Goodbye to all that

Last week, having written about the rise of online disruptors and the emergence of super-boutiques, I promised that the final entry in this de facto trilogy would identify how lawyers and law firms can ensure their profitability in this new environment. But then I spent three days at ILTA’s Rev-elation, the 2011 annual meeting of the International Legal Technology Association, and it seems to me that that ship is already sailing out of the port.

What I saw and heard at ILTA, about document assembly and contract standardization and reverse auctions and KM advances and outsourcing services and a host of other developments, is that the storm we’ve been warning about for the past few years has finally broken (read the linked articles for more details). Tired of waiting for law firms to lead change, the market has itself developed tools and processes to provide the certainty, efficiency, transparency and cost-effectiveness that legal services have long needed. Clients love these innovations and are telling law firms to use them, even (and especially) where they conflict with firms’ traditional ways of working and making money. And firms are obeying, with the vague but dawning realization that they’re now being told how to do their jobs.

What’s happening is this: law firms are finally losing control of the legal marketplace.

Law firms used to dictate the terms upon which legal services were performed — work assignment, work flow, scheduling, timeliness, format, delivery, billing, pricing, and many others — because buyers had no other options. Those options have now emerged, powered by technology and driven forward by market demand.

  • They promise legal documents not just faster and cheaper but also, incredibly, better, in terms of quality and reliability.
  • They promise greater efficiency and transparency in the previously laborious RFP-driven process of choosing and pricing law firms.
  • They promise real-time integration of world-class legal knowledge into the legal work production process.
  • They promise alignment of a legal task’s value with its performer’s skills, qualification and location.
  • And at ILTA, they demonstrated delivery on all these promises and more.

But the emergence of these options isn’t the real story. The real story is that firms are buying these new products and services, not selling them. They’re taking marching orders about their use, not issuing them. They’re accepting the new realities of the marketplace, not inventing them. Law firms are now drifting to the periphery of the marketplace, trading places with technology-driven outsiders whose own importance increases daily. Law firms, whether they realize it or not, are settling into a new role: sources of valued specialists called upon to perform certain tasks within a larger legal system that they did not create and that they do not control.

New providers and new technologies are not going to replace lawyers. But they are going to marginalize lawyers and render law firms mostly irrelevant.

Lawyers are smart, knowledgeable, creative and trustworthy professionals who, unfortunately, suffer from poor business acumen, terrible management skills, wildly disproportionate aversion to risk, outsized revenue expectations, and a business model about 25 years out of date. The market won’t abandon them — they have unique and sometimes extraordinarily valuable skills and characteristics — but it will find the best use for them: expert specialists with limited influence over the larger process.

Law firms are widely decentralized partnerships that charge on a cost-plus basis, retain no earnings from year to year, and pray every morning that their best assets will walk back through the same doors they exited the previous night. That’s not good enough. The new legal market demands systematization, collaboration, transparency, alignment, efficiency and cost-effectiveness within and among its providers. A few law firms have already adapted these traits, and some more will follow. Some law firms are so powerful they won’t have to change. The rest are in grave danger.

Here’s a revealing thought experiment to illustrate these points. Consider the flurry of investments and acquisitions that have taken place in the legal technology area recently. I’ve already written about Google Ventures’ $18 million investment in Rocket Lawyer and LegalZoom’s acquisition of $66 million in venture funding. During ILTA, Aderant acquired Client Services and CompuLaw for an undisclosed but certainly massive sum. And in the biggest news of the week, Hewlett-Packard purchased Autonomy, which among other things is a leading e-discovery provider, for no less than $10 billion.

With those figures in mind, ask yourself: what would you pay for a law firm? What price would you meet for any of the world’s ten largest law firms? Some very smart people discussed that question during a conversation at ILTA, and we reached this likely conclusion: nothing. Not a cent. Because really, what do law firms have to sell? They have no patents. They have no unique business methods. They have little unique knowledge. They have few long-term client commitments under contract. They have limited goodwill. Their only real assets are a handful of partners with great technical expertise or amazing rainmaking skills, and these assets can leave anytime with no penalty. What, precisely, would you be buying?

I said at the outset of these posts that lawyers and law firms need to decide carefully what they do and how they do it if they want to remain profitable and valuable. Let me instead suggest more questions for lawyers and law firms to ask themselves in order to even remain in the conversation.

What: Identify your inventory — what you sell to clients — and determine how much of it involves the application of lawyers’ high-value performance or analytical skills. Assume that the price for everything else you sell will plummet, and that you’ll be able to stay in these markets only if you adopt various high-efficiency systems. Absorb the reality that you will need many fewer people within your law firm to be competitive in these areas.

How: Study the means by which you accomplish the work you sell to clients and determine whether and to what extent you can adopt new technologies and processes to be not just more efficient, but also more effective in terms of quality, relevance and responsiveness. Don’t think in terms of adapting your current approaches; think in terms of starting from scratch. Use your creativity and ask: How should we go about doing what we do?

Who: Identify every person who receives a salary or a draw from your firm and ask: what is their primary contribution to the firm? Good answers will include proven business development skills, outstanding professional expertise, and amazing management abilities. These are your irreplaceables, and you’re probably underpaying them. Everyone else will require a clear demonstration of why they occupy a place in your office.

Where: In association with the previous entry, determine the best physical location for the services you provide. We are past the time in which a law firm’s four walls house all or almost all of its functionality. Some services might best be performed in a suburban location, others in a home office, others in a low-cost center elsewhere in the country or in the world, and others from a server farm.

Why: This might be the most important question of all, and I posed it in an article last month: what is the point of your law firm? I don’t mean generating profits for partners; I mean your marketplace purpose. Why do you exist? What specific need for what specific audience do you meet? If you disappeared tomorrow, who would find the loss irreplaceable? Believe me when I say: The market is asking you that question right now.

We’ve begun crossing over from the old legal marketplace to the new one. Lawyers still have outstanding value to offer in certain quarters, but we need to concentrate our market offerings around that value, and we need better platforms for our services than traditional law firms provide. We need to understand what technology is doing to legal services and either adopt that technology, adapt to the client expectations it’s creating, or leave. We need to understand our role in this new market and appreciate that it does not lie at the center of the legal universe. We’ve missed our chance to lead the new market, but we can still flourish inside it. It’s up to us.

Welcome to the crucible.

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 rise of the super-boutique

Yesterday, I advanced the notion that lawyers’ profitability now depends on what they do and how they do it. One reason is disruptive internet-based providers that not only are grabbing commodity work and profiting from it, but more dangerously, are also changing the values clients associate with “good legal service” to emphasize speed, affordability and convenience, threatening to replace firms as platforms of choice for many legal services. Today, I’d like to look at parallel developments within the legal profession that further illustrate this point.

Earlier this year, I wrote about the stratified legal market and its implications, and more recently, for The Lawyers Weekly, I described the consequent need for law firms to do what they do best and outsource the rest. With a hat tip to John Wallbillich’s fee pyramid, I’ve put together the following rough approximation of what the market for legal services now looks like (click to enlarge):

So you have bet-the-company work at the top, ordinary course of business legal tasks in the middle, and low-value commodity work at the bottom (the stratified legal market post explores these tiers in more detail). The top tier is now shrinking — it’s probably on its way down to 10% of the total market — and the bottom layer is growing, soon to encompass about half of what clients need.

Clients enjoy seeing their legal needs settle into segments with different price points, but they still find most lawyers and law firms frustratingly amorphous and undifferentiated, both individually and collectively, in terms of skills, methods and attitudes. They sure would like to see the legal profession recognize and respond to the realities illustrated by this pyramid.

That’s why the news last week from CMS Cameron McKenna looks so significant. The London-based global firm announced that it was essentially outsourcing its entire immigration law department to an equally global but fully specialized immigration law firm, Fragomen, Del Rey, Bernsen and Loewy. Understand, Camerons isn’t sending some low-value aspects of immigration work to Fragomen — they’re sending everything, lawyers and all. Camerons will no longer provide immigration law services within its offices — but it will still provide those services to its clients, using Fragomen as its preferred supplier.

This, I need hardly tell you, is something new. It’s so new that we don’t have a verb for what Camerons has done. The Lawyer uses “divests” and “offloads,” LegalWeek uses “transfers” and “spins off,” Fragomen uses “acquires” and I used “outsourced,” but none of these really seems to fit. Fragomen is now a little bit Camerons, and Camerons is now a little bit Fragomen; they’ll always be separate entities but they’ll always be joined. We probably need a term borrowed not from business, but from biology.

John Wallbillich, again on the case, wonders if this is the end of the full-service law firm, and he may be right. But at the very least, it’s a major mutation in the full-service firm’s evolution. Camerons hasn’t abandoned immigration law altogether; it has simply recognized that immigration work was neither strategically nor financially significant enough to remain a core activity of the firm, yet was still important to the firm’s key clients. You solve a problem like that by figuring out what you do best and outsourcing the rest, which is exactly what Camerons did here. It’s closest to the Wave system pioneered by Lovells (as it then was), but a Wave circulates work from a major urban firm through smaller regional providers and back again; this is a different animal.

What we may be seeing, in addition to the evolution of the full-service firm, is the rise of the super-boutique. Fragomen, as Ron Friedmann explains, is a walking illustration of what he calls Law Factory principles:

  • Focus on a single practice: with 250 lawyers, it is much bigger than its next biggest immigration firm competitor at 35 lawyers.
  • Handle high volumes: it has handled 50,000 immigration transactions annually for 3 years.
  • Keep overhead low: its offices are not fancy (and until a then-recent move, the offices sounded pretty shabby).
  • Leverage non-lawyer professionals: the firm has more than 500 paralegals, putting the ratio to lawyers at more than 2:1.
  • Work on fixed fees: 95% of its work is charged on a flat-fee basis.
  • Take legal technology seriously: the firm has provided web-access to case files for more than 10 years; its paralegals have access to a digital best practices library of key flowcharts.
  • Keep lawyer pay in check: new associates earn $125k, not $160k and do not come from top-tier schools.
  • Be global: the factory is global with 15% of work outside the USA.

You know what leaps out at me from that list? Fixed-fee work is ninety-five percent of Fragomen’s business. You can charge fixed fees when you only practise one type of law and come to know the area intimately; you have to charge fixed fees when your margins are so thin that you need to know exactly how much it costs you to carry out a given task. That’s the world Fragomen lives in, and it has adapted itself accordingly. It’s a world foreign to most law firms, who like to do everything and charge it all at cost-plus. But it’s a world that’s growing.

Take a look at the insurance defence bar, at least in the UK (which, thanks almost entirely to the Legal Services Act, is now the world’s legal laboratory). This article in The Lawyer describes the rise of insurance defence mega-firms, most recently highlighted by Clyde & Co.’s merger with (acquisition of) Barlow Lyde & Gilbert to produce a firm with 280 partners and revenue just south of half a billion dollars. Think about that for a second: $500 million a year largely from insurance defence work, possibly the least remunerative and most demanding corporate legal practice area in existence. And that merger simply lets the new firm tackle rivals that are about to grow in a hurry: Irwin Mitchell (soon to convert to an ABS), Parabis Law and Minster Law (both with aspirations in that area). Says The Lawyer:

This change is being ­driven by savvy in-house counsel,?who?can see ­financial savings to be made from their service providers. … Clydes chief executive Peter Hasson said the ­merger was driven in part by the anticipated reduction in panel places for global insurers. “The insurance industry is consolidating suppliers on a global basis. The UK insurance industry is much more international. Our clients are saying, ’We’ve just opened in Canada – we want you there’,” he said. [And so Clydes is, recently acquiring Montreal-based Nicholl Paskell-Mede to become the second global firm to enter Canada.] …

The insurance legal ­market is changing the way legal services are being delivered. This is a change that is being driven by the volume markets squeezing profit margins and forcing their peers to play a different game. Consolidation can only continue in this sector for a limited time before it starts to seep into other key legal areas.

And so it will. Take a look at Littler Mendelson, 71st in the 2011 AmLaw 100 with 750 lawyers in 50 offices across the US and annual revenue of $381 million, and the only thing it does is labour and employment law. Like other super-boutiques, Littler is a sharp, savvy firm that knows how to maximize the value of its investments. Just as an example, read this description of Littler’s CaseSmart system, nominated for an InnovAction Award this year:

“[It] streamlines the way that cases are managed and provides attorneys with a ‘smart system’ designed to anticipate their needs as they investigate facts, conduct research, prepare responsive documentation and perform their legal and risk analyses. The system also provides clients transparent, online access to information about the status of their individual legal matters, as well as key performance indicators regarding the overall work being performed in this system.”

How many full-service law firms do you suppose create and support something like this? Not many. Yet firms like Littler, Clydes and Fragomen make investments like these, because they’re responding to the realities of a legal marketplace that demands better and more cost-effective ways of producing legal work. That’s why Camerons’ move is so significant: it has created a visceral and structured relationship with a super-boutique, increasing its effective reach and capacity while simultaneously reducing its size and spend. That’s a pretty neat trick, one that other firms may find hard to duplicate.

So we come back to the theme at the start of this post: how do lawyers and law firms ensure their profitability in this environment? That’s going to take more space and time than I have right now, so it looks like this series will have to stretch to Part 3 next week.

But I want to emphasize the trend that seems to me undeniable: as commodity work grows in volume, more law firms are stepping up to take that work and profit from it through a relentless focus on volume, specialization and systematization. Go back to the pyramid: these firms are eventually going to dominate that third tier of client work (or at least, that percentage of the work that doesn’t leave the legal profession altogether). The first tier, mission-critical work, is shrinking, and the very top law firms have already locked in on it.

What’s left for the vast majority of non-specialist law firms? What do they get? In my opinion, they get an existential crisis. More on that next week.

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 new capitals of law

A minor parlour game for BigLaw cognoscenti is the question of which city will be the next world capital of law. New York has held the unofficial title for many years, although London made a powerful case throughout the 2000s. Down the road, who knows? Maybe Hong Kong or Shanghai, possibly New Delhi or Mumbai; real outliers might include Singapore or Rio De Janeiro. And of course, don’t count out London or NYC retaining the crown.

Allow me to suggest, however, that some of the future capitals of law have already been nominated. Here are seven worth considering, in alphabetical order:

  • Belfast, Northern Ireland
  • Carrollton, Texas
  • Dayton, Ohio
  • Fargo, North Dakota
  • Hamilton, Ontario
  • Overland Park, Kansas
  • Wheeling, West Virginia

These seven cities, of course, are home to low-cost law offices or legal outsourcing facilities, many of which have just opened or are in rapid growth stages. More specifically:

These law firms and companies are choosing these locations not just because of lower costs, but also because of good-quality legal talent in the area and proximity to transportation hubs. Skeptics who complain they’ve never heard of Carrollton or Overland Park should remember that no one used to know where Bentonville is, either. If our clients are in smaller regional locations, why shouldn’t we be there as well?

This is by no means an exhaustive list, of course — many Indian cities host legal outsourcing operations, and similar entities can be found in South Africa, New Zealand and Australia. But two factors in particular are marking many of these operations as a whole new animal. The first is closer physical proximity to law firms’ national headquarters — “onshoring,” if you like, as opposed to “offshoring.” This approach to outsourcing has long had political and public relations benefits — opening plants in Tennessee rather than Tianjin pays numerous dividends — but as wages in previous outsourcing hotspots start to rise, the cost gap is narrowing and other non-financial factors are coming into play.

The second element, though, is more interesting. Increasingly, these outsourcing centers aren’t just low-cost “drudge” work outposts — they’re growth engines. Orrick’s Wheeling office has increased from 75 people to 350 in the last two years alone, while Allen & Overy aims to have 50 fee earners join 250 support staff in Belfast by 2014. Pangea3, as this New York Times article points out, is busily hiring lawyers in the United States, which is more than a lot of U.S. law firms can say. These cities look like new magnets for legal talent in the 2010s and maybe beyond.

These legal jobs are for so-called “second-tier associates,” but the reality behind that insulting label is this: these jobs do work that isn’t extremely challenging and needn’t be performed in global financial centers. These jobs and their lower salaries are perfectly calibrated to the value of the work they produce. They aren’t based in New York or London because, as firms have been painfully learning the past few years, clients won’t pay the rates required to sustain mid-range jobs in high-priced locations. (And as the grim statistics make clear, new lawyers are paying the price for this change.) These jobs are in Dayton and Wheeling because that’s how much they’re worth, and there’s nothing the least bit wrong with that.

What we’re looking at here is the unbundling of law firms: the disassembly of the once-mighty law firm talent block into discrete groups of lawyers and para-professionals based in various locations to carry out several types of legal work in ways better aligned with its value. Law firms and legal enterprises are heading towards a hub-and-spoke model: small but focused strategic headquarters in a major financial center, revenue-producing satellites in a variety of lower-cost locations worldwide. Soon enough, we’ll look back and wonder why on earth a law firm ever kept all of its partners and all of its associates inside the walls of its major downtown office buildings.

It bears repeating: this is not a temporary, stop-gap response to tougher economic times and partner profitability demands. This is the beginning of a fundamental change in how law firms carry out the work their clients send them. Ron Friedmann, in a wide-ranging post that takes in both these developments and the emergence of a “Top 23” in the AmLaw 100 (related developments, Ron thinks, and I agree), puts it plainly: “As more work moves to an AFA basis, firms will have to examine how the work itself is done: they will need to minimize time spent on matters to protect and grow profits. Wasting time on repeatable, wheel-reinventing matters simply makes no economic sense.”

This isn’t really about outsourcing, although LPOs have played an invaluable catalytic role in this process. This isn’t about new lawyers getting stuck in low-paying jobs, although my heart goes out to law school graduates caught in the breakdown between the old system and the new one.  And this isn’t about partners being greedy — or at least, no more than it ever was and no less than should be expected and encouraged from equity shareholders in a business enterprise. This is about how legal work is priced and delivered in a newly competitive marketplace. That’s the prism through which you should examine almost everything currently happening in the law, including the emergence of some unlikely new capitals.

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

Why do law firms exist?

What is the point of a law firm?

This is neither a rhetorical nor a snarky question. I’m interested in nailing down the economic rationale for a law firm’s existence. What benefits flow to both clients and lawyers from law firms? In what ways are the buyers and sellers of legal services better off because a law firm is the platform of choice for their transactions (instead of, say, an individual lawyer-client exchange)?

A good way to answer that question, I think, is by reference to the work of 20th-century economist Ronald Coase, who (among other things) authored a pioneering treatise titled The Nature of The Firm. As The Economist observed in celebrating Coase’s 100th birthday last year, Coase asked and answered a similar question in the business world: why do companies exist? “His central insight,” The Economist wrote, “was that firms exist because going to the market all the time can impose heavy transaction costs. You need to hire workers, negotiate prices and enforce contracts, to name but three time-consuming activities. A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome.”

The magazine went on to point out that while important, reducing transaction friction is only a partial answer to the why of corporations: “[Companies] can marshal a wide range of resources — particularly nebulous ones such as ‘corporate culture’ and ‘collective knowledge’ — that markets cannot access. Companies can organize production and create knowledge in unique ways. They can also make long-term bets on innovations that will redefine markets rather than merely satisfy demand.”

Companies exist, therefore, because they:

  • reduce transaction costs,
  • build valuable culture,
  • organize production,
  • assemble collective knowledge, and
  • spur innovation.

So now let’s take a look at law firms. I don’t think it would be too huge a liberty to state that as a general rule, law firms:

  • develop relatively weak and fragmented cultures,
  • manage production and process indifferently,
  • assign and perform work inefficiently,
  • share knowledge haphazardly and grudgingly, and
  • display almost no interest in innovation.

That’s an inventory of defects that would make Ronald Coase wonder exactly what it is that keeps law firms together as commercial entities. And he’d be further daunted by the following considerations:

  • This week, Bruce MacEwen at Adam Smith Esq. wrote about the difficulty of “branding” a law firm: “Law firm partners are anything but designed or acculturated to delivering a ‘consistent experience’ or ‘a particular quality level.'” And in any event, he added, “what exactly is the [law firm brand] promise?” In many law firms, the client experience varies wildly from lawyer to lawyer, to such an extent that basic documentation and even invoices will differ from one partner to another. In that light, it’s difficult to say that a law firm has an “identity” or a “way of doing business.”
  • Last week, Mark Hermann at Above The Law, tackling the old question of whether clients hire lawyers or firms,  averred that “[i]f clients have any sense at all, they hire lawyers.” This is because firms are unsure of the quality of their own lawyers, and because hardly any firm systematically conducts internal quality assurance to review and approve its lawyers’ work. For the same reason, lawyers are reluctant to cross-sell “partners” whose expertise they don’t know or trust and to whom they won’t dare refer their prized clients.
  • Back in July 2010, Anthony Kearns wrote for The American Lawyer about the absence of risk assessment and post-mortem systems in law firms. These systems could reduce the chances that something will go wrong in the first place, and could create processes by which lessons can be learned from errors and the same mistakes avoided in future. But law firms are extremely culturally resistant to admitting that lawyers have failed in the past and will fail again — and as a result, there is no institutional expectation that errors be acknowledged and treated as learning opportunities.

These are not problems, it should be noted, that you can easily correct through the simple application of good management practices. These are problems bred deep in the bones of lawyer culture. Lawyers tend to protect and promote their own individual interests over that of the collective to which they belong. Many sensible management innovations that have tried to gain a foothold in law firms over the past couple of decades — including knowledge management, cross-selling, brand discipline, billing reform, associate apprenticeship, collaborative workflow, and so forth — have foundered on the shoals of lawyers’ reluctance to sacrifice some individual short-term good for some collective long-term gain. This isn’t a bug of law firms; it’s a feature.

So what does that leave? From the original list of Coaseian advantages, we still have the first and most important: the reduction of transaction costs. There’s no denying that this is an important and useful aspect of a law firm. While there are many legal tasks that can be accomplished fairly easily by a single lawyer working alone, there are many more that require more resources to accomplish: other lawyers, numerous staff, many knowledge assets, multiple connections and contacts, and so forth. A client with an even slightly complicated legal matter does not want to go out and contract individually with each of these players and suppliers; she wants a centralized platform, a one-stop shop. Lawyers, equally, don’t want to access the market every time they need an asset; they prefer to keep them all on hand.

And that, to make an over-long story short, is why I think the fragmenting of legal services and the rise of viable non-firm suppliers pose a threat to the continued existence of law firms. New competition and technology are lowering the transaction costs of complex legal work; they’re reducing the friction loss traditionally associated with repeatedly accessing the legal market. New resources such as legal process outsourcing companies, virtual law firms, temporary and contract lawyers, and sophisticated software programs are available, reliable, and increasingly accessible in a timely and cost-effective fashion. We used to lower the hassle and cost of accessing multiple legal resources by putting them all inside a law firm; we don’t need to do that anymore. The remaining fundamental rationale for law firms is under siege.

To be clear, I’m not forecasting an imminent worldwide cull of law firms; many firms are still better at cost-effective legal transaction facilitation than the vast but jumbled array of separate providers. But we’re about to see the rise of a new generation of effective legal resource organizers (which, when you think about it, is all law firms really are). They’ll organize disparate, far-flung, specialized suppliers of legal services into a complex, finely tuned, just-in-time assembly and delivery system for complex legal services — supply chain managers for the modern legal marketplace. And they’ll do it more affordably and with better quality controls that law firms can offer. Some firms might evolve to fill this role, but if they do, we’ll barely recognize them when compared to their ancestors. Legal information and systems companies like Thomson or Lexis might fit the bill; so might LPOs; so might completely new businesses financed through the Legal Services Act.

That’s why law firms need to understand their own economic purpose, what role they really serve in the market. If, as I’ve argued, it’s to be an effective organizer of legal resources, then they need to get much, much better at identifying, organizing, and efficiently managing those resources, inside and (especially) outside their walls. That’s the role — quarterback, manager, general contractor, call it what you like — that’s up for grabs right now, and it’s the only one that really matters. That’s the point of a law firm.

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

A changing of the guard

Legal historians might look back at the spring of 2011 and judge it the time when the old law firm model began to pass away and a new one began to take its place. Specifically, they might contrast last month’s dissolution of Washington-based global firm Howrey LLP with today’s announcement by 300-lawyer Irwin Mitchell LLP (the first by a major UK firm) that it intends to convert to an Alternative Business Structure under the Legal Services Act.

Personally, I was sorry to see Howrey go, especially since I’ve written about several worthwhile initiatives the firm undertook these last few years, including Howrey University, merit-based associate compensation, and joining the short-lived associate apprenticeship trend. Whatever else it did wrong, Howrey did or tried to do a number of things right.

But the process by which it sank deserves further examination. Most of the Howrey post-mortems identified some common causes of Howrey’s fate: too-rapid international expansion, an increasing numbers of conflicts, an over-reliance on contingency litigation that suffocated cash flow, low-cost non-lawyer competition for process work, and eventually, a growing loss of confidence in leadership. Some of that holds up, and some of it doesn’t. But if it sounds to you like these factors are not unique to Howrey, but in fact could be shared by a number of other law firms, you’re right.

Yet an even more important factor, also shared by several other firms, lurks behind the collapse: a culture too weak to withstand all these pressures. An article about Howrey in CPA Global’s New Legal Review included this observation from legal consultant Brad Blickstein: [T]his firm had been on the cutting edge for a long time. Attorneys, however, do not tend to embrace change. For a firm to be “non-traditional”, its attorneys have to believe. The firm grew so quickly through the merger that many partners did not grow up in this culture. When times got rough, they did not have the fortitude or desire to continue being non-traditional.

Writing in the Washington Post, Steven Pearlstein drew a similar conclusion: Howrey … was not a strong partnership. Over the past 20 years, it had more than tripled in size by luring away lawyers from other firms and setting them up in offices that had little traffic with each other, or with the lawyers back in Washington. For the most part, these were lawyers willing to switch firms because of the prospect of earning more money and attracting more clients, and for many years, it worked out just that way. But then, suddenly, it didn’t, for one year and then a second, without any clear indication of when or whether things would finally turn around. And it was then, by last autumn, that it began to be clear that the personal roots were not deep enough, the bonds of loyalty not strong enough, to hold Howrey together.

There’s more Howrey in many law firms today than those firms would like to admit. Firms built primarily (if not entirely) on the foundation of partner profitability shake and totter whenever that foundation is threatened. Think back to the financial meltdown and to the massive associate and staff firings that followed: they were done solely to preserve profitability levels and prevent the kind of crisis of confidence and partner desertions that marked the beginning of Howrey’s end. If there’s nothing keeping partners within your walls beyond their annual draw — and that’s the dominant modern law firm model — then a Howrey-style disaster is always going to be one string of bad results away. That’s a risky and stressful way for a law firm to live.

At the same time, from England & Wales, comes the first sign of a different approach. Here are some excerpts from the news that Irwin Mitchell, a full-service firm with an affinity for personal injury work, has retained an investment bank to guide it through the ABS process:

All options are up for consideration, with the aim being to raise a war chest to fund future growth. Managing partner John Pickering said: “Conversion to an ABS will broaden our access to capital and enhance our funding flexibility as we execute our strategic growth plan, while ensuring that we can continue to provide the very highest standards of service to our clients. … The Legal Services Act will create exciting growth opportunities for strong, well-financed legal services businesses to accelerate their growth plans. Irwin Mitchell intends to be at the forefront of these changes and we have therefore taken the decision to seek external investment to further our ambitious plans for the business.” …

In preparation for the conversion, Irwin Mitchell is to restructure into a two-tier business, with the creation of a corporate vehicle. The firm will continue to operate as a limited liability partnership (LLP) and the new holding company is intended to become the controlling member of the LLP. Irwin Mitchell has a strong personal injury base and in recent years has invested in its affinity business to build up branded consumer-focused products. This has been part of a long-term strategy to build up a series of branded goods that could be offered to the consumer market. In March last year, the firm signed a deal with the Daily Telegraph that enabled it to offer legal services to the national newspaper’s readers.

I noted last week that law firms, as compared to non-lawyer legal businesses, likely will have a tougher time attracting equity investment (for an excellent illustration why, check out John Wallbillich’s fictional law firm IPO). So it might be that Irwin Mitchell will fail to find a backer to its liking.

But it’s clear that the firm has been preparing for this move for quite some time, carving out a commoditized services section on its website. At a time when small-firm franchisor Quality Solicitors is about to open legal service kiosks in British bookstores, consumer and small-business legal work seems to be leading the revolution. More interestingly, recall that the world’s first law firm to acquire outside investment, Australia’s Slater & Gordon, was also a personal injury firm that floated shares on the stock exchange and proceeded to go on a massive and profitable law firm buying spree.

But most interesting of all might be a common reaction, in reader comments and Twitter posts, that a public offering or other equity investment in Irwin Mitchell will quickly result in a number of senior partners cashing out and leaving everyone else behind. “ABS is just money for old men. Prepare for the senior associate exodus,” says one commenter at The Lawyer. Steven Harper echoes that thought: Many of those in big law who already take a short-term economic view of their institutions would leap at the opportunity for a one-time payday that discounted future cash flows to today’s dollar. In fact, a big lump sum will tempt every equity partner who worries about next year’s annual review.

But I wonder whether for some firms, that would be less a fatal flaw than simply part of the plan. It’s possible Irwin Mitchell may have decided that what it offers is more important than who offers it. It may have decided that in the future legal marketplace, lawyer-critical work — major assignments that only a very few lawyers are trusted to handle — is a diminishing asset, whereas ordinary-course-of-business and commodity work is set to grow rapidly.

It may, in fact, have recognized the problem common to law firms everywhere — that rainmakers and other heavyweights exercise an unhealthy degree of influence over a firm’s fortunes — and responded with a strategy that lessens the risk and impact of that problem. It may envision a law firm model where the firm’s overall profitability, not each partner’s individual profitability, is the driving force. A firm like this might be only too happy to see some partners cash out, because the firm has bigger plans than simply being that partner’s most convenient current platform for generating profit and can do without the risk of his or her abrupt departure.

It’s still very early days, of course. But it’s possible we’re seeing the sun start to set on one law firm model and start to rise on another. Howrey illustrates that the fundamental purpose of the traditional law firm — to maximize profit annually for its partners — damages and can fatally undermine its culture, and is unacceptably prone to the risk that panicking partners will make a run on the bank and leave. Irwin Mitchell suggests that an alternative model — deliver legal services systematically, efficiently and effectively to generate a reliable firm-wide profit, minus the risk that partner defections could sink the whole enterprise — might catch the attention of both the purchasers and funders of legal service businesses. If both of these are true, then we might currently be watching a changing of the guard.

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

Not wanted on the voyage

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

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

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

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

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

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

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

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

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

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

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

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

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

The stratified legal market and its implications

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

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

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

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

1. Mission-critical.

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

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

2. Ordinary course of business

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

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

3. Commodity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mergers or acquisitions?

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

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

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

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

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

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

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

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

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

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

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

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

Are you selling the lawyer or the firm?

From England and Wales, the newest hotbed of innovation in the current legal marketplace, comes word that the first nationwide solicitor franchise is on its way. Legal Futures reports that Face2Face Solicitors “is initially aimed at small private client law firms and will provide franchisee solicitors with centralized back-office systems – including accounts, IT and regulatory compliance – and central marketing and business development, to enable them to focus on the legal work.” Face2Face would seem to fit the Alternative Business Structures model very well, and in fact, the company plans to register as an ABS when the starting gun sounds October 6.

Face2Face is compared to and contrasted with another British operation, Quality Solicitors, which has been around for longer. Quality Solicitors is a network of about 200 independent law firms across the UK, ranging in size from solos to firms with more than 40 partners. Face2Face characterizes QS’s business model as one that rebrands existing firms, whereas its own model is “targeting start-ups, breakaways and firms looking to be ‘reconstructed,’ especially if there is a need to consider succession/exit.” In practice, the two models probably won’t come across much differently to clients; in both cases, they’ll see a small law firm with a franchised brand and the promises that come with it.

The UK, of course, is also home to the still-mythical “Tesco Law,” the widely mooted example of what the ABS provisions of the Legal Services Act would enable: legal services sold by supermarkets. This too would be a franchise operation, albeit with the franchised firms operating inside the mega-stores rather than in downtown or suburban storefronts. Canada has something similar with the “President’s Choice” line of banking and insurance services offered through Loblaw’s or the Great Canadian Superstore supermarket chains. (I enjoy telling US audiences that the Tesco Law equivalent in Canada would be “Loblaw’s Law”).

President’s Choice aside, however, the idea of franchise law firms hasn’t taken off in North America. I still remember the launch, back in the mid-1990s, of First American Law (not to be confused with First American Title Insurance or the First American Law Center), which planned to build a fleet of small branded firms across the US and Canada. Perhaps because it was ahead of its time, FAL didn’t take. The idea hasn’t gone away, though: Richard Granat recently floated the idea that LegalZoom might get into the same kind of business, supporting small firms with a brand and a back-office processing center.

The common thread in all these companies and concepts is this: a series of small firms, from solos up to about five lawyers but conceivably larger, operating independently but under a single brand name and supported by centralized web-based back-office support and marketing functions, serving consumers and some small businesses in heavy-traffic areas of law like family, real estate, wills, and business law. Because the work is what lawyers like to call “commoditized,” the brand becomes extremely important. Among the promises that QS firms make to their clients, for instance, are “no hidden costs,” “direct lawyer contact,” “same day response” and “the first consultation free.”

That’s one vision of the future. At the opposite end of the spectrum lie the global giants, and they’re taking a much different approach. Most of these firms dread the “commodity work” label and strive to serve a high-end market of major corporate clients with complex, challenging, high-stakes work that engages lawyers intellectually and rewards them stunningly. And while smaller firms are turning to a faceless brand to give them an edge, the larger firms are counting on faces, very specific ones, as their salvation.

The Wall Street Journal‘s recent report on lateral hiring trends was one of a growing number of accounts of law firms raiding rival firms for superstar partners with large books of business. These laterals don’t come cheap: many new arrivals expect compensation up to ten times heftier than what some of their new colleagues are earning. The compensation gap is to be expected, of course: just as LeBron James is paid a lot of money because he’s expected to fill a lot of seats, laterals are expected to earn their keep and more. But it’s still interesting to hear DLA Piper chairman Frank Burch explain the rationale behind lateral hires: “We are focused on making big, strategic hires, who can allow us to achieve greater stature and visibility in the business community.” That’s not a productivity argument; that’s a marketing argument, a profile-augmentation rationale.

None of this is new, of course: smaller firms that sell what everyone else is selling need to find a market differentiator (hence the interest in brands), while large firms want to sell services of a type or quality that no one else is selling and make that the differentiator. The question, at this stage, is which of these approaches makes more sense in the marketplace of the near future? It seems to me that going forward, the branded commodity approach actually has more upside.

I was speaking at a retreat for an AmLaw 100 firm last summer, and one of the lawyers asked me about what the future held for both “commodity” work and “bet-the-company” work. My response was that virtually every law firm mid-size and higher insists that it wants to pursue the latter kind of work, that that’s what it wants to be known for in the market. The problem, I said, is that there’s actually relatively little work of that kind available — companies don’t bet themselves every day — and thousands of law firms are all chasing it. Compare that to the “commodity” work: there’s tons of it out there and hardly anyone wants to provide it (indeed, judging from the number of self-represented consumer clients, there’s a massive shortage of supply). Which of these two areas looks more promising from a business development perspective?

The high end of the legal market is over-served and the low end is under-served, and there’s two reasons for that. One is that many lawyers don’t find the low-end work “challenging” enough (to which I say, find me a high-paid M&A superstar who can last a week in family court without breaking down). The other, of course, is that the low-end doesn’t pay enough. But I’ve written before about how it doesn’t matter how much the client pays, it matters how much profit you make after the costs you incur are subtracted from the price you charge.

National branded legal franchises look like an excellent way to accomplish the goal of providing more with less to this market. Let us do the things you hate, the franchisors tell lawyers, like marketing and branding and administration and whatnot. You do the things you love, like practise law and serve clients. Our efficiencies reduce your costs, so you can price competitively yet still keep more of what you charge (with a slice to us, of course). As more and more legal tasks pass through Richard Susskind’s five declining stages of work, from bespoke to commodity, the “low-end” “commoditized” share of the market is going to grow. Firms that took a more enlightened approach to this sector should reap the rewards.

And the big firms, the global giants? They have plenty of marketing and branding firepower, without question, and they’re awfully good at what they do. But they’re also susceptible to the weakness inherent in the traditional law firm model: your assets walk out the door every night, and you need to pray they come back the next morning or else you don’t have a business. The Lawyer reported this month on a survey of nearly 2,000 partner moves in London from 2005-2010 that found almost half of those hires left their new firm within five years, and up to a third left after three. Do you think those acquisitions were good investments of those firms’ time, money and effort?

As legal work drifts towards commoditization, lawyers drift towards fungibility. All five partners in your branded storefront franchise walked out today? You can probably find five other lawyers with very similar skill sets to replace them — and in this economy, you can probably do so fairly quickly. But brand names and logos — they don’t leave. Now suppose that all five partners in your large firm’s biotechnology practice group walk out the door; you have a much bigger problem. A wise manager once said that if he discovers he has an irreplaceable employee, his mission become making that employee replaceable. Large firms that boast about the irreplaceability of their top earners perhaps don’t realize the double-edged nature of that particular sword.

The oldest axiom in the legal business is that clients buy the lawyer, not the firm. This is true and always will be true, insofar as the lawyer brings something unique to the table: extraordinary skills, outstanding personality, or perhaps most importantly, the ability to craft and perfect a trusted relationship. But absent those conditions — and those conditions, I expect, will become increasingly rare — and with bespoke legal work diminishing, clients’ buying criteria are going to expand to emphasize factors like price, accessibility and reliability. When you’re sliding towards those criteria, you’re walking into territory where national brands have developed a very strong home-field advantage.

Are you selling clients your lawyers or your firm? Think carefully about the ramifications of your answer, now and down the road, because clients are starting to ask themselves the same question.

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

Canada’s Big Bang

Earlier this fall, I gave a presentation to a Canadian law society that described the key trends in the current legal marketplace and forecast where they’re likely to lead in future. As part of the presentation, we discussed a series of hypothetical future developments that would require the profession’s regulators to respond. One of them went like this:

A new legal services company, GlobalLaw Inc., has risen suddenly and dramatically. Based in London, it has taken advantage of the non-lawyer equity provisions of the Legal Services Act to collect massive amounts of capital from investment banks. With this money, GlobalLaw has bought law firms and hired lawyers worldwide, created a huge and sophisticated online service infrastructure, and marketed itself aggressively in multiple jurisdictions. GlobalLaw has now announced plans to buy mid-sized firms in Vancouver, Calgary, Toronto and Montreal simultaneously, and to re-brand and operate them all as GlobalLaw offices. What do you do?

That scenario stopped being hypothetical yesterday, with the bombshell announcement by UK-based global law firm Norton Rose that it was merging with South Africa’s Deneys Reitz and Canada’s Ogilvy Renault. You can read the details in any number of places, including The American Lawyer, LegalWeek, the WSJ Law Blog, the Financial Post, and The Globe & Mail — a range of international coverage that underlines the fact that this, as Joe Biden might say, is a big freakin’ deal.

Norton Rose started the day with close to 2,000 lawyers in 31 cities on three continents, whereas Deneys and Ogilvy together total about 600 attorneys in eight cities, so this looks more like strategic acquisitions as part of a global expansion than a merger of near-equals. I can’t speak to the South African side of this deal, and I’m not even that interested in the logic of the moves from the firms’ respective strategic perspectives (though it sure looks sound to me). What I’m most interested in today is the impact of this development on Canada’s legal marketplace, which I think will be extraordinary.

Some context is necessary, especially if you’re not from around these parts: nothing like this has happened in the Canadian legal marketplace before. Baker & McKenzie was the first “global” firm to come to Canada, but its Toronto office opened in 1962, virtually the Mesozoic Era in law firm history. In 1999, Tory Tory DesLauriers & Binnington consummated Canada’s first (and to date only) cross-border merger with New York’s Haythe & Curley, a union that took something of a star-crossed turn for both firms. In 2008, pulses quickened briefly on a report, immediately denied by all parties, that DLA Piper was in talks with national giant Fasken Martineau DuMoulin. And that’s pretty much the entire notable history of foreign forays into the Canadian legal market, until yesterday.

So you can understand why much of Canada’s legal profession looked like a poleaxed mule when this news broke. Before yesterday, the largest law firm in Canada was Borden Ladner Gervais with 753 lawyers; with this merger, Norton Rose will have more than three times that number. The Canadian firm with the most overseas offices was Macleod Dixon with four, followed by Faskens with three; Norton Rose will soon have nearly 35 offices outside Canada. This is like Gulliver buying a house in Lilliput; or, to borrow a metaphor from the US-Canada relationship, like the elephant moving in next to the mice. This is the world arriving on your doorstep without calling ahead — all the talk about globalization suddenly turned into the reality of a legal behemoth setting up shop down the street.

Norton Rose OR (as the new firm will be officially known) seems likely to affect the Canadian marketplace in a number of ways. Obviously, with a critical mass of lawyers in cities across Europe, Asia, the Middle East and Australasia, Norton Rose will be a serious contender to pick up Canadian multinational clients (or the Canadian work of multinationals with head offices elsewhere). That platform will be equally attractive to potential lateral hires at other Canadian firms who’ll want to know whether there are wider horizons than those they’re currently flying. Aside from possible client and partner losses, incumbent Canadian firms will also be faced with new management pressures: as the Legal Post‘s Mitch Kowalksi points out, Norton Rose brings unprecedented financial transparency (the firm makes its annual report public) as well as superior knowledge management and online services to Canada. All of this changes the competitive calculus of a law firm marketplace that traditionally has behaved more like a cozy fraternity of genteel rivals.

I can see two other Canadian impacts flowing from this merger. The first is the fact that a precedent for global mergers has now been set, and precedent is both a reassuring and a galvanizing strategic force: nothing motivates a law firm more than removing the fear of going first while simultaneously creating the fear of going last. Will we see a stampede of Canadian firms rushing into global mergers? Not likely. But a lot of executive committees will meet to talk about what this merger means for them and whether there are similar overseas opportunities that their firms must now consider. There’s been a sense here that there are too many large firms in Canada for a population and a capital base this size: the Potash Corporation of Saskatchewan notwithstanding, this country is not and isn’t likely to become the world’s corporate headquarters. Some people think that if the law of conflicts of interest were loosened, a wave of national mergers would soon follow. This is a marketplace more than ready for change and consolidation.

But here’s something else to think about: Norton Rose is on a major expansion tear. Last June, the firm made headlines when it merged with Australia’s well-regarded Deacons. Deneys Reitz itself was Chambers’ African Law Firm of the Year in 2006 and maintains a strong commercial law presence in the continent’s biggest economy. (It’s beyond debate that Norton Rose must be looking very hard at potential US merger partners as we speak.) Ogilvy Renault is not a “national” firm as we understand the term — it has little presence west of Toronto (though its Calgary office, opened last year, has grown to eight lawyers), and it still houses more lawyers in Quebec’s capital (Quebec City) than in Canada’s (Ottawa). But it represents global companies like Bombardier, SNC Lavalin and Royal Bank of Canada, and is widely considered a “blue chip” firm within the Canadian profession.

All of which is to say, each of these three firms brought serious credentials to the table, yet each agreed to give up their names and identities to join another firm. So we’re learning that global platform matters, and global capacity matters, and maybe above all, global brand matters — we might very well be on our way to the Legal Transformation Project‘s suggested outcome of a future filled with megafirms and boutiques.

But we might also keep this in mind: the Alternative Business Structure (ABS) provisions of the UK’s Legal Services Act come into effect next fall, and any law firm aiming to be a global powerhouse would want to consider all available options to finance and pursue such a strategy. And I do know this: any global law firm with an office in Canada and with access to global private capital would turn this country’s legal profession upside down, from acquiring talent to investing in online infrastructure to marketing its brand to forcing law societies across Canada to look hard at regulations surrounding non-lawyer investment in or ownership of law firms.

This is all extremely early days yet, and the merger won’t even take effect until next June. But my feeling is that something very big happened in this country’s legal profession yesterday. The sudden deregulation of financial markets in England on October 27, 1986, has come to be called the “Big Bang,” and the coming introduction of ABSs in England & Wales on October 6, 2011, has already been anointed as the legal profession’s own explosion. Well, that was one very loud sound we heard across Canada on November 15, 2010.