Destroying your own business

Well before Blockbuster Video actually filed for bankruptcy protection earlier this fall, The Onion produced a prescient video about a museum tour based on the movie rental chain: Historic ‘Blockbuster’ Store Offers Glimpse Of How Movies Were Rented In The Past. One dazzled visitor remarks: “It’s like stepping into a time machine … it’s hard to believe people used to live this way.” The whole feature is well worth the two minutes, but the sting comes at the end, as the anchor adds: “Blockbuster joins a growing number of historical sites, including Buffalo, New York’s re-creation of a Virgin Records music store and Iowa City’s Borders Bookstore Museum.”

The only thing more striking than the dismantling of these former powerhouse franchises is the speed at which they’re coming apart. Blockbuster, Virgin and Borders were corporate giants with global reach and massive brand strength. Yet today, when you think of videos, music and books, you first think of Netflix, iTunes and Amazon, companies that launched in 2001, 1999 and 1995, respectively. How did the mighty fall so swiftly?

James Surowiecki asks that very question in a recent New Yorker column, citing not just Blockbuster but other former “category killers” like Home Depot, Toys R Us, and Circuit City, companies that dominated the “big-box” developments that spread like wildfire throughout suburbia over the last few decades. These stores were also giants in their day, but today each is either struggling badly in the new economy or has already sunk beneath the waves. Surowiecki puts his finger on the problem in three paragraphs that every law firm leader should read and take to heart:

The problem — in Blockbuster’s case, at least — was that the very features that people thought were strengths turned out to be weaknesses. Blockbuster’s huge investment, both literally and psychologically, in traditional stores made it slow to recognize the Web’s importance: in 2002, it was still calling the Net a “niche” market. And it wasn’t just the Net. Blockbuster was late on everything — online rentals, Redbox-style kiosks, streaming video.

There was a time when customers had few alternatives, so they tolerated the chain’s limited stock, exorbitant late fees … and absence of good advice about what to watch. But, once Netflix came along, it became clear that you could have tremendous variety, keep movies as long as you liked, and, thanks to the Netflix recommendation engine, actually get some serviceable advice. (Places like Netflix and Amazon have demonstrated the great irony that computer algorithms can provide a more personalized and engaging customer experience than many physical stores.) …

Why didn’t Blockbuster evolve more quickly? In part, it was because of what you could call the “internal constituency” problem: the company was full of people who had been there when bricks-and-mortar stores were hugely profitable, and who couldn’t believe that those days were gone for good. Blockbuster treated its thousands of stores as if they were a protective moat, when in fact they were the business equivalent of the Maginot Line.

What happened to Blockbuster and Virgin and Circuit City is now starting to happen to law firms, for all the same reasons. Firms have invested heavily in legacy costs like long-term leases of downtown offices with rich interiors, and have resolutely refused to take the internet seriously as a service delivery vehicle. They have thrived from the absence of client choice, but will suffer as new competitors offer more options and, ironically, more personalized service. Firms aren’t evolving because they can’t evolve: the lawyers within these firms are so invested financially and emotionally in the old structure that they can’t believe things could change.

It’s difficult to see how the outcome for our profession will be any different, because like Blockbuster, we aren’t even trying to adapt. Almost all the innovation in the legal marketplace is now taking place outside of law firms or on their periphery. Contract lawyers work from home, legal process outsourcers work from Mumbai or Manila, LegalZoom works entirely on the internet — these entities are the drivers of change today. The happy result for clients is a fractured marketplace in which they’ll have their choice of which providers to provide which services in which priority.

If you want to see what the client of the future looks like, in fact, take a good look at Colt Technology Services, a UK-based Europe-wide IT company profiled this week in The Lawyer. Colt’s GC uses a combination of providers, including law firms, an offshore captive operation, contract lawyers, and Berwin Leighton Paisner’s revolutionary Lawyers On Demand service, to meet his company’s legal needs. This is an established client trend towards using a portfolio of legal providers, and law firms should be aware of it by now.

But what really concerns me is this: where is the strategic response from law firms to the revolution outside their gates? Where are the signs that firms recognize the existential threats to their marketplace position and are reacting accordingly?

Here’s an example: last month, Bloomberg BusinessWeek published a cover story about Diapers.com, a sort of Amazon.com for baby and infant products that looked to be the next evolution in online shopping. Its founders were quoted in the article as saying they’d welcome a price war with Amazon, and the article was in fact titled “What Amazon Fears Most.” This week, Amazon announced it had bought out Diapers.com for a truly stunning $545 million. That is how you handle upstart competition that threatens your market position.

So what are law firms, facing the same kind of threat, doing these days? Merging with each other, of course: mergers within the United States, within Canada and across the Atlantic, with more surely to come. Same old response, same old thinking. Where are the law firms buying out LPOs and bringing them in-house? Where are the law firms adapting the online delivery methods of startups? Where are the law firms that recognize the peril of their position and are moving to thwart, or to transform themselves into, their smaller, swifter, hungrier new rivals? They’re nowhere to be found, and that’s why the future of law firms looks a lot more like Blockbuster than Netflix.

Surowiecki concludes his article with an observation that readers of The Innovator’s Dilemma will find familiar: “Sometimes you have to destroy your business to save it.” Law firms, unfortunately for them, don’t come with self-destruct buttons.

The platform is changing

Seth Godin calls it the WordPerfect Axiom, and he’s exactly right: When the platform changes, the leaders change.

WordPerfect had a virtual monopoly on word processing in big firms that used DOS. Then Windows arrived and the folks at WordPerfect didn’t feel the need to hurry in porting themselves to the new platform. They had achieved lock-in after all, and why support Microsoft. In less than a year, they were toast.

When the game machine platform of choice switches from Sony to xBox to Nintendo, etc., the list of bestelling games change and new companies become dominant. When the platform for music shifted from record stores to iTunes, the power shifted too, and many labels were crushed.

Again and again the same rules apply. In fact, they always do. When the platform changes, the deck gets shuffled. …  Insiders become outsiders and new opportunities abound.

This is happening, right now, in the legal services marketplace. The platform for legal service delivery is changing, and if you’re standing on it — and most lawyers are — you’re going to find it very difficult to keep your balance.  The platform used to be the traditional, top-down, hourly-billing, pyramidic law firm, where lawyers set the parameters for where, how, and at what price their services would be made available. Other potential platforms were either underfunded, impractical, or unauthorized. The legal profession as we know it today grew up secure and well-fed on this platform and has flourished as a result. Now, a platform shift is occurring.

We’ve already felt some tremors; now the full-scale quakes are arriving. Howrey LLP is preparing to cut 10% of its partnership after experiencing a 35% drop in equity partner profits. Clifford Chance has changed its governance structure allowing it to do the same thing. A major report from Hildebrandt and Citibank warned that more de-equitizations are coming this year because there’s nothing else left for firms to cut. Respected New York IP boutique Darby & Darby disappeared without warning (and, if you believe the accounts at Above The Law, it went out poorly). Corporate law departments are pulling work back in-house, spending less on outside counsel and turning to alternative fee arrangements. Law firms across the United States are cutting back radically on law student and new lawyer hiring (sample stat: median summer offers per firm dropped from 30 in 2008 to 8 in 2010). And looming over everything is the prospect, now little more than a year away in England & Wales, of full-scale non-lawyer equity ownership of law firms.

We can’t blame this on the recession anymore — what we’re seeing is more fundamental than that. The traditional platform for legal service delivery is giving way, overburdened by its own inefficiencies, inflexibility, and market-unfriendliness. In its place is emerging a new platform — the internet. And on that platform is springing up a multitude of new models by which clients can purchase the legal services they want, whether through virtual or distributed law firms with minimal overhead, advanced software for the completion of simple documents or the facilitation of basic transactions, process-savvy lawyers in other countries or quasi-lawyers in our own jurisdictions, and other platforms yet to emerge that we can’t currently envision. The common thread is client customization: the type, quality, and timeliness of service you want at the price you’re prepared to pay. Law firms will emerge and compete on these bases as well, but they’ll be far from the only game in town.

It’s a revolution, and like all revolutions, the benefits will lag behind the costs. It’s going to be messy and even ugly for awhile — platform shifts are neither neat nor bloodless. Think back to the hassles we all went through with Word-to-WordPerfect conversions while the two programs battled it out. Remember the upheaval in the auto industry as electricity began to shove oil off its fuel platform and the damage that caused to gigantic automakers saddled with suddenly unsellable gas-guzzlers. Think of the carnage in the record and newspaper industries as the internet took away their platforms and rewrote the rules of their games. It may take longer, it may not be as brutal, and it may not generate as much attention in the wider world, but the legal services marketplace is starting to go through something very similar. And there will be casualties.

It’s ironic that Seth chose WordPerfect for his lead example — the legal profession was one of the very last professional groups to abandon WP for the now-ubiquitous Word. Many lawyers to this day insist that WordPerfect was the better program, but when the platform changed for good, even lawyers eventually had to switch. The parallels are close enough to be striking and extremely uncomfortable.

When the platform changes, outsiders replace insiders and opportunities abound. Get ready.

The boutique exodus

I was talking the other day with a partner in a large national firm. For a variety of reasons, including the nature of his practice area, his annual billings have been declining for a couple of years now, and he’s been contacted about it by some of the senior people in the firm. He’s been tempted, from time to time, to respond to their concerns by saying: “Have you ever noticed that every year, you raise my billing rates, and every year, I bill fewer hours?”

That neatly encapsulates what I think is a real and dangerous trend at a lot of the bigger law firms: week by week, rate increase by rate increase, they’re pricing themselves out of the market. The profit imperative is so strong at these firms, and the level of economic sophistication often so low, that rate increases are ordered up regardless of whether the clients want them, can afford them, or are screaming bloody murder about them. To the extent a firm thinks about its clients when raising rates, it often wagers that they have relatively limited options — they need to get the work done and they want it done by lawyers they trust — and that they aren’t prepared to make a radical and onerous move like switching firms (especially since almost all big firms operate the same and bill the same anyway). That gamble has paid off handsomely over the years, and so the firms have had little incentive to change their approach.

What’s happening now, however, is that the clients and their lawyers are teaming up and doing an end run around the firms. There’s been a barrage of reports over the past few months about lawyers abandoning big firms to set up smaller boutique practices, taking clients with them, and thriving in the result. It’s a four-step process: client tells lawyer it can’t afford her rates anymore. Lawyer tells client she doesn’t control her rates and doesn’t want to lose the client. Light bulbs appear simultaneously over their heads. And a few months later, a new small firm is born, with at least one A-list client on its roster. Continue Reading

The lamp and the laser

When you set up a home office, as I’ve recently been doing, you begin to notice lighting in a way you hadn’t before. It quickly becomes apparent that fixed overhead lights and large floor lamps, no matter how bright they might be, don’t illuminate desks and laptops very well. For close-range work, helping you navigate the nooks and crannies of keyboards and file folders, you need more focused lighting — portable, flexible, easily angled, with small super-bright halogen rather than rounded regular bulbs. These light sources are smaller and carry less wattage than the big lights and lamps — but they serve a specific need much better, and many of our illumination needs these days are pretty specific.

I used this analogy — high-wattage lamps that cast vast amounts of light in a wide circle, contrasted with smaller, sharper, focused sources that put only the light you need exactly where you need it — in a recent discussion about the future size of law firms. My theory is that most things being equal, the future belongs to smaller firms and solos, because the large-firm model ultimately suffers from an over-reliance on volume and an inability to finely focus resources. Continue Reading

Law firms on demand

What if you could take a law firm, carve away all the parts of it you don’t like, and keep all the parts you did? What if, from the client perspective, you could get rid of high and rising prices, time-based bills, gratuitous overhead costs and unfamiliarity with your business? What if, from the lawyer perspective, you could do away with brutal billing targets, inflexible work schedules and long commutes into the downtown core? But what if in both cases, you could keep the high quality of talent and the brand-name assurance that comes with a respected legal services provider — what would that be like?

It’s an intriguing question, but not because of whether it would be feasible — it already is. Firms following this model are blossoming across North America and Europe. They offer corporate clients the services of lawyers with pedigreed credentials (large-firm and law-department experience) who will work from the client’s office or from home, for limited periods of time, at much lower rates than traditional law firms charge. The selling point for clients is the services of an excellent lawyer on the client’s terms, at a competitive price that excludes traditional firm overhead costs and revenue expectations; for lawyers, the challenge of high-end work on a short-term, flexible or even itinerant basis.

Maybe the best-known of this new breed of firms is Axiom Legal, which is closing in on the 300-lawyer mark, but there’s a growing collection of similar operations like Virtual Law Partners, FSB Corporate Counsel, Paragon Legal, Cognition LLP, Virtual Law [UK], The Rimon Law Group, and Keystone Law. They’re often called “virtual firms,” but that’s a little confusing, in light of the growing number of small cloud-based law practices. I prefer VLP’s self-description, a “distributed” law firm, or Keystone’s, “dispersed.” Concerns about these firms usually focus on the scope of their expertise, their value for money, and their KM and quality-control systems, all reasonable worries.  There doesn’t seem to be much question, however, that these firms are sustainable and are already legitimate players in the marketplace.

No, what’s really intriguing about these firms is the fact that they developed at all — that the traditional law firm has become sufficiently unpalatable to the people who retain it (and to some of the people who work inside it) that something new and different can flourish. Dispersed law firms directly challenge the traditional law firm model, presenting themselves as at least a complementary service to what traditional firms offer, and at most, a full-fledged alternative provider. These new firms question the fundamental nature of traditional firms, arguing that the physical concentration of legal talent in a high-priced centralized location with a rigid hierarchy and pyramidic revenue structure is outdated and self-serving. Flexible, project-based, techno-savvy, client-focused law firms are the way of the future, they contend: they’re more efficient, more accessible, and more rational. Continue Reading

Hands across the water

I don’t normally focus on very large law firms and mergers thereof, but I’ll make an exception for this one. As you might have heard, US-based Hogan & Hartson and UK-based Lovells have apparently reached an agreement to merge their respective firms by May 2010. The combined entity (Hogan Lovells, provisionally) would crack the top ten worldwide in terms of both number of lawyers (circa 2,500) and annual billings (north of $1.9 billion), would have a massive global reach (as many as 40 offices, including substantial presence in China, Hong Kong and Germany), and would represent a rare joining of roughly equal-sized firms that appear compatible in both practice and culture.

I won’t try to improve upon the analyses already provided by Bruce MacEwen, Alex Novarese and Aric Press, among others. But I will provide one quote from each to indicate that this is not your garden-variety merger announcement:

– Bruce: “This is potentially a transaction that will change a conspicuous portion of the BigLaw landscape globally.”

– Alex: This is “the first concrete evidence to back up the claims made for months by managing partners on both sides of the pond that the general mood is warming to transatlantic mergers.”

– Aric: This is “a sign that while the Magic Circle and most financially elite New York firms continue to insist on their independent futures, firms just one step behind can see a future where a combination is greater than the sum of their parts.”

And in its daily e-newsletter, The Lawyer put it this way: “[T]he consensus so far in the market is that this deal could genuinely see the creation of something not seen before. ‘At a stroke you’ll have a firm the size of [Allen & Overy], better quality than DLA Piper, broader in scope than Herbert Smith and far more international than anything in the current UK mid-market,’ is how one London consultant sums up the deal.” The arrival of anything truly new in the legal services marketplace is always noteworthy, but a Hogan/Lovells merger could have significance beyond whether the firm manages to become more than the sum of its parts (which at this point seems fairly likely).

For one thing, this firm could be really transatlantic, in ways previous cross-ocean expansions (cf. Clifford Chance and Rogers & Wells) were not: a mega-firm, created by a merger of equals, with a center of gravity somewhere between the two capitals rather than vying between them (Hogan & Hartson, with a strong government practice, is headquartered in Washington, D.C., such that traditional London-New York rivalries might not kick in.) Back in February, I forecast a true US-UK powerhouse emerging from the recession, although I thought the American entry would hail from the Big Apple, and I didn’t think it would happen quite so soon. If the experts are right, other cross-ocean mergers might follow and a real wave of consolidation could be at hand.

Secondly, it’s instructive to note the innovations that each side is bringing to the table. The Lawyer reported earlier this month that Lovells is preparing to abandon its lockstep partner compensation system in favour of Hogan’s pure merit-based approach. Merit-based compensation has tremendous momentum in large firms right now, and although no one’s denying the challenges of partner compensation facing a potential Hogan Lovells, this suggests that more complex systems for assessing lawyers’ productivity are at hand. At the same time, Lovells was one of the first law firms to publicly acknowledge it was outsourcing legal document review to India, back in December 2007. UK firms are substantially ahead of their US counterparts in offshoring, so the Hogan side of the deal is going to acquire direct experience with this phenomenon. So in at least two ways, this is going to be very much a 21st-century law firm.

But here’s the main reason why I think this deal could be a game-changer: about a year after the expected May 2010 date for the Hogan Lovells merger to be completed, key provisions of the Legal Services Act come into force, and UK law firms will be allowed to accept non-lawyer investment and ownership under Alternative Business Structures (ABS). What if a future Hogan Lovells decided to take advantage of those provisions? It doesn’t figure to be the kind of Magic Circle or white-shoe firm that most agree would disdain the entrepreneurial offerings of the LSA — in fact, it looks exactly like the sort of firm (fresh, ambitious, global, innovative and unencumbered) for which the non-lawyer equity investment provisions were designed. If this new firm — or any other powerhouse resulting from a US-UK merger in the near future — went down that road, extremely interesting things would start to happen.

Hogan Lovells would be both English and American — and not one of the 50 states allows non-lawyer ownership of even a fraction of a law firm. So if this new firm did in fact accept venture capital or investment-fund equity, or float shares on a stock exchange, it likely would be in immediate contravention of the ethics rules in all the states where it carries on business. Hogan & Hartson, by way of example, currently has offices in Maryland, Colorado, Texas, California, Florida, New York, Virginia and Pennsylvania, as well as the District of Columbia. The ensuing tangle, it seems to me, would rapidly bring to a head the burgeoning conflict between how UK firms and US firms are structured and governed. In a globalized legal profession, this conflict is inevitable — but this new firm, if it comes into existence and if it acquires an ABS under the Legal Services Act, could actualize that conflict much sooner than we  expect.

So keep a closer eye on this merger than you normally might. It could be just another instance of two large firms becoming an even larger firm, still struggling to make its way in a challenging marketplace. Or it might turn out to be the catalyst for unprecedented change in the profession worldwide.

Breaking the big firm

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The firms of the future

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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