Law firm profits in the process era

Large and midsize law firms appear to have an “expenses problem.”

  • Few managing partners expect that they’ll be able to corral rising expenses in the foreseeable future, according to the Citi Private Bank Law Firm Group’s most recent report. The bank’s newest survey of law firm leaders showed that only about 10% believed expenses would decrease by as little as 5%; about 21% thought expenses would stay steady, and a whopping 69% believed expenses would rise, with more than 22% forecasting an increase greater than 5%.

We know a few things about this market by now, or at least we should. First and most importantly: demand is soft, and it promises to stay that way for a few years. Macro-economically, we’re all stuck in a low-growth environment, with several landmines still active in Europe and China that could go off anytime. Law firm business is equally slack: every recent survey of in-house counsel confirms that law departments are insourcing more work and are pushing back on fees for the work they do send out. (Bruce MacEwen goes further and insists that “Growth is dead” in a must-read five-part series of Adam Smith Esq. posts, with a sixth to come.)

Aggressive marketing and business development can go some way to offset this decline in demand, but you can only squeeze so much blood from a stone. Severely discounting rates will get you some work, but clients have been playing this game for awhile and they know how it works: the firms keep raising their rates, the clients keep asking for steeper discounts, and the circle of life goes on. Demand is soft, and there’s not really much firms can do about it.

But expenses are up too, and firms can do something about that, even if they haven’t had much success so far. Physical premises might be off-limits if the firm is in the middle of a long-term lease (hopefully not one signed at the height of the boom), but property owners under recessionary pressure might be persuaded to renegotiate terms. Moving into a less ornate yet still respectable location is sometimes an option, though most lawyers are extremely reluctant to risk the perception of shifting downmarket, and it ain’t exactly cheap to move a law firm.

The killer expense for most law firms, however, is people, which is why reducing headcount is still a popular route to an improved bottom line. We all recall that firms threw thousands of employees over the side in the wake of the financial crisis. But most haven’t fully repopulated, instead forcing more work onto the partners, associates and staff who remain. That trend has never really gone away: just yesterday, white-shoe UK firm Slaughter & May fired 28 secretaries, while partner de-equitization remains the new black for every large firm. But you can only fire so many people, and you can’t fire them over and over again. At a certain point, you stop cutting fat and start carving into bone.

The other popular option is to find cheaper alternatives to your current staffing arrangements. But as Bruce points out in part 4 of his “Growth Is Dead” series, labour market arbitage — “a) cheaper people; (b) cheaper locales; (c) cheaper career paths; (d) cheaper offices, or some combination of all of these” — also has built-in limits: “You can only move certain people out of midtown Manhattan once, and you can only introduce the non-partner associate track once; [moreover,] there are virtually no barriers to entry in the labour market arbitrage business. If AmLaw firm A can do it, so can AmLaw firm B, C, D … — not to mention the Pangea3s and Integreons of the world.”

Bruce then goes on to make a critically important point: “We have not fundamentally changed how we do things. We have changed who does them and where.” [My emphasis.] I think that’s the heart of the matter right there.

Law firms have run up against a wall when it comes to reducing expenses, and that wall is their business model. The traditional law firm business model is fundamentally people-intensive. The only way most firms know how to get work done is by using lawyers and support staff. Few technologies more advanced than email management or time and billing software govern their operations. Few systems more sophisticated than hourly docketing support their workflow. People provide the vast majority of law firms’ products and services — but the market price of those products and services is falling below the baseline cost of their in-house providers and will eventually surpass the cost of the outsourced ones. Something has to give.

There’s only one door that leads through that wall — but firms are immensely reluctant to walk through it, because it leads to a radically new business model. The fundamental nature of law firms has to change from “people-intensive” to “process-intensive.” Systems and technology must play a greater role in the creation of products and services — not least because systems and technology are less expensive, more easily scalable, and completely immune to lateral hiring offers. Lawyers must be reassigned from performing systems-level work to either overseeing that work or taking on higher-value tasks. We are well into the process era I identified more than three years ago. It’s past time for firms to acknowledge that and adapt.

But many don’t. Many firms keep trying to force more low-value productivity from a resource — lawyers — that is fundamentally designed to deliver high-value production and that has maxed out in its current usage. The law firm business model has to shift its primary fuel source away from lawyers and towards systems, reserving the challenging tasks for the former and relegating the routine work to the latter. This is no longer a matter of being innovative and cutting-edge; that was three years ago. Now it’s about remaining competitive and profitable.

Don’t underestimate the impact this business model change will have throughout the legal ecosystem. Because the volume of routine legal work is much greater than the volume of challenging work, law firms will require fewer lawyers to create and deliver their inventory — a lot fewer. I’ve already written about the fact that many law firms have too many partners. The next step will be the legal market’s eventual realization that it has many more lawyers than it needs.

We can already see the outlines of this new market emerge. Prof. William Henderson has noted that new lawyer hiring by large US law firms has fallen off a cliff: “In 2011, firms of 500+ attorneys hired 2,856 entry-level lawyers. In 2007, that figure was 4,745. So, after five years, Big Law is paying the same wage but hiring 40% fewer lawyers.” Even if, as Mitt Regan suggests in a comment, that 2011 figure represents the nadir rather than a midpoint, we’re not going to see those hiring levels go back to where they were, because the work simply isn’t there.

The best-case estimate of US new-lawyer full-time legal employment right now is about 55%. According to the US Bureau of Labour Statistics, 44,000 law school grads are expected to compete for 28,000 jobs over the next decade. We should expect to see compensation for entry-level lawyers nosedive over the next few years, as the glut in that particular supply becomes clear.

It’s not simply a matter of law schools producing too many graduates for the market to absorb. It’s a matter of law schools producing graduates for a legal market that will shortly pass from this world. Law firms today are lawyer-intensive, process-light operations; throughout this next decade, they’ll become process-intensive, lawyer-light operations.

Law schools are not the only stakeholder in this industry to be fundamentally misaligned with that future: legal publishers, CLE providers, and bar associations are likely to be the hardest-hit, because they all rely on “volume of lawyers” as the basis for their businesses. Conversely, legal technology suppliers and legal systems analysts should have a field day as they retrofit firms for leaner infrastructure and more mechanized operations. (Read my article on disruptive legal technologies if you’d like to refresh yourself as to what’s coming.)

Law firms wonder where the growth in the legal market has gone. But Toby Brown has answered that: growth is bypassing law firms and going instead to innovative new providers, few of which are law firms and hardly any of which employ lawyers in the usual way. Law firms are going to realize that in order to compete for this market growth, they will need to emulate the approach of these competitors, which invest heavily in systems and reserve lawyers for those tasks that truly require their intellectual heft and skilled judgment. The hard fact for lawyers to absorb is that those tasks are much fewer than our traditional law firm model supposed them to be.

Many law firms believe their “expenses problem” is all about cutting costs to preserve profit in the face of declining revenue. It’s not. It’s a concrete sign of the growing misalignment between law firms’ lawyer-intensive workflow models and the market’s emerging requirement for a better use of resources in the delivery of legal services. The “expenses problem” can’t be solved by making deeper workforce cuts or by playing around with outsourcing and automation. It can only be solved by recognizing that firms must be configured differently in order to deliver legal services profitably.

Business is down for law firms, and it will stay down for a while. But when it comes back (and remember, it always does), it will look different and behave differently than it did before. Your firm must be ready for that. If you have an expenses problem today, prepare to change the way you do business tomorrow.

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

Walking away from a losing game

And suddenly, everyone’s talking about Procurement. Not that long ago, warning lawyers about the rise of the corporate purchasing function was a little like a medieval parent telling their children about the goblin who lived under the floorboards: you’d better behave, or he’ll come and eat you up. Now the goblin is loose: Procurement’s importance in the purchase of outside legal services, which has been slowly and quietly growing over the past few years, is exploding into view.

Silvia Hodges writes at Bloomberg Law about Procurement’s growing role in Legal, Ari Kaplan provides procurement examples at Law Technology News, and Toby Brown at 3 Geeks gives us three separate columns on the intersection of procurement and legal spend and the implications thereof. You should take the time to read all of these entries, but I think the authors’ overall point is that

(a) Procurement is here to stay,
(b) Procurement’s traditional approach to purchasing is a questionable fit with best practices for legal spend, and
(c) the ideal outcome would be for procurement representatives, the in-house department and the outside law firm to work together towards arrangements that try to serve everyone’s interests.

I’m not confident that (c) is a likely outcome, given each party’s dramatically divergent self-interests, but it’s certainly worth a shot.

What interests me more about the rise of Procurement, however, is how it illustrates a broader trend throughout the legal community: our tendency to let third parties set the rules by which we operate. Procurement at least has a good argument for being at the table: it’s an important aspect of the corporate client that pays the bills. But I’m talking more generally about lawyers ceding control over our own business and professional destinies — our ongoing acquiescence to more aggressive players who have set the standards by which we judge ourselves. The two highest-profile examples, interestingly, are magazines.

For lawyers in large US firms, of course, it’s The American Lawyer. I don’t need to tell you that AmLaw is an excellent periodical, among the very best in class. But the AmLaw 100 rankings are a remarkable thing. A magazine chooses a single metric (average profits per partner) by which to assess large law firms and invites those firms to submit annual financial information so that the magazine can judge them on that metric. And the law firms do exactly that. Has that ever struck you, at any point, as, well, a little odd?

The AmLaw 100 (and 200) rankings, and their progeny in other publications, have arguably done a great disservice to law firms’ own sense of identity and success. Average profits per partner is a flawed metric in many ways (not least mathematically — even median PPP would be a more accurate gauge of a firm’s financial situation, since outliers don’t skew the result so much). It’s especially flawed because it regards annual profit for individual owners as a direct proxy for the health, success and prestige of a law firm. Recent history nicely illustrates the problem with that — Dewey & LeBoeuf was profitable and prestigious until shortly before it crashed.

We already know that good law firms provide more than just partner profits. They also deliver enterprise-wide productivity, a satisfying vocation for employees, a positive corporate social footprint, and above all, value for clients specifically and the legal system generally. Those features aren’t as easy to measure as PPP (especially when the firms conveniently supply all the figures), but they’re no less important. The pernicious modern belief that “The purpose of a business is to create wealth for its owners” was never all that accurate even for ordinary businesses. Law firms are not ordinary businesses — they’re fiduciary professional businesses that operate in a very favourably regulated environment, and they require both responsible management and responsible measurement.

You can probably guess, at this point, that I’m no big fan of PPP rankings. But as much as this approach to measuring law firm success alarms me, I’m more alarmed by the degree to which law firms have surrendered to it. Large US law firms routinely make important decisions about partner recruitment, associate development, legal service pricing and a host of other issues based upon whether the outcome will affect their PPP.

The spectre of a precipitous dive down the AmLaw rankings, and the legitimate fear of the subsequent loss of key partners to firms higher up the list, drives any number of short-term tactical moves by law firms. Some of these moves are sensible; many others aren’t. But the point is that we’ve allowed someone else to set the criteria that drive these decisions. We judge our success on their terms, rather than setting our own standards and taking our destiny into our own hands.

Similarly, take a look at law schools and the degree to which they’re beholden to magazine-based rankings. The US News & World Report — a publication I once referred to as the RC Cola of weekly news periodicals — is infamous for the influence it wields over American law schools. A publication — this one without any actual connection to the legal profession — adopts a series of criteria that it considers important and uses those criteria to rank the schools.

These rankings and their criteria subsequently become vitally important to the schools, which start making decisions — about applicant admission, student classification, faculty hiring, even the number of books in their libraries — not on what’s best for the school and its community, but on what will help them move up the rankings. In many cases, as Brian Tamanaha notes, these decisions have driven behaviour that was not only unwise, but also flat-out dishonest.

In-house counsel now face, with Procurement, a similar phenomenon. Just as the AmLaw rankings care about a single metric (partner profit), procurement officials tend to care about a single outcome: lower expenditures. If that becomes the sole focus of in-house law departments, then it will drive very different types of internal behaviour by Legal — some of it good, some of it not; but all of it determined by someone other than the lawyers involved.

I want to emphasize here that Procurement is not a villain, and neither is US News nor The American Lawyer. These are corporate entities making business decisions that happen to involve or affect the legal profession, and they have every right to do so. The problem, from my point of view, is that lawyers and legal enterprises haven’t responded strongly enough to advance our own priorities in turn. We’ve allowed ourselves to be drawn into games in which we didn’t write the rules, in which those rules don’t serve our best interests, and in which other players’ moves dictate our own. Is that really the best we can do? Are we so insecure that we’re content to be the raw material for other people’s platforms?

Maybe so. But I would hate to think that we went down that road on anyone’s terms but our own. If we allow other people’s criteria for success to become our own, and then blame those criteria when we engage in highly questionable behaviour, then we have an existential problem. But we’re powerless only if we decide to be. We can decide for ourselves what behaviour is important to our mission and values. We can assert broader and better criteria for success, and transparently self-publish them. We can make it perfectly clear, both internally and externally, what matters to us, and then let the world judge us on those choices, not on someone else’s.

The only way to win a game in which you’re set up to lose is not to play. The only way to gain control over your own destiny is to ignore anyone outside your core constituencies who asserts otherwise. There are exactly two constituencies that law firms have to please: the clients who buy their work and the lawyers who are paid to produce it. There are exactly two constituencies that law schools have to please: the profession that hires their graduates and the students who pay to graduate.

Law firms’ and law schools’ conversations about strategy and destiny need to start with those constituencies, and they should end there, too. Everything else, no matter how popular or pervasive, is ultimately just a sideshow and a distraction.

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

 

The “non-lawyer” gap in law firms: narrowing or widening?

I’ve had the opportunity to speak with several groups of law firm professionals this summer, principally in presentations to the Private Law Libraries Summit at the American Association of Law Libraries and the International Legal Technology Association’s annual conference. In these venues, I’ve spoken to and heard from law librarians, knowledge managers, IT professionals, training and recruitment specialists, HR chiefs, and other “non-lawyers” who keep law firms ticking along while the lawyers are out bringing in revenue.

These people, as you’ll know if you’ve spent much time with them, are smart, highly credentialed (sometimes more so than the lawyers for whom they work) and very good at getting things done. Yet they’re frequently frustrated by their inability to get lawyers to notice them, acknowledge their priorities, and act on them. They keep running into the same familiar responses (sometimes explicit, more often implicit) from lawyers:

  • “I don’t really understand what you do.”
  • “I don’t highly value what you do.”
  • “We can’t afford to do that right now.”
  • “You don’t bring in revenue; you’re just a cost center.”
  • “You’re not a lawyer.”

The first four of these objections can all be met and overcome, so long as the professional staff have enough time, energy and resilience, and if they can find a champion on the partnership committee (or better yet, with a key client) who will campaign for their interests. The “cost center” response is a tough nut to crack, but even that hurdle can be cleared if the professional’s work can be integrated into revenue-generating activities or quantified by calculating its replacement value to the firm. Most lawyers do appreciate the business side of their practice, if dimly, and can be led to a more illuminated perspective on it with time and patience.

That fifth objection, however, is usually the killer. It taps into lawyers’ deeply rooted cultural distinction between lawyers and “non-lawyers,” between those whose opinions merit a default level of respect and attention and those whose opinions do not. Virtually every lawyer falls into this pattern, even the good ones who treat “non-lawyers” thoughtfully and well. It’s a class distinction that’s bred in the bone: law students’ natural affinity for exclusivity and elitism is encouraged in law school and exacerbated by prolonged exposure to the practicing bar. As I’m fond of saying, this isn’t a bug in lawyers’ personalities: it’s a feature.

My view, slightly cynical as it might be, is that the “non-lawyer” distinction is the main reason why professional staff have such difficulties getting their work and their perspectives taken seriously. It explains why the same internal initiative, when championed by a lawyer, makes far more headway among the partners than when even the most highly experienced and credentialed non-lawyer makes the case. It echoes my own experiences: I’ve encountered lawyers who initially greet my opinions with skepticism or hostility suddenly warm to my perspective when they learn that I’m a lawyer. That shouldn’t matter — arguments should be judged on their merits, not on their source — but for many lawyers, it does.

These cultural blinders damage both law firms’ effectiveness and lawyers’ profitability. “Non-lawyer” professionals can do (and have done) amazing things in law firms, if the lawyers only let them. Sadly, another belief to which many lawyers subscribe is that they’re innately better qualified to make decisions about areas outside their expertise than are the professionals they hired to handle this work. I often marvel at the patience and professionalism of law firm staff who are repeatedly second-guessed and overruled by people less qualified than they are. “Non-lawyers” have been second-class citizens in most law firms almost from the day of their founding, and all the C-Suite titles bestowed upon “non-lawyer” professionals can never entirely forgive their original sin of lacking a law degree.

Before meeting with these groups over the summer, I had held out some hope that the situation might be improving, that lawyers who needed to focus on improving their profitability might become more willing to grant more resources and autonomy to their “non-lawyers.” However, after listening to what’s been happening in their workplaces, I’m starting to wonder if the opposite might be true.

I heard a number of non-lawyer professionals at ILTA ask about whether they should invest in a law degree — not to further their careers, but to protect them.  These people have seen growing encroachment on “non-lawyer” territory by unemployed and underemployed lawyers, and they believe that applicants for “non-lawyer” positions with J.D.s hold an enormous advantage over those without. Indeed, I spoke with one law firm partner whose firm plans to convert underutilized lawyers into full-time knowledge managers. It’s obviously a very small data set, but it suggests to me that law firms might finally be preparing to deal with lawyers’ neglect of non-lawyer issues. But not by getting their lawyers to take the non-lawyers more seriously — by placing lawyers into traditional “non-lawyer” positions.

This strategy, if it unfolds, would have several benefits from the firm’s perspective:

  • It would make good use of lawyers who otherwise don’t have enough work to keep them busy, a growing problem in many firms that have seen business go slack and hours fall off.
  • It would help postpone decisions about ending these lawyers’ careers with the firm — it’s much easier to fire a staff person than it is to lay off a lawyer, and you might need the lawyer again when business picks up.
  • It would bring a dose of “lawyer knowledge” to traditional “non-lawyer” roles (don’t underestimate the premium that lawyers place on legal knowledge as an all-purpose contributor of value).
  • It would ensure these positions and their priorities will be treated more seriously and more quickly by the partnership, because lawyers will naturally pay more attention to one of their own than to a “non-lawyer.”

Along with these anticipated benefits, of course, would come some downsides.

  • Lawyers are still more expensive than non-lawyers, so the firm would be paying more for these positions than it currently does (although still less than the lawyer would make if he or she were in practice).
  • Inside the “lawyer bias” can be found another bias, this one held by lawyers who generate revenue against lawyers who don’t (“You’re not a real lawyer,” etc.), which could continue to limit the degree to which partners take these issues seriously.
  • “Non-lawyers” provide unseen and unappreciated (by lawyers) diversity of thinking and perspectives to law firms — very few situations have been improved by increasing the population density of lawyers in the vicinity.
  • This stuff that the “non-lawyers” do? It’s actually not as easy to pick up as you might suppose it is.

I don’t think that sending lawyers in to do “non-lawyer” jobs would be the way to a more effective and profitable firm. I’d be far more inclined to make better use of the “non-lawyers” that firms currently employ: give them more resources, grant them more leeway, get them more training, and upgrade the quality and reach of their contributions to the firm. Most importantly, pay attention to what they have to say, and make it your default position to accept their recommendations if they’re sensible and practical. You hired these people; you might as well use them to the best of their abilities.

I don’t know if law firms are really heading in this direction — I’d welcome your own eyewitness reports from the field. But knowing lawyers and their tendency to believe they’re usually the best solution to most problems, it wouldn’t surprise me either. And it would be a mistake. “Non-lawyers” are poised to become the rule more than the exception in the legal services market; law firms should be finding ways to gather them close, not drive them away.

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

Too big to succeed

(Note: This article is reprinted with permission from the July 10, 2012 issue of The Legal Intelligencer. © 2012 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.)

What do we talk about when we talk about “BigLaw”? Let’s be honest: we’re not actually discussing specific law firms at all. We’re really talking about an idea, a model, an approach to the market. “BigLaw” is shorthand for a particular type of law firm, one that employs hundreds of lawyers charging exceptionally high fees to deliver a wide range of standard commercial and dispute resolution services to corporate and institutional clients.

Calling this model “BigLaw,” however, oversimplifies things. These are complex, multi-dimensional entities, and it’s neither accurate nor helpful to describe them by size alone. More to the point, in the months and years to come, the “Big” part of that name will become less relevant. Many of these firms are actually much larger than they need to be — and they’re about to get a whole lot smaller.

Here is an uncomfortable but increasingly unavoidable fact: most large law firms today are overlawyered:

  • They hired too many associates, back when associates were a widely traveled road to higher leverage and greater profits, with no clear plan for their long-term use or development.
  • They converted too many of those associates into oxymoronic “non-equity partners,” bestowing the prestige of partnership without adding the demands and sacrifices the title requires.
  • They promoted or laterally acquired too many equity partners, failing to grasp that partnership is best restricted to exceptional rainmakers and extraordinary managers of people or processes.

In the result, big firms now find themselves misaligned with the emerging realities of the modern legal marketplace. The word that best describes most of these firms is “bloated” — that sickly feeling that comes from indulging too long at the holiday banquet. The holidays lasted a long time for large law firms, but they’re ending now.

The staff and associate layoffs at big firms in the wake of the financial crisis were the first steps in this direction. The growing number of partner de-equitizations is the next stage, and in many firms, that process is just getting started. But it would be wrong to describe those cuts as strategic: for the most part, they were short-term, knee-jerk responses to real or anticipated drops in partner profitability.

What we’re about to see are very similar outcomes driven by very different considerations. Big firms are preparing to go on severe lawyer diets not to fend off dreaded declines in PPP, but because they’re simply not going to need as many lawyers as they once did.

It started, as most market trends do, with the customer. The financial crisis and recession offered corporate clients numerous opportunities to take a stronger hand in their relationships with big law firms, opportunities that they’ve largely squandered. But the law departments at least managed to push back on big firms’ routine fee increases and persuaded their outside counsel to pay more attention to cost control and legal project management.

However reluctantly, big firms did start paying attention to all these issues. And when they did, they rapidly came to recognize a growing array of options for performing legal work that don’t require full-time salaried lawyers.

Technology: Ron Friedmann has assembled this eye-opening list of large firms (including gilded names such as Skadden Arps, Sullivan & Cromwell, Linklaters, and Clifford Chance) that have created online legal services in areas ranging from Dodd-Frank and derivatives to trademark, privacy, and environmental law. These web-based, firm-exclusive solutions are complemented by a growing number of private-sector providers such as Neota Logic, kiiac, Koncision and Fair Outcomes, which all promise to disrupt traditional methods for accomplishing legal tasks (and the traditional workforce that has performed them).

Outsourcing: The initial entrants to this category were legal process outsourcing (LPO) companies, usually based in India, that promised high-quality legal work for much less than large law firms were charging. Many of these companies continue to thrive, such as Pangea3, famously purchased a couple of years ago by Thomson Reuters. But LPOs have since been overtaken in the profession’s imagination by other outsourcing options, including Axiom Law, The Practical Law Company, Novus Law, and Project Counsel, all offering entry-level legal tasks and managed legal services at much lower prices.

Insourcing: You might more accurately call this a market condition imposed upon large firms by their corporate clients, rather than a new option for the firms to work differently. But the practical effect is the same: in-house law departments are choosing to keep more work, especially routine work, within their offices rather than farming it to outside firms. This makes big firms even less inclined to maintain large cohorts of associates, especially newer lawyers unqualified to do much beyond basic tasks. For firms that depended heavily on that routine work to bolster the bottom line, the impact on revenue is even more pronounced.

Every day, more large firms across the U.S. and the U.K. avail themselves of these options, sending more work outside their walls, beyond the border, or into software programs, making full-time salaried lawyers increasingly unnecessary. The ultimate outcome isn’t hard to foresee: large law firms are going to get smaller.

Less work for lawyers isn’t a theory or a prediction: it’s already a fact. In the U.K., many large firms continue to announce new rounds of layoffs each week. Job losses in the U.S. legal sector have stabilized for now, but overall employment numbers are still below pre-recession levels. Moreover, the ABA reported recently that just 55% of 2011’s graduating law class had found full-time, long-term jobs that require bar passage nine months after they graduated.

Would-be lawyers have already begun to take the hint: the Law School Admissions Council reports that the number of law school applicants dropped 15.6% last year and is down 24.1% over the past two years. That might go some way to explaining why 10 law schools are planning to reduce the size of their first-year classes.

If you think this looks like the beginning of a shrinking legal profession, you’re probably right. But at the very least, it’s a parallel trend traveling in the same direction and leading to essentially the same destination: the BigLaw lawyer employment engine is revving down.

Mergers, even among global giants, aren’t going to change the fact that fewer lawyers will be required to perform legal tasks. Massive as they might be, newly merged super-firms will still be smaller than they would have been even a few years ago. We might even start to see law firm mergers more closely resemble mergers in the corporate world: amalgamations undertaken chiefly to increase efficiency and productivity, frequently followed by mass employee redundancies and the closing of surplus offices.

The lesson for law firms is this: Size, measured in the number of lawyers at least, is not an end in itself. Big is fine; needlessly big is not. There are new and often better ways for firms to deliver legal services that don’t require the contributions of a full-time lawyer. That will become clear to large firms in the coming months and years, and it will have devastating short-term consequences for lawyer employment as the impact is fully realized.

How can law firms go about this streamlining process? Here are five strategies:

1. Rethink the purpose of associates. Leverage alone won’t be a good enough reason to maintain vast grazing herds of associates, not with lower-cost options available on the market and with fixed fees taking more work from the billable hour. In the same way, the inefficient and arbitrary “tournament” approach to grooming future partners through attrition has no place in a modern enterprise. The primary purpose of associates will (once again) become to create future partners and leaders — and firms will not require nearly so many associates for that.

2. Scale back the accumulation of partners. Dewey & LeBoeuf presents a tragic portrait of a firm that engaged in the undisciplined and irresponsible pursuit of ever more partners at ever higher remuneration with no long-term plan. Smart firms will come to demand the highest standards for free-agent acquisitions, applying to potential new “rainmakers” the fundamental business truth that past performance is no predictor of future success. As a general rule, most big firms are over-partnered to a far greater degree than they are over-associated.

3. Invest seriously in low-cost performance options. Class and cultural blinders are the primary obstacles to big firms’ acceptance that excellent work can be produced outside their hallowed halls. Contract lawyers in smaller centers and LPO lawyers in foreign jurisdictions are much smarter and harder-working than most firms have been willing to believe. Automated contract programs, expert knowledge applications and innovative dispute elimination services are exceptionally powerful and reliable. Pedigree is overrated.

4. Re-engineer workflow. The first three steps lead inevitably to the fourth, which in some ways is the most important. Large firms that insist on producing legal services as if it were 1992 will be unable to give up their addiction to having armies of lawyers on hand. Smart firms will create templates and processes to regulate their systems and activities. They’ll implement legal project management as a philosophy, not just a cost-management measure. They’ll change how they work, and thereby change the nature of the resources needed to perform it.

5. Partner with in-house clients. There’s no point in a large firm trying to transform itself in splendid isolation from its paying customers. In-house law departments are dying to hear that their outside counsel are committed to practicing law differently and more effectively. These clients are going to keep more work for themselves regardless; the firm might as well be part of the process, perhaps through long-term lawyer secondments or client-specific online applications. Strong client ties are far more valuable than adding yet another body at yet another desk.

Clients already know that sheer size is no substitute for value or effectiveness in a law firm. Nor, law firms are finally coming to realize, is it a substitute for being excellent or profitable. The legal profession’s fetish about size is drawing to a close, thanks to advances in technology and alternative resources for legal proficiency. It’ll soon be time to find another word for “BigLaw” — it’s just not about size anymore.

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

The dying cult of the corner partner

Let’s start with an odd fact: the self-interest of a law firm is fundamentally opposed to the self-interest of its most powerful partners.

Here’s how I see it. The more influence a lawyer wields over a given client, the more stature, leverage and tactical advantage that lawyer gains within his or her firm; these benefits grow in proportion to the size of the client and its strategic importance to the firm. This partner’s influence naturally tends to undermine the firm’s security: the partner could bolt at any time, depriving the firm not only of a key client but also of the partner’s substantial contribution to the firm’s average PPP, which in this environment might actually be the greater threat. This creates a dysfunction in the relationship between a firm and its best lawyers: the more the lawyer succeeds, the less control the law firm has over its own destiny.

The firm recognizes this fact, of course, and it takes steps to mitigate the inherent risks of a powerful partner. It invests heavily in firm-wide marketing and “brand,” to ensure that its individual stars don’t shine more brightly than their corporate constellation. More importantly, it strives to create teams for critical clients, to attach multiple lawyers to these clients and to increase the “stickiness” of the relationships. I’ve written elsewhere that if you have an irreplaceable employee, your goal as a manager is to make that employee replaceable.

The partner, no fool either, recognizes these attempts and does everything possible to undermine them, most notably by hoarding the most significant work and key client interactions and by keeping more junior partners at a safe distance (tactics that dovetail nicely with lawyers’ natural proclivities anyway). This power struggle takes place every day in almost every sizable firm, often with neither side consciously realizing what it’s doing and why.

That struggle, however, usually leads to a long-foregone conclusion: the partner wins. And that’s mostly because of one of the legal industry’s most durable and reliable mantras: “Clients hire the lawyer, not the firm.”

The lawyer and the firm are always fighting over who gets to take the client to the dance; but in the end, the client invariably chooses the lawyer for its date. It’s not an entirely irrational choice. As I’ve catalogued before, law firms traditionally have been unable to guarantee the consistency of their service delivery, the reliability of their systems, or even the quality of their lawyers. And powerful partners are very good at creating industrial-strength personal bonds with clients. But there’s something else, something more pernicious, at work here: there’s the cult of the corner partner.

There is no more powerful person in a law firm (arguably, in the legal market itself) than the corner partner. You know the one I mean: extraordinary skills, extensive connections, huge book of business, intimidating presence, and (to put it politely) an outsized personality. Corner partners don’t have to occupy actual corner offices, of course: what distinguishes them is not their dual window views, but their status (real or perceived) as the sine qua non of the firm’s profitability and prestige.

No major firm decisions are taken without the input or acquiescence of corner partners; no new initiatives proceed without their approval and no member of the firm, up to and including the managing partner, survives a serious conflict with them. We sometimes call them “rainmakers,” but that sells them short: they’re more like the patriarchal (or matriarchal) overlords of the firm. Some are benevolent overlords, using their influence to ensure the long-term prosperity of the firm and its members; I don’t think it’s overly cynical to call such partners the exceptions rather than the rule.

Everyone buys into the cult of the corner partner, and this is nowhere more evident than in law firms’ single-minded preoccupation with, and frenzied pursuit of, lateral partner hires. Subscribing fully to the “Clients hire the lawyer” mantra, law firms clamber over one another in the mad scramble to poach partners with big books of business in key practices or industries, invariably with escalating promises of more and more money.

If its efforts are successful, the law firm trumpets its poaching expedition in a flurry of statements and press releases (in which the new corner partner can be expected to speak glowingly about the advantages of the new firm’s “larger platform”). This has been the primary growth strategy for hundreds of midsize and large law firms through North America for several years now. The resulting free-agent culture of the BigLaw bar, as well as the increasingly yawning spread between the annual incomes of a firm’s highest- and lowest-paid “partners,” are hardly surprising results.

But should this state of affairs change in any meaningful way — should the power of the corner partner begin to wane, should the cult lose some of its fervour — then the implications for law firms and the legal market would be immense. This week, Ron Friedmann gave us a thought-provoking post that quotes extensively from an analysis by Steve Nelson, managing principal of The McCormick Group, who believes that this very change might be upon us.:

There is a widening gap between the prospective portable billings that incoming laterals vouch for and the actual results that occur months after the laterals arrive. While some of this can be attributed to overly optimistic predictions by the laterals themselves, we believe that other factors are more significant. In particular, the old adage about “we don’t hire law firms, we hire lawyers,” often no longer applies. Instead, in an era where increased pressure is on corporate counsel to reduce outside legal spending, there has been an increased emphasis to consolidate legal providers who both know the client’s business and can offer increased efficiencies. So the ability of one partner (or sometimes even a group) to hold onto a significant amount of a client’s business in a particular discipline is diminishing each year.

It’s difficult to overstate how significant this development would be on the corporate legal market. Both lawyers’ personal career trajectories and law firms’ strategic growth plans have long revolved around the idea that the partner is king and the corner partner is emperor. But there’s growing evidence that the emperor is perhaps not actually as fully dressed as we had thought.

I’ve heard of multiple law firms expressing disappointment over the failure of ballyhooed lateral acquisitions to deliver the promised injections of business and profit. Often, the new partner’s expenses (including paying for the entourage that accompanied him or her from the old firm) cancel out the new revenue streams; the partner is a zero-sum acquisition. More problematically (but quite predictably), the new corner partners don’t cross-sell to, or grow the business books of, their new partners: they guard their client relationships just as jealously here as they did there. And it need hardly be added that new corner partners are an unstable resource: just as the best predictor of divorce is having been divorced before, the best predictor of a partner leaving a firm is that partner having bailed on a previous one.

But there’s more to it than just profit churn and instability: there’s also a growing loss of faith in the lateral acquisition model itself. The tipping point here might prove to be the failure of Dewey & LeBoeuf, a mega-firm built on a stack of lateral partners the way Yertle’s kingdom was built on a stack of turtles. We’ve only begun to see the damage Dewey’s fall will wreak on the traditional BigLaw model, but I suspect one of the first victims will be the cult of the corner partner. Lawyers and law firms are remarkably susceptible to fashions in strategy and management; but as soon as one of these trends becomes unfashionable, it can’t be abandoned fast enough. Law firms everywhere are now waking to a sudden thought: not only does corner partner poaching not accomplish much, it can be incredibly destabilizing. Once that thought crystallizes, look out.

What’s really interesting, though, is that this isn’t just about the fall of the corner partner; it’s also about the rise of the law firm.

A funny thing happened following the financial crisis: law firms realized they needed to get better at what they did if they wanted to survive and prosper. What’s more, they actually began following through on that realization. One of corner partners’ strongest advantages over their firms has always been that most firms were haphazardly structured and amateurishly managed, never more than the sum of their parts: the best partners always looked better by comparison. That is now changing.

  • Professionally trained managers now occupy more positions of influence in law firms.
  • Practice and industry groups operate with more precision and panache.
  • Associate training and partner competence has received more attention and resources.
  • Knowledge management has developed real engines of expertise circulation.
  • Legal project management has brought order and discipline to the legal production process.

Law firms, after many years and many false starts, are finally starting to get their act together. Not all of them, by any means, and mostly in fits and starts. But there is unmistakeably a change in the air. Law firms are taking themselves more seriously as corporate entities, and clients are taking notice. We are seeing the start of a shift in the balance of power between law firms and their most accomplished lawyers.

Obviously, it’s very early days for this phenomenon, and as always, anything could happen. The history of both lawyer behaviour and law firm management provides ample evidence for pessimism. And even if diminished and brought to heel, corner partners remain extremely formidable forces within their firms and the larger legal market; there will always be outstanding lawyers and they will always command more than their share of the sunshine.

But I do think the days of law firms dancing attendance on, and throwing borrowed money at, the latest free-agent power broker are drawing to a close. The focused, streamlined and systematized law firm is, gradually but inevitably, on the rise. The cult of the corner partner is in slow but irreversible decline, and much of our conventional wisdom about the legal market is going down with it.

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

Rebundling the law firm

Perhaps most importantly, unbundling has the immensely positive effect of removing from lawyers our self-imposed burden of omnipotence. Our intense dislike of risk and our fervent striving for control has left us vulnerable to taking on more responsibility for our clients’ outcomes than we often should. The modern view of clients — one they share themselves — emphasizes partnership over patronization, collaboration over command-and-control. Many lawyer-client relationships still fit well within the traditional model; but many more do not, and they need a better option. Limited scope retainers make for a very good start.

That’s a brief excerpt from my foreword to Stephanie Kimbro’s forthcoming book Limited Scope Legal Services: Unbundling and the Self-Help Client, to be published next month by the ABA’s Law Practice Management Section. (With Stephanie’s permission, I’ll post the entire foreword here when the book comes out.) Perhaps needless to add, I support both the theory and practice of limited-scope retainers. Yes, it must be done carefully and yes, there are insurance issues that need to be addressed. But the potential risks of unbundling shouldn’t keep us from doing what we can to help people access its substantial benefits.

Interestingly, though, I’ve recently been thinking about what might be a related concept to unbundling. It came up in a conversation I had with Thomas Prowse, an innovative open-source technology lawyer based here in Ottawa, as we were discussing the imminent dismantling of the traditional law firm. Thomas coined a phrase that I immediately liked: “rebundling.”

Unbundling, Thomas suggested, is not a sign to give up on lawyers and law firms as primary legal service providers. It’s merely the first step in the process, similar to the creative destruction that occurs periodically in the high-tech sector, where the failure of one industry or company provides the conditions needed to foster the emergence of new ones. He also saw a parallel with situations where the internet-enabled disintermediation process led to the emergence of new intermediaries to deal with continuing market complexities (e.g.,  iTunes filling many roles once played by recording companies).

I find “rebundling” a very appealing notion. Unbundling, as I suggested above, requires the lawyer to let go some of the work she has traditionally performed, permitting some flexibility to take hold in the previously rigid definition of law practice. But once you’ve unbundled legal tasks or even entire law practices, what do you do with all the individual elements left lying around? One of the reasons law practices have been such successful entities is that there are real benefits of efficiency and specialization to be gained from integrating related tasks and elements into a single enterprise.

The problem is that these enterprises — law firms — have grown stolid, over-encumbered, and intransigent. The traditional law firm is like one of those old steamer trunks — huge, heavy, unwieldy, often latched with padlocks and difficult to move anywhere, but highly effective at gathering everything you might need and keeping it safely tucked away. The problem, of course, is that hardly anyone uses steamer trunks anymore. We opened them up, unbundled the contents, and for the most part threw them away.

But we didn’t leave our unbundled clothes and toiletries and such lying about individually, or stagger around with everything stuffed into our arms. We rebundled most of it into more portable containers: rollaway suitcases, smaller luggage, carry-on handbags, and so forth. Some items we stopped bringing altogether or trusted others to provide, buying water at the airport or downloading books onto our Kindles. We repackaged our assets into smaller, more flexible cases, some of which could either snap together as a larger unit or function on their own. As travel became more difficult and confining, we adjusted how we traveled.

I don’t want to stretch the analogy beyond its modest capacity, but I do think “rebundling” is a helpful way to think about the challenge that lies ahead for law firms. Doing everything for everyone is a difficult business proposition, but it’s the fundamental basis not just of the full-service law firm, but also of the full-service lawyer. We need to become more flexible and nuanced in how we construct our legal enterprises and carry out our legal projects. We need to make greater use of the construction industry model, where a general contractor gathers individual tradespeople for their skills and disbands the team when the work is done. We need more small boutiques in niche areas to flourish. We need to see the relaunch of the sole practitioner as a 21st-century online mobile entrepreneur. We need fewer steamer trunks and more rollaway carry-ons.

Despite what you may have heard (or what some may think I’ve been saying), the lawyer is not dead and the law firm is not dying. But the time is here to restructure our models, our approaches and our offerings — to start rebundling the law practices that market forces are relentlessly unbundling for us.

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

What mergers can’t achieve

Back in my university days, I remember walking past the Graduate Students Office and seeing a photocopied diagram taped to the door. It was called “The Doctoral Candidate Flowchart,” and it provided a series of turns and directions for graduates struggling to get their thesis finally completed. My favourite entry on the flowchart was in the “Delaying Tactics” stream, a box that sent the user back up to the top to start again. The box was labelled: “Read another book.”

I thought of the Doctoral Candidate Flowchart after seeing all the recent reports of real or suggested law firm mergers in the US and UK, because it occurred to me that just as grad students read another book when they don’t know what else to do, many law firms start talking merger when they’re not sure how else to facilitate growth. After a banner year for mergers in 2011, we can expect, as my Edge colleague Ed Wesemann points out, much more of the same in 2012. But Ed, who has facilitated many such mergers, will tell you that he’s proudest of the ones he helped discourage because they would have come to a sorry end. More firms should reflect seriously on that.

Interestingly, the latest round of breathless merger speculation in the legal press is starting to give way to more skepticism. Alex Novarese doubts that cultural fit and business case no longer matter as much sheer size in merger calculations. Ron Friedmann asks a pertinent question: in what ways do merged firms demonstrably deliver greater benefits to clients than their smaller antecedents? And most significantly, we should all ask: do mergers produce stronger firms? SNR Denton, to take one example, is a transatlantic giant born of a merger two years ago, yet its UK arm suffered a 40% profit drop last year; nonetheless, it’s on the merger trail again.

Don’t get me wrong: many law firms mergers make eminent sense and create real growth. But others do not and will not. And in any event, I think all the merger talk right now might be distracting us from the main event, which is taking place in other settings altogether. Let me suggest four developments in the global legal marketplace in the last couple of months that I think are more important than the latest elephant mating dance.

  • One merger that really matters: King & Wood Mallesons, the Sino-Australian giant whose emergence has caused barely a ripple among many legal market observers. But this colossal firm, Asia’s largest with almost 2,200 lawyers, looks better positioned than any global incumbent to generate real business opportunities in southeast Asia and Oceania, if not beyond. And Mallesons, before the merger, was the most innovative law firm in the world. Are they a threat to the AmLaw 100? Not today; but they’re looking much farther down the road than today, something that’s true of very few AmLaw 100 firms.
  • Another Australian invasion: the outright purchase by Slater & Gordon, the world’s first publicly traded law firm, of national British firm Russell Jones & Walker for an eye-opening £54 million. Not incidentally, RJW is the owner of Claims Direct, a slick and highly effective public portal for personal injury claims, and I’d not be surprised if Slater & Gordon considered that to be the jewel in the crown it just acquired. (See this acute analysis of the deal by Edge’s Sean Larkan and Chris Bull.)
  • Along with the RJW move, two other transactions under the finally-active Alternative Business Structures provisions of the UK’s Legal Services Act: technology and outsourcing company Quindell Portfolio bought personal injury law firm Silverbeck Rymer for £19.3 million, and private equity firm Duke Street shelled out as much as £50 million for majority ownership of Parabis Group, parent company of insurance litigation firms Plexus Law and Cogent Law. That’s almost £125 million in two weeks’ worth of law firm shopping, for those of you keeping score at home.
  • Finally, a move that’s not a merger but still matters: Nixon Peabody’s announcement that it’s retaining Thomson Reuters’ LPO division Pangea3 as its preferred provider of e-discovery services. You might remember a time when large US law firms wouldn’t even acknowledge the existence of LPOs, let alone suggest they might work with them. This is a tacit acknowledgement by a major American firm that much work previously performed by lawyers can no longer be done profitably by lawyers, which is absolutely correct. Nixon Peabody has broken the ice: expect similar announcements from other firms in future, and expect this relationship to evolve past e-discovery.

LPOs, private equity shops, publicly traded law firms and Sino-Australian giants are no longer theoretical participants in a future legal market. They’re here, they’re real, they’re sitting at the same table as (or partnering with) traditional law firms, and most importantly, they’re outsiders. They don’t carry all or most of the habits, assumptions and baggage of the traditional Anglo-American law firm, which leaves them free to be as aggressive, disruptive or innovative as they like. They think the future legal market belongs to those who approach and engage it differently. I think they’re right.

The fatal flaw of all market incumbents is a failure of imagination, the inability to perceive that what they currently do could be done differently and better by someone else. Many law firms eager to merge and expand seem to believe they’re still competing against other law firms in a market suffering a temporary downturn, and that size and reach are the cures for what ails them. I think they’re mistaken. They’re actually competing against new models, new approaches and new attitudes, in a market that has started to evolve beyond them. Size and reach alone simply aren’t going to be adequate responses to that.

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

The year of living dangerously

So there goes 2011, and from a legal marketplace perspective, you could probably call it the year of hanging on. Large law firms hung on in the face of flat-lined or diminishing revenues, in no small part through the wonders of de-equitization. Small law firms hung on despite an expanding sea of legal service providers targeting the consumer market. Corporate law departments hung on despite seeing their outside counsel budgets cut by as much as 25%, yet still managed not to force change in the market. Law schools hung on in the teeth of a growing storm of criticism that they had failed to look out for their students’ financial interests. Measured in terms of endurance and tenacity, at any rate, it was a pretty good year for the incumbents.

Now here comes 2012, and from where I’m standing, it looks like a year in which the limits of perseverance will be reached and breached. There are just too many places within the traditional legal community where resistance to change will weaken and ultimately collapse. I want to point out three in particular that strike me as especially noteworthy harbingers of some new realities.

Disappearing law firms: Mergers and acquisitions of law firms picked up pace in 2011, but here in December came word of some interesting variations on the theme. Bryan Cave “merged” with Denver-based Holme Roberts & Owen, while Arnold & Porter “merged” with San Francisco’s Howard Rice. I put “merged” in quotes because it’s a polite fiction to pretend that these were anything other than flat-out acquisitions of law firms that were experiencing serious pain. Holme Roberts suffered a string of partner defections and staff layoffs earlier this year, while Howard Rice had lost nearly half its complement of lawyers in the last nine years, including two senior partners in 2009.

You can expect to see a lot more of these kinds of deals in 2012, because a lot of firms are having a very tough time adjusting to the new rules of the market. Some firms, as I noted in a post last month, don’t even make it to the acquisition stage: they simply disappear. This AmLaw Daily article makes it even clearer that dissolutions of law firms took place throughout 2011, starting with Howrey LLP and continuing with smaller and midsize firms throughout the year. You can call it “consolidation” if you like, but it also bears a strong resemblance to a profession-wide culling of the herd. Many law firms are weaker than they appear from the outside, or even from the inside, depending on how transparent their internal financial disclosures turn out to be. Some bigger dominoes could start falling early in 2012.

The rise of Asia: It remains something of a puzzle to me that the merger of China’s King & Wood and Australia’s Mallesons hasn’t set alarm bells ringing across the global legal marketplace. Now the largest law firm based in the Asia-Pacific region, with more than 1,800 lawyers, King & Wood Mallesons is something we’ve never seen before. Put it this way: Mallesons was one of Australia’s biggest and most esteemed law firms, large enough to entertain lengthy merger talks with Clifford Chance and innovative enough to be the only two-time winner of the College of Law Practice Management’s InnovAction Awards. Yet which firm wound up with top billing? That should tell you something about how much influence Chinese law firms are set to wield.

Will King & Wood Mallesons be able to crack the rich Anglo-American legal market? I’m not sure that’s on their radar right now. There’s more than enough work in Asia and Oceania to keep them busy, and frankly, it would be understandable if they think that their corner of the world has more medium-term upside than the western corner. But other Chinese firms are quite happy to go west: in fact, the two biggest law firms in China, Dacheng and Yingke, are preparing to open bases in London. Then there’s small Chinese firm Broad & Bright, in merger discussions of its own with none other than Clifford Chance. Years from now, we’ll look back on 2011 as the year China began breaking into the global legal market.

Alternative Business Structures: And heeeere we go. Starting the first week of January, the UK’s Solicitors Regulation Authority will officially throw open the doors to applicants of all stripes that want to become Alternative Business Structures under the long-anticipated provisions of the Legal Services Act. Regular readers will know that the SRA expects at least a dozen applicants straight away, and that the initial group will include law firms, claims management companies, major retailers, accounting firms, loss adjusters,  private equity houses, legal expense insurers, banks, will-writing companies, and even, remarkably enough, in-house law departments. I don’t know about you, but that looks like a revolution to me.

It’s a revolution that won’t stop at the English Channel or the North Sea, either. There are too many UK companies and law firms with offices worldwide to believe that the contagion can be contained. We’ve already seen the influence of the Legal Services Act in the ABA’s planned endorsement of limited, lawyer-controlled multi-disciplinary partnerships (although the degree of innovation here is comparatively tiny) and the lawsuit launched by Jacoby & Meyers to the restrictions against non-lawyer ownership of firms. Whether these initiatives succeed is almost beside the point: even the specter of massive change in the UK is enough to drive limited reform efforts. What kind of response will the real thing generate?

Those are three reasons to think that 2012 will be the year that the pressure relentlessly building on the fault lines of the traditional legal marketplace will finally produce the quakes we’ve been expecting for a while. And here’s one more: macro-economic and geopolitical events will play a role in the legal market as well. Europe’s financial situation is unsustainable, and the odds of something truly ugly taking place there and spreading worldwide seem to increase every month. The 2008 Lehman Brothers collapse and the resulting western financial crisis was the first shock to hit the legal system and generated a tidal wave of change. The next one could be bigger.

If you like living dangerously, then by all means, plan for 2012 to be another year of raising rates, de-equitizing partners, downsizing staff and taking whatever other measures you feel will continue to prop up the artificial and increasingly archaic metric of profits per partner. Keep on doing what you’ve been doing lately, just more of it. You might yet manage quite well, if your financial position entering the year was rock solid,  your firm culture intensely positive and your relationships with clients extremely sound. But if you feel like your foundation is a little shaky, your strategic direction has meandered, or your morale is brittle, then I think you’d be well advised to pay close attention to what comes next. We were warned.

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

Too many partners

Law firms, facing a formidable array of external trends and pressures, are simultaneously experiencing a series of internal shocks and shakeups. The most prominent of these is an ongoing reconsideration of the role played by each member of the firm — a process of asking, “What function do you play in this enterprise, and could that function be performed differently?”

This process, which has been underway for a couple of years now, is behind the move of back-office and middle-office jobs to outsourcing companies (both offshore and onshore) and the transfer of associates’ jobs to LPOs, free-agent project lawyers, and innovative offerings like Axiom and Lawyers On Demand. (Some of these functions are also being replaced by technology, at a rate that will steadily increase in the next few years.)

The impact of these efforts is already clear, ranging from the emergence of new “capitals of law” outside the major financial centers to the steady decline in the partner-associate ratio (leverage is now just below 1-to-1 in the AmLaw 200). There’s nothing sinister about this: it’s the natural market-driven process by which labour shifts and reconstitutes itself to its most efficient and effective use.

But I suspect that the partners driving this process forward haven’t thought about where it’s inevitably going to wind up. When you’ve finished asking, “What’s the point of an IT department?” and “What’s the point of all these associates?” there’s really only one question left: “What is the point of a partner?”

Asking that question — and every firm is either asking it now or will have to ask it shortly — raises some uncomfortable issues. We know what function the payroll clerk performs, and we know her job can be done in Wheeling or Belfast. Ditto the paralegal, whose job can be outsourced to someone working from home in a small town in California. We know what the associate is for: either to be groomed for future partnership and leadership or (far more likely) to do highly leveraged work and generate partner profit until eliminated, voluntarily or otherwise.

Positions like these, whose role in the overall  scheme of things is clear, can be understood and moved around as needed. But what about partners? What are they for? I can think of three possibilities.

  • Do they bring in big business? (That is to say, enough business to sustain much more than just their own practice?) A small percentage of partners do, and they’re incredibly valuable. (A friend of mine in a big firm estimates that the best rainmakers are probably underpaid by a factor of 10.)
  • If they don’t bring in big business, are they superb client relationship maintainers? (And I mean superb.) Most great “relationship” partners are rainmakers covered by the first category, but this possibility should still be raised.
  • If they’re not critical to client relationships in either of the two preceding senses, are they tremendous managers? That is to say, are they highly valued and indispensable managers of the organization, its people, or its processes?

To my mind, at least, those three categories cover virtually all the justifications for inviting a lawyer into a law firm partnership. These are the key roles that make a firm profitable and successful — they constitute the essence of what “partner” status is supposed to describe. But by no means do all or most law firm partners today qualify under one of these headings. And if a “partner” doesn’t fall into one of those three categories, then what precisely is he or she doing in the partnership?

I suspect that a lot of “partners” in law firms today are in that position because the firm didn’t know what else to do with them, because the other partners liked them, and because times were good — in short, they were made partners because it pleased the firm to do so. Not a few younger lawyers in law firms have glared upwards at the people above them and groused, “How did they become partners?” And in more than a few cases, they’re right to wonder, because these lawyers aren’t partners so much as they’re superannuated associates who came along at the right time. It’s my belief that, speaking from a labour utilization perspective, these partners are not occupying the correct role, either for them or the firm. They need to be reassigned.

And they are. Earlier this year came a report about increased profits at AmLaw 100 firms achieved at least in part by thinning the ranks: 2% of partners de-equitized over the previous two years. A recent survey reported that fully half the UK’s top 30 law firms are now either de-equitizing partners or considering doing so, a development predicted back in January by Hildebrandt and Citi Private Bank. In addition to steadily reducing the partnership ranks, firms are taking steps to ensure that future cohorts are smaller: Eversheds, for example, has gone so far as to create a brand new position (legal director) as an alternative to becoming partner.

There’s a growing belief among many firms that they invited too many people into the partnership over the past years and decades. Those firms are now starting the process of unwinding those errors. Record low realization rates being reported for some of the biggest US firms, as low as 85%, will only spur that development, because there’s nothing else left to cut and no one else left to reassign.

Nor is it likely that partner ranks will swell again in future, following some highly anticipated but nowhere-in-sight economic recovery. Partnership, as Stephen Mayson argues, is neither an appropriate nor a viable way to manage enterprises of the size and complexity of most law firms. The imminent arrival of Alternative Business Structures in the UK and the outside ownership they’ll bring with them should ensure that the partnership model will henceforth be reserved for smaller firms, as it was originally intended.

Law firms are in the process of reinventing themselves, but the easy work — cutting staff and laying off associates — is long past. Removing lawyers from the partnership is (or should be) an extremely difficult experience for all concerned, but as times continue to be tough and worse, the stronger members of the herd will not hesitate to cull the weaker. But most firms have yet to face up to the hardest part of all — re-engineering the firm’s workflow, delivery, pricing and compensation systems in order to compete in a new marketplace. That’s a bridge, I suspect, that few firms will find themselves willing or able to cross.

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

We measure what we value

People love lists. We love the choosiness, the ordering, the nice linear way they stack up or count down. There’s a reason why every cover of Cosmopolitan includes at least one numbered list. You think Stephen Covey would be a millionaire today if he’d merely written The Habits of Highly Successful People? You think we’d even have heard of the American Film Institute but for its endless series of movie lists? We love lists, and we especially love rankings, which add the irresistible power of personal judgment: I declare “you” more important than “you.”

Sometimes it seems that no one loves rankings more than lawyers. We devour directories, books and websites that rate and rank our firms and competitors. We want to know what Chambers, Martindale-Hubbell, Avvo and other august authorities have to say about us, and if they’re saying good things, we crow about it. Lawyer magazines (and you can think of a few) generate attention and revenue every time they publish an article rating lawyers or law firms in a given region or field. Lawyers love attention, status, prestige, and beating the other guy, and rankings tick all those boxes. (Clients who want easy or lazy ways to choose a law firm like them too.)

The problem with rankings, of course, is that they’re riddled with subjectivity and bias. Who and what you rank, and in which order, has everything to do with the criteria you choose and the people you ask to apply them. What are the best corporate finance law firms in New York? How we answer that question says more about us than it does about the firms, and how those questions are phrased says more about the questioner than it does about us or the firms. When you stare into a ranking, the ranking stares back into you.

Rankings are in the news right now thanks to this recent article (and this follow-up, not password-protected) in the Wall Street Journal. It reported some discrepancies between the profits per partner (PPP) of the 100 biggest law firms in the United States (the AmLaw 100) published in The American Lawyer, and the same numbers apparently compiled by Citi Private Bank Law Firm Group, which lends to many of these firms. Specifically, the Journal reported that “[r]oughly 22% of the top 50 firms overstated their ‘profits per partner’ by more than 20% in 2010, according to a person briefed on an analysis prepared by Citi Private Bank Law Firm Group.” Citigroup declined to comment or to release its figures to the Journal. The American Lawyer also tried to obtain Citi’s figures and was rebuffed.

This has generated a lot of attention, and as those links demonstrate, many people have reasonably drawn conclusions that don’t exactly flatter the firms. At this stage, I’m inclined to think the likeliest explanation for the discrepancy is that we’re measuring different things here — Citi’s definition of “equity partner,” which lies at the heart of the calculation, is slightly different than AmLaw’s. That said, it sure seems odd that none of the discrepancies arose from firms under-reporting their profits per partner in 2010. And it does seem odd, when we really think about it, that the industry-bible ranking of large law firm profitability — a measure that is extremely important to these firms’ position in the market — is based on self-reported figures that do not, so far as I know, have anything like an independent audit standing behind them.

This story reminds us of a couple of things. One is that few checks and balances exist to ward off the potential for privately held law firms to inflate their publicly announced financials. This is especially a problem because whether or not every firm inflates (and I don’t think they all do), every firm is highly motivated to do so. A precipitous slide down the AmLaw rankings is often a prelude to an exodus of key partners and potentially the collapse of a firm. It was to avoid exactly that result that many firms sliced off so many staff and associates in the wake of the financial crisis — you have to prop up profits in the face of falling revenue by slashing costs or risk having partners flee the firm as if it were on fire. Moreover, to the extent partners pay attention to their firm’s overall financial situation (and that is generally not a great extent), they quite probably suffer from cognitive bias: they want to believe that their firms are highly profitable, so they’re not going to heavily scrutinize any report that says they are. This is a system inherently prone to inflationary bias.

The other reminder is of the stark reality that we’ve developed some pretty unhealthy priorities in the legal profession. We use rankings of the previous year’s self-reported partner profitability as a surrogate for the prestige and desirability of a law firm, and what that says about our profession isn’t good. (Do you admire companies based on their ability to make a profit off you? Do your clients?) I was speaking to a friend who advises law firms on professional development, and she mentioned that relatively few law firms track what their associates are actually doing — the opportunities offered to them, the tasks they’re engaged in, and the skills they are (or aren’t) developing. In fact, most law firms closely measure only one aspect of their associates’ work lives: how many hours they’re billing. The message about the firm’s priorities is clearly received by associates and is passed on in turn to the next generation.

We like to complain, as a profession, that law firms only seem to care about partner profits — but we assiduously follow and legitimize rankings that not only endorse that outcome but effectively create it. We measure what we value. So you might try asking yourself what your own firm records, measures and acts upon. Those are your priorities. That’s your culture.

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