find the Spoke to be closer to their homes,  which reduces their travel time and increases their quality of life. In the Spoke, we have moved away from separate offices for lawyers,  which allows for the efficient use of smaller rentable space with better HVAC flow (further reducing costs). Small meeting rooms throughout the Spoke accommodate privacy as needed.

What the virtual law firm, Marbury Madison, and BFC Law all have in common is that they’re different and quite realistic visions of how lawyers can come together to offer legal services to the marketplace. They reject, or at least test severely, the standing assumptions about how a law firm should be constructed, both physically in terms of its premises and organizationally in terms of its clients and employees. In doing so, they reflect our evolving understanding within the profession of just what a law firm is supposed to look like.

We have this funny little idea in the law that the nature of your work and the quality of your practice are heavily influenced by the physical environment in which you operate. Are you on the 40th floor of a steel and glass tower in an urban center? You must be doing intricate, high-end, bespoke work for multinational clients. Are you in a nice but inconspicuous brick building with a wooden front door and creaky floorboards in an exurban community? You must be doing basic, commoditized work for unsophisticated clients. Lawyers love to judge people, and the people we love judging the most are each other, using criteria that reveal more about our own assumptions and biases than anything else. What the rise of the virtual law firm really signifies is that those assumptions, at least in terms of law firm structure, should soon be fading away.

In fact, if the form that a law firm takes will be influenced by anyone, it’s going to be clients, not lawyers. Both clients and lawyers — but especially lawyers — are very used to the idea that “they” come to see “us” in a place and at a time of our choosing. That simple unconscious assumption sets the tone for all relations that follow between the two parties. Lawyers have always had home-field advantage over clients, and we like it that way.

Now, the gravitational pull is starting to run the other way. As clients’ influence grows, so too will their ability to draw us to them, rather than vice versa. That doesn’t have to mean house calls — although it might — but it does mean that law firms will feel more obliged to arrange their physical availability in ways that increase convenience to clients. “Lawyers on demand,” a little like time-shifted TV shows? It’s not a preposterous result, and even thinking about it prepares us to better adjust to future client relationships where we don’t get to set all the ground rules from the start.

Yesterday’s law firm selection was a boxed lunch packed by lawyers; tomorrow’s is going to be a lavish buffet with clients standing in line next to you while you choose. For all that we still need to work on diversity within law firms, it’s going to be nice to have a little diversity of law firms as well.

Three hotspots for change

I thought I’d bring your attention to three upcoming conferences that crystallize the enormous changes taking place in the legal services marketplace these days. I aim to attend all three, but if you can get to even one of them, you’ll be exposed to some tremendous insights into what’s happening in the legal profession right now.

The first stop will be Denver, Colorado, from September 25-26, 2009. That’s where the College of Law Practice Management will be hosting its inaugural Futures Conference, as leaders and visionaries of the legal profession lay out their vision of the future course of this industry. Keynote presentations will be made by Ward Bower of Altman Weil, Bruce MacEwen of Adam Smith Esq., and Harry Trueheart, Chairman of Nixon Peabody LLP, with interactive discussions provided by the Fellows themselves. I wrote about this event in more detail here, and I continue to highly recommend it for anyone interested in where the profession is heading.

Next up is Toronto, Ontario, from November 16-17, 2009. The Canadian Bar Association will present its fifth annual Law Firm Leadership Conference, with a focus on change management. There’s an amazing international lineup for this event: Richard Susskind, Bruce MacEwen again, Legal OnRamp’s Paul Lippe, Cravath, Swaine & Moore’s Evan Chesler, Valorem Law Group’s Patrick J. Lamb, top GCs like David Allgood and Gord Currie, and the managing partners of Torys, Fasken Martineau, and other firms. More information and registration details are available at the CBA website.

The third and final leg of the tour is in Washington, D.C., from March 22-23, 2010. The Center for the Study of the Legal Profession at Georgetown University Law Center will host a symposium titled “Law Firm Evolution: Brave New World or Business As Usual?” The call for papers has gone out, and there’s still time to submit your abstract: September 15, 2009, is the deadline for proposals. The Center’s previous symposium, on the future of the global law firm, attracted a stellar cast of managing partners,  leading academics, and professional thought leaders. This year’s symposium figures to be no less insightful and significant.

So there you go: three North American hotspots for talking about and advancing the cause of innovation on legal services delivery. If you plan on attending one or more, please let me know.

All good things…

My newest column is up and running at Slaw, where I’m always honoured it has a place. You can also find it directly below:

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“Eighty percent of the poor in the United States are unable to afford a lawyer or find pro bono help for their civil legal problems, according to the American Bar Association.” That sentence, from an American Lawyer article last month, is not only embarrassing. It’s also an omen.

The article in question, titled “Unmet Needs,” was part of a special series on pro bono in the United States, including AmLaw’s list of the top 100 pro bono-friendly law firms and a powerful critique of big-firm pro bono by Deborah Rhode. The latter piece highlighted how pro bono at many firms is less an exercise in professional and public responsibility than it is an opportunity to enhance associate recruitment and retention and score some easy PR points. The result, Rhode points out, is that the clients most in need — the “sob stories” and “difficult clients” referenced in the article — are the least likely to get pro bono help from these firms.

It reminded me of a conversation I had last year with two senior local practitioners. Both lawyers were partners in national firms; both were also extensively involved in volunteer and community activities. They were lamenting the pro bono culture that had taken hold in law firms, especially among newer lawyers. Young associates were constantly clamouring to do pro bono work for one socially aware organization or another. “What I’d like to see,” one lawyer said, “is a lot more of them go down to family court and help out some of the unrepresented litigants there. That’s where we need pro bono help right now.”

Pro bono assistance of that kind is just the sort of “unmet need” that the American Lawyer article was talking about. The writers spoke with legal aid and pro bono lawyers across the US and identified five “needs baskets” where the demand for pro bono work is great and the supply from big firms is limited:

  1. Representing military personnel
  2. Helping the unemployed
  3. Easing the load in family court
  4. The cracking pro bono infrastructure
  5. Serving the rural poor

The first category might be uniquely demanding in the US (and perhaps also Great Britain) right now, but the other four needs baskets are present in virtually every common-law jurisdiction. AmLaw was focusing on pro bono and large law firms, but it seems to me that this is part of a larger pattern of areas systematically under-served by lawyers.

It’s almost received wisdom in our profession that many practitioners couldn’t afford to hire themselves if they needed a lawyer, a statement that I suspect is at least a little exaggerated. But for many people, especially those in the categories above, it’s no joke: they flatly cannot afford to hire a lawyer for anything more than the most basic tasks. Legal assistance is a service that middle-class people, with help from family members and savings accounts, can just about manage. It’s something that working-class people struggle terribly to afford. But for the poor and unemployed, it’s legal aid, pro bono, or nothing. And thanks to the recession, legal aid systems are being cut back in the US, the UK and Canada, while the number of people applying for legal aid is growing.

If you’re a lawyer with a conscience, that should bother you a great deal. But even if you’re without a conscience, you should still be worried by this trend, because it’s about to dovetail with another trend and lead to some serious consequences: lawyer shortages outside urban centers are starting to become endemic in some countries.

Canada: “43 percent of lawyers practising in [B.C.] are now over the age of 50 … in the last 10 years, the numbers of lawyers aged 51 to 60 has doubled, with an average age across the province of 47 years old. In small communities, the aging of the profession is even more pronounced, with an average age of over 50 years old.”

Australia: “[M]any rural and regional practices do not have enough lawyers to service community needs, with 43 per cent of principals indicating that their practice currently does not have enough lawyers to service its client base. The problem looks set to escalate, with a large number of lawyers – many of whom are sole practitioners – looking to retire from practice in the next five years.”

Japan: “The dateline is Yakumo, a small city of almost 20,000 within a legal district of about 50,000. Journalist Norimitsu Onishi reports that it is not unusual for cities five times that size to have not a single lawyer.”

The root causes of most lawyer shortages are the same: aging practitioners ready to wind down their practices, not enough young lawyers willing to move to smaller communities to replace them. It’s not surprising that the US, a country with more than one million lawyers, doesn’t have many lawyer shortages, but less heavily populated states like Maine and Idaho are reporting such shortages already. Many industrialized countries are facing the prospect of communities without enough lawyers to serve the local population.

So from one direction, we have growing numbers of people in dire circumstances needing but not getting lawyers’ help. And from the other direction comes a growing number of non-urban centers without enough lawyers to meet residents’ legal needs. Without question, the demand for legal services is growing — but the supply of these services, how much they cost, and where and to whom they’ll be delivered all lie within the control of lawyers. And as we’ve seen, we can’t always count on lawyers to put the public interest ahead of their own interest when deciding how their supply will meet that demand.

So how do you think this is going to end? Faced with a legal profession unable or unwilling to provide affordable legal services to clients whom and in communities where they have little economic interest, do you suppose governments will stand idly by? Do you think they won’t wonder why it is that lawyers and only lawyers are licensed to provide the great majority of legal services? Do you think they’ll continue to believe that the Unauthorized Practice of Law is a legitimate restraint on the delivery of legal services? Do you think they’ll ever consider that lawyers are anything other than facilitators of legal services delivery?

If you think all these things will come to pass, that the status quo will roll along unchecked, then more power to you. But if not, then you might yet come to believe that the era when lawyers were in control of the legal services marketplace is drawing rapidly to a close.

Free and the GP

Like Thomas Friedman and Malcolm Gladwell before him, Chris Anderson is becoming known for books that identify and name an evolving trend that connects business and society. You’ve probably read or head about his newest book Free: the Future of a Radical Price. It’s generating a tremendous amount of heat around the idea that the cost of many things is heading towards zero and the price of those things is following. Reviews from established providers have ranged from mixed (The New York Times and The Economist, to name two) to devastating (Gladwell himself in The New Yorker), while reaction from the blogosphere and Twitterati has, not surprisingly, been far more positive.

I try not to talk about books I haven’t read, and Free is still on my to-get list. But I did read the lengthy excerpt published in Anderson’s magazine Wired last February, and it seems to capture the book’s arguments nicely (and for free, no less). The gist is that technological advances have made the cost of creating one more copy of many products (the marginal cost) and the cost of distributing those products so small that they are effectively zero. Content that can be rendered digitally (almost all of it) is accordingly “too cheap to meter,” which in any kind of open marketplace means that competition will cut the price of those products to virtually nothing.

Of course, not everything falls into this category: products like shoes and TVs aren’t heading towards free. And even for products whose marginal costs are nearly nothing, that’s not the end of the story, as the Times review notes:

More precisely, the marginal cost of digital products, or the cost of delivering one additional copy, is approaching zero. The fixed cost of producing the first copy, however, may be as high as ever. All those servers and transmission lines, as cheap as they may be per gigabyte, require large initial investments. The articles still have to be written, the songs recorded, the movies made. The crucial business question, then, is how you cover those fixed costs. As many an airline bankruptcy demonstrates, it can be extremely hard to survive in a business with high fixed costs, low marginal costs and relatively easy entry. As long as serving one new customer costs next to nothing, the competition to attract as many customers as possible will drive prices toward zero. And zero doesn’t pay the bills.

Interesting as all this is, what does it have to do with the legal profession? Potentially, a great deal, as some legal bloggers have noted. Carolyn Elefant and Doug Cornelius both point to innovative new offerings from two well-known US law firms: Wilson Sonsini has set up an online term sheet generator, while Orrick has created a start-up forms library on its website. Both of these products (or are they services?) are entirely free, to anyone (client, non-client, other lawyer) who wants to use them. They’re also products from which these firms and others have traditionally made money. “But there’s a method to Orrick’s apparent madness,” Carolyn writes:

Orrick’s freebies help it capture a segment of the market which either couldn’t afford to hire Orrick or if they could, would not have  been worth Orrick’s time.  Consider the example of a small business — typically the type of client outside of biglaw’s demographic.   The business might download and fill in Orrick’s incorporation form and then say to itself “I’ve already filled out the data.  How much could it cost to pay an Orrick attorney to look this over?”  Likewise, Orrick could charge far less to eyeball a completed form which it prepared itself than if the firm were to begin the incorporation from scratch (in which case, it would have to invite the client to the office, interview the client, gather the data and prepare the incorporation papers).

Meanwhile, Doug points out that many law firms have already adopted the philosophy of Free, in their own law firm newsletters and “client alerts”:

When you had to mail these alerts, there was a dollar cost associated with that distribution. To better phrase that, there was a stamp cost associated with distribution. Now distribution are costs are minimal. The costs are the same whether you email it to 500 people or 50,000 people. The same is true with viewing it on the law firm’s website. … Lawyers and their firms are giving away this valuable legal insight in the hopes that you will hire them to represent you in a matter related to the information in their publication. They use the publications to showcase their expertise, but in the process give away some of their substantive knowledge.

Giving away something for free or ultra-cheap in hopes you’ll entice users to buy your other services is not a new phenomenon, even in law: smaller firms have been using items like wills as “loss leaders” for years. What’s significant here is what’s being given away.

Legal forms aren’t matchbooks or Bic pens — or at least, they didn’t use to be: they were once important elements of the lawyer’s inventory that required a lawyer’s skills. The fact that they’re now customizable and downloadable on the Net tells us that the skill to produce them is now available widely. That implies a lack of scarcity and a consequent inability to charge much of a price. Legal knowledge, as Doug points out, is already being given away free by law firms; now, it appears that legal processes like document creation are following suit.

But it’s not law firms like Wilson and Orrick leading the charge and blazing this trial; it’s non-lawyer entities. Companies like LegalZoom sell forms for low prices; start-ups like WhichDraft give them away for free; most tellingly of all, services like JD Supra encourage lawyers to donate them to the profession at large as, among other things, a marketing tool. “Lawyers need to recognize,” Carolyn notes, “that we are fast reaching a point where the kinds of forms that companies like LegalZoom offer – such as contracts, leases, incorporations and wills – may be available online to all for free.”

Lawyers’ marginal cost of document preparation has always been low, but in the absence of other alternatives for clients, document-focused products could be sold at a profit. Now, thanks to the Free effect, the marketplace value of these sorts of products — their price, in other words — reflects their marginal cost. That’s great for clients; it’s bad for a lot of lawyers. Specifically, it’s terrible news for lawyers whose practices depend on the creation and sale of documents, contracts, agreements and anything else that can be digitized, templated and algorithmed. In other words, for many general practitioners.

Think of the services your typical general practitioner provides: wills, incorporations, divorce papers, leases, standard contracts and so on. If all these things aren’t yet available for little or for nothing on the web, they soon will be. How will the lawyers who rely on this kind of work survive? If they can offer more in-depth services in a given area, they could give away the documents in hopes of attracting that higher-end paying work. Jay Flesichman explains:

Would you prepare the divorce paperwork if you could make the money in another fashion? Say, on a new estate plan for the client? Would you draft bankruptcy petitions at no cost if it would cause the client to pay you for post-petition services and give you the chance to handle all of the lucrative fee-shifting adversary proceedings that come out of the bankruptcy case? … [In bankruptcy,] the consultation is often free as a way to get the prospect in the door.  Maybe the credit report is free.  Perhaps credit counseling is built into the price, making it free.  But not much else.

The thing of it is, though, if you could provide these in-depth services, by definition you wouldn’t be a general practitioner. That’s why the future for GPs looks incredibly grim: there’s just no profit to be had in providing a wide range of basic legal services. And I’m not talking just or even exclusively about solos: urban office towers are filled with lawyers whose working days are spent creating and reviewing corporate forms and documents. They might be exquisitely complicated forms. They might involve huge sums of money. But they’re still forms and documents, and if the wave of this kind of work heading to India wasn’t a big enough clue as to its marketplace value, the people at Wilson Sonsini and Orrick are making it crystal clear.

Inevitably, the term “commoditization” is going to enter this conversation, and Jay Parkhill makes the connection from Free to Richard Susskind. In The End of Lawyers?, Richard is careful to mark five stops on the route from bespoke to commoditized work, including standardized, systematized and packaged work. For legal tasks, he wrote, a commodity is “an IT-based offering that is undifferentiated in the marketplace (undifferentiated in the minds of the recipients and not the providers of the service). For any given commodity, there may be very similar competitor products, or the product is so commonplace that it is distributed at low or no cost.” We seem to have reached the point where legal document work is becoming entrenched in the packaged and commoditized areas.

What this all comes down to is this: if your main source of value is your ability to craft a legal document — if you rely heavily on products with a very low marginal cost — you could be in serious trouble. And it may only have begun: recall the NYT review of Free that noted: it can be extremely hard to survive in a business with high fixed costs, low marginal costs and relatively easy entry.

Law firms have traditionally had high fixed costs — expensive lawyers and prime real estate, principally. Many practice areas have low marginal costs — once you’ve drawn up a prospectus for one client, you’re 70% of the way to drawing one up for the next one. What’s missing from the equation is the relatively easy entry: lawyers still decide who can offer legal services, and we prosecute for the unauthorized practice of law those whom we decide can’t. If that barrier ever falls, look out.

2009 InnovAction Award winners

After serving two stints on the judging panel for the College of Law Practice Management’s InnovAction Awards, I spent this past year as Chair of the Awards. One of the great parts of that job is that I get to contact the winners, which I had the pleasure of doing last week. Now that the College has announced the winners publicly, I can do the same. Here’s the announcement post from the College’s blog — my sincere thanks to the judging panel (Merrilyn Astin Tarlton (Chair), Maggie Callicrate, Thomas S. Clay, Greg Siskind, and Tony Williams) and to everyone who submitted a nomination for this year’s Awards!

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Israeli legal organization New Family is the 2009 recipient of the coveted InnovAction Awards from the College of Law Practice Management, while New York-based legal services provider Practical Law Company, Inc. received the first-ever InnovAction Honorable Mention Award.

For the fifth year, the InnovAction Awards have recognized outstanding innovation in the delivery of legal services, demonstrating to the legal community what can happen when passionate professionals, with big ideas and strong convictions, resolve to create effective change.

Meet our 2009 InnovAction winner!

New Family Organization
Family, Justice and Law initiative

Irit Rosenblum broke fresh ground defending a universal right to family as intrinsic to the practice of law. Rosenblum pioneered a new sphere of legal rights surrounding the family based on the conviction that the rights to marry, divorce, have children, bequeath and inherit assets, and conduct family life are human rights and must be attainable to all regardless of faith, nationality, sexual orientation or status. She founded New Family to fill a critical gap in the practice of law in Israel: to attain the right of every individual to establish a family and to exercise equal rights within it. For the two million people in Israel who are subject to discrimination due to family status, New Family’s achievements have been invaluable.

In addition, for the first time, the InnovAction Awards offered Honorable Mentions to entries that have taken an existing innovation in the practice of law, transformed it in a unique and valuable way, and made it better than before.

Here is our very first InnovAction Honorable Mention:

Practical Law Company, Inc.
Creating efficiency for business lawyers

Practical Law Company (PLC) is changing the way business lawyers work. It employ attorneys with significant experience practicing with the world’s leading law firms and legal departments (e.g. Davis Polk, Skadden, Pfizer, Sullivan & Cromwell) to provide practical, up-to-date resources that help business lawyers practice more efficiently and provide greater value to clients. PLC provides the practical, generic level of information needed by all business lawyers that allows them to get up to speed quickly, stop reinventing the wheel and focus on client and firm specific work. It launched its first US services in December 2008 to wide market acceptance. PLC began in the UK in 1990.

The 2009 InnovAction Awards will be presented on Saturday, September 26, 2009 at a special session during the 2009 Futures Conference held in conjunction with the Annual Meeting of the College of Law Practice Management in Denver, CO.

Chaos in the castle

One of my favourite expressions about innovation is that few revolutions have ever started inside the castle. (I changed it from “no revolutions” after someone pointed out that Mikhail Gorbachev was a pretty clear exception.) The idea behind the expression is that the people who benefit most from the status quo are also the ones most inclined and best positioned to maintain it — as well as the ones least likely to notice when real change is fomenting.

So it’s noteworthy when you start seeing revolutionary flags inside the castle grounds. This thought was going through my head — along with a Tom Petty song (no bad thing) — when reading this item at Legal Blog Watch about the new “Legal Rebels” project now underway. According to its website:

Dozens of lawyers nationwide aren’t waiting for change. Day by day, they’re remaking their corners of the profession. These mavericks are finding new ways to practice law, represent their clients, adjudicate cases and train the next generation of lawyers. Most are leveraging the power of the Internet to help them work better, faster and different. The Legal Rebels project will profile these innovators and describe the changes they are making.

Legal Rebels even comes with its own manifesto, which unfortunately for me appears to be only for Americans. But that’s understandable, because Legal Rebels is an initiative of the ABA Journal. I actually think it’s a very cool idea and a great magazine feature (interactive and wikified, no less) — I kind of wish I’d thought of it for my own magazine, though the InnovAction Awards (which will be announced next week) have occupied me on that score.

But what’s interesting is that Legal Rebels came from the Journal, which LBW refers to as “one of the most mainstream of all legal industry publications.” And that’s not the only example of subversive conduct by leading legal periodicals: The American Lawyer, which has so much influence over the largest US law firms that they’re referred to as the AmLaw 100, publishes in its AmLaw Daily e-zine a regular column by Paul Lippe, founder of Legal OnRamp. It’s called “Welcome to the Future” and it tracks the insurgency underway in the legal services marketplace; the newest column talks about the impending collapse of the BigLaw summer student program.  (The AmLaw Daily also just brought us an article by a Cooley Godward partner with the pointed title “Change or Die.”) Not to be outdone, the National Law Journal asks whether law schools are at a tipping point.

When the pillars of American legal journalism are promoting innovation and cataclysmic change, something’s going on.  But it’s not just the legal media — legal marketplace heresy is breaking out all over the profession’s elite and sacrosanct institutions.  Evan Chesler, presiding partner at Cravath, Swaine & Moore LLP, famously called for the end of the billable hour late last year. Harvard law student Daniel Thies has written a powerful paper about “practical legal education and the new job market.” British Lords talk about being “inundated” by private equity companies looking to invest in law firms. Bar associations, elite law schools and exclusive legal organizations are sponsoring conferences and symposia on the upheaval of the present and the new world of the future.

All of this looks remarkable to those of us agitating from the outside — we’re used to hearing the radicals in the streets, not inside the castle grounds. But as Paul Lippe has pointed out elsewhere, what’s most remarkable about this revolution is that no one’s manning the battlements or guarding the portcullis. No one’s stepping up publicly to defend the status quo of hourly billing and compensation, up-or-out partnership tracks, overworked and underchallenged associates, and so on. That’s because there really isn’t any good defence for them; they’re irrational. What they have been, up until now, is incredibly profitable for law firms. But as their profitability wanes, so does any illusion that they can be justified.

Revolutions fail all the time — they run out of steam, or they’re ground down by entrenched interests, or both. I don’t see either of those things happening in the law right now, and I don’t see this revolution slowing down.

Spend wisely

One of the reasons — maybe the main reason — why lawyers are so risk-averse is that averting risk is kind of the whole point of having lawyers. People hire us for two reasons: (a) to fix a problem that’s already occurred, or (b) to arrange things so as to minimize or eliminate the risk that problems will occur. In Susskindian terms, these are the ambulance at the bottom of the cliff and the fence at the top, respectively.

The idea that we’d be better off with fewer ambulances and more fences is starting to catch on within the profession. But there’s an important question in there: how many fences do you really need? Is it possible you’re installing more fences than can be justified by the reduced risk of accidents? And as sellers of both fences and ambulances, are lawyers sufficiently objective to be the ones making that call?

Ron Friedmann got me thinking about all this with two insightful and provocative posts about reducing corporate legal spend. He argues that institutional clients “need to do a better job assessing risk and deciding what warrants legal attention,” and draws an analogy to the US health care system which, by many accounts, costs so much in part because of rampant unnecessary treatment. If clients took the time to review all their legal spending and figure out what percentage could be eliminated with an acceptably small increase in risk, they could lower their legal spend without dramatically increasing the company’s exposure.

The idea that companies are over-protecting themselves against risk and therefore overspending on lawyers is compelling. Obviously, there are legal costs that can’t be eliminated — if the government tells you to comply with a given regulation or face prosecution, you’re going to comply. But if you separated corporate legal spend into two piles — one for “we need to do this or we’ll go out of business” and “we’d better do this to make sure we’ve covered all our bases” — you might find the second pile a lot higher than you expected. And if you weighed the savings of not covering a given base against its reasonably foreseeable consequences — not the possibility, but the probability of trouble — you might decide you’re buying too much legal risk aversion.

I can see more companies doing just that — figuring out what they can live without in terms of legal coverage and proceeding to live without it. The lawyer’s argument against that, of course, is that even the smallest detail overlooked can lead to devastating liability consequences in court. But as the rise of “good enough” continues, especially in what figures to be an economically difficult period of time to come, I can see rules and regulations being interpreted in similarly “good enough” fashion — threshold standards being lowered slightly, breaches looked upon more leniently, etc. In the aggregate, it could add up to a collective consensus that not every stone needs to be unturned and not every potential risk needs to be run by the lawyers. If that came to pass, the impact on lawyers would be profound.

In his posts, Ron specifically notes he’s excluding consumer legal spending from the discussion. But if anything, I think the reverse applies to the way individuals buy legal services: I think they underestimate risks and under-purchase legal protection. How many people buy and sell a house without using a lawyer, bypassing expertise and institutional protection in order to save a few hundred bucks on a transaction worth hundreds of thousands of dollars? How many people die intestate every year, even with children and extensive assets, because they just never got around to making a will? How many litigants choose to make their own way through our labyrinthine court system?

Individuals’ failure to avail themselves of lawyers isn’t entirely, or even mainly, their own fault, of course. Too often, lawyers have either failed to adequately market the value and importance of their services, or allowed their prices to balloon past the point where many people can afford to hire a lawyer without help from family members or government programs. In my ideal world, you couldn’t get a  driver’s license until you’d filled out even a basic will, and you couldn’t get a marriage license without having to take a basic course in family breakdown, support, custody and access — both at low costs.

Unless and until that comes to pass, lawyers have an obligation — not just for business reasons but also for social ones — to let people know how important these sorts of fundamental legal instruments are and to ensure they’re accessible to the majority of potential buyers. And at the other end of the spectrum, lawyers also have a responsibility to help their institutional clients tell the difference between “need-to-haves” and “nice-to-haves,” and to place the focus of their services firmly on the former. A trusted contractor won’t replace your garage if a repair will do just as well; trusted lawyers do the same.

Over the years, legal spending patterns have become habit-forming: institutions have gotten used to buying ever more risk-avoidance services, while individuals have gotten used to buying only those services that circumstances require them to buy. It would be reasonable, in an extended period of economic malaise, to expect those habits to change. Lawyers who want to stay ahead of dangerous curves like that should spend time thinking about what their clients absolutely require, and changing what they sell — more of some things, less of others — to match.