The imaginary normal

The joke goes like this: “The optimist says the glass is half-full. The pessimist says it’s half-empty. The engineer says it’s twice the required capacity.”

So what does the lawyer say when looking at the glass? In many cases, it’s: “Why hasn’t anyone refilled my drink yet?”

I speak to more lawyers and legal professionals every day who really get it — who understand how much is changing and who are preparing to adjust and respond. I can’t tell you how encouraging that is to me.

But I’m still taken aback by the number of lawyers and legal professionals who cannot or will not recognize what’s happening — who look at the market and see only what they want to see, interpreting a storm of the century as merely a passing squall.

For many such lawyers, I’ve come to conclude, the underlying cause of that delusion is a sense of entitlement. They’re entitled to respect for their position, steady work from clients, protection from unqualified competition, privilege at the top of the pyramid, stability in an unstable world.

And why should they think different? It’s all they’ve ever known and it’s rewarded them handsomely, so of course they believe it’s the natural order of things. They believe it’s normal, and they’re waiting impatiently for it to return.

Here’s what I want them to understand: It’s not normal. It never was.

The legal market hasn’t really been a “market,” in classical terms, at all. It’s been artificially constrained for decades by asymmetric knowledge, inadequate technology, limited competition, undifferentiated providers, seller-driven pricing, and most damaging of all, the absence of disinterested regulators. Accordingly, buyers have long suffered from weak bargaining positions and low self-confidence. Why, when you stop and think about it, would we ever have supposed that was normal?

The legal profession has been living inside a bubble for decades. And like all bubbles, those on the inside thrived disproportionate to the overall benefits they were delivering, while resentment and frustration continually grew on the outside. And we had no clue, because we figured that was how it was meant to be.

But now that’s changing. Consumers are gaining more knowledge and more choice, giving them more power. The bubble is leaking. The traditional mechanics of healthy markets, by which sellers truly compete with each other to gain the business of well-informed buyers on the buyers’ terms, are reasserting themselves. A legal marketplace that has always been tilted in lawyers’ favour is rebalancing itself.

This isn’t a market going crazy. It’s a market going normal. And it’s not going back.

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.

 

Losing the quality wars

There are days when I feel optimistic that lawyers can rise to the challenges before us and take the lead in the new legal marketplace now emerging worldwide. And then there are days like today.

Three data points for you. The first from a friend who sent along this item from the 2010 ACC/Serengeti Managing Outside Counsel Survey:

Slightly more than 40% of in-house counsel believe that the value of the work performed by at least some of their outside counsel declined during 2010. About 55% of in-house counsel provided some specific suggestions to their outside lawyers as to how the quality of services could be improved.

The second, from an outstanding article by USC Law School’s Gillian Hadfield:

Surprisingly, the complaints I hear focus far more on the value of legal work than on the cost. This focus is surprising because during the last decade or so, the cost of legal services and procedures has soared. One recent industry survey concluded that law firm prices had increased 75 percent since 2000, far outstripping a 20 percent growth in non-law firm costs. … But the cost problem only sharpens the sting of complaints about value: Clients feel that they are paying more and more for legal work that helps them out less and less.

The third, from a LexisNexis Martindale-Hubbell survey (as reported by the AmLaw Daily) about law firm “efforts” to solicit and implement feedback from clients:

More than 70 percent of law firms responded that client feedback affects the way their lawyers conduct business … yet fewer than half (48 percent) formally solicit client critiques and just one-third communicate the feedback to lawyers. … Corporate counsel report that one of their biggest frustrations is giving feedback that is neither properly fed back to relevant parties in the firm, nor acted upon. … 56 percent of firms reported that their lawyers were either “ambivalent” or “not enthusiastic” about any attempts to actively communicate with clients.

Folks, it’s one thing to be defeated by superior forces with a better product or service. It’s another to lose before we begin because we couldn’t even be bothered to show up for the fight.

It should be clear enough by now that client work is segmenting into a small number of mission-critical matters and growing piles of ordinary and commoditized tasks. It also should be clear that highly efficient and systematic competitors from outside the profession have targeted those piles and are on a mission to own them. We are getting beaten up on both price and convenience because we don’t take either of these pillars of business success seriously. None of this, unfortunately, is new to lawyers.

But the one thing we could always fall back on, the foundation stone of our professional edifice, is that we deliver high-quality legal work when it counts. Competitors without our training, expertise and ethics might take away all that basic low-margin commodity work, what with their relentless focus on efficiency and customer service. But no computer, no paralegal, no foreign attorney will ever be able to replace the high-quality legal solutions we deliver to our clients. That belief lies at the heart of what I can only call our continued widespread complacency in the face of extraordinary market change.

And that’s fine. But if high-quality legal solutions are the foundation of our offering, then the three points listed above should strike fear. Because if we lose our clients on quality — if clients come to perceive, and a disturbing number already do, that the quality of lawyers’ services is declining and that we don’t seem to care — then we are in serious danger. Clients will always pay us whatever we charge for one thing: high-quality services that deliver verifiably high value. If that foundation crumbles — if our quality suffers and our value, already questionable, declines further — what do we think is going to happen next?

I want to see the legal profession win the coming battles for the lion’s share of the legal marketplace. But if it’s not asking too much, could we at least arrive at the battlefield on time and give it our best shot?

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 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.

The new price wars

Their World Series victory last fall wasn’t the only surprise the San Francisco Giants sprang on the baseball establishment. Throughout the 2010 season, the team engaged in “dynamic pricing,” changing the price of single-game tickets according to demand. The same seat for a Monday night yawnfest in May against the Washington Nationals, for example, would be priced well below a Friday night game down the stretch in September with the L.A. Dodgers. The new system, which reflects the ancient marketplace rule that demand drives price, produced a 6% revenue increase throughout the season and is expected to spread throughout not just MLB, but also the NBA and NHL in short order.

The Giants’ approach will sound familiar to anyone who grew up, as I did, in the era of “cheap night” at the movies, wherein ticket prices for Tuesday night showings were less than half those of other nights. The theaters, normally all but deserted on Tuesdays, were instead always full. Given that cinema owners make most of their money off concession sales, I imagine that “cheap Tuesdays” were immensely profitable. But as Malcolm Gladwell observed in The Tipping Point, theaters could actually go farther and change the price of individual movies according to their popularity, much as the Giants are doing with their game tickets: charge more for The King’s Speech and less (much less) for Yogi Bear.

There’s a reason why price tags are printed on cheap stickers, easily applied and frequently changed. Price is not carved in stone; it’s elastic, a function of supply and demand. This is true even in the law: it’s the rare lawyer who has never offered a discount on his or her hourly rate to win a client engagement. But rate discounts are about as radical as law firms have ever gotten with price. For most lawyers, fixing a price in advance of providing the service is anathema, and adjusting that fixed price according to a set of evolving criteria is farther beyond the pale again. But I think that’s about to change.

What got me thinking in this direction were reports this week that henceforth, DLA Piper (the newest holder of the “world’s biggest firm” title) was instituting minimum purchase levels for its clients. DLA’s US offices are said to be mandating an entry-level threshold of $200,000 a year for all new clients, while DLA International will set the amounts at €25,000 for new clients that don’t pose a potential conflict and €100,000 for those that do. The reasons, as explained in an excellent post by Financial Times GC Tim Bratton, are interesting: the firm wants lawyers to consider the firm’s strategic priorities more than their own; it wants to reduce the size of “conflict shadows” cast by smaller clients; and it wants to reduce the administrative cost of dealing with so many matters. Essentially, the firm wants many fewer, and much bigger, clients.

Some of my friends in the blawgosphere have called this a “cover charge,” but I don’t think that’s exactly the right analogy. A cover charge is an amount everyone pays at the entrance to ensure that no matter how little you spend upon entering, the proprietor will still turn a profit. DLA Piper, by contrast, is hiring a large, heavily muscled man to stand at the front door and admit only those customers who are guaranteed to spend enough to produce a profit. They’re pre-screening their clients for wealth, much as a legal aid clinic pre-screens its clients for poverty.

It might not win any points for populism, and there are serious implications for current and future partners. But as a strategic execution, as a profitability measure, and as a clear marketplace signal about which clients it desires, it’s brilliant: as Ron Friedmann notes, “it’s about making a conscious decision about your business, your costs, and your market position,” something few firms do. And in its own way, it’s an example of pricing innovation that other firms should follow.

I’ve written before about how the maxim “Don’t compete on price” has limited value in a highly competitive, price-sensitive market. Law didn’t use to be one of those markets; it is now, and some degree of price competition is becoming inevitable. But “competing on price” doesn’t have to mean getting involved in a downward-spiraling price war. As DLA Piper has demonstrated, you can compete on price upwards, setting floors rather than ceilings on how much you charge. For that matter, you can compete on price sideways, diagonally, and inside out through the fourth dimension if you like. You can make price a market differentiator simply by being creative and gutsy.

Examples are already abounding. Carolyn Elefant suggests that DLA Piper might effectively “offer $300,000 worth of service to clients who are willing to lock in and pre-pay the $200,000 minimum. Between the cash-flow benefit of receiving $200,000 up front and use of offshoring or second-tier contract lawyers in house, DLA Piper could still earn a decent profit, even while providing a ‘volume discount.” John Wallbillich at The Wired GC goes further: “What about a firm that does $1 million plus for a client not charging for telephone consultations with a defined number of client in-house counsel? Or provide access to part of a firm’s form files or knowledge management repository? How about a 3+ year associate on-site, gratis, for clients spending more than $5 million?”

Here are some more possibilities that law firms should mull over.

1. Charge like an airline. Some client matters are utterly routine, some are high priority, and some are absolutely urgent; but most lawyers tend to price solutions to each type of matter the same. Airlines thrive, even in a cutthroat marketplace, by charging you more for a ticket tomorrow than for one in three weeks’ time. What’s to stop a law firm from saying to client with an urgent problem: “To get this done tomorrow, we’ll need to drop everything else we’re doing and work on it for the next 24 hours; that’s a lost opportunity cost for us that will be reflected in a higher price.” Or conversely: “This is a low priority for you and can be done at a fairly leisurely pace by us; we’ll chop 30% off our regular price to reflect those facts.” Clients might not like the former treatment, but they’d understand it and probably accept it; they would love, and remember, the latter treatment.

2. Charge like a cellphone company. A dangerous comparison, to be sure, since many cellphone contracts epitomize the concept of gouging. But I mean this in the sense that many companies will discount the price of a cellphone itself, all the way up to 100%, if you subscribe to the connection service and payment plan. What would a law firm give a client for free in return for the guarantee of a fixed (and pre-paid) monthly fee over a two-year period? Maybe ten hours a month of a designated senior associate or junior partner’s time, no bills, no disbursements; maybe access to multi-jurisdictional regulatory compliance status updates; maybe an emergency “hot line” number that would put the client directly in touch with a responsible firm representative 24 hours a day. It would essentially be the freemium model applied to law.

3. Charge like a partner in a relationship. Seth Godin points out the cognitive dissonance by which many companies give their best rates to their worst customers: the difficult, the demanding, the frequent switchers. Similarly, their most loyal and enthusiastic customers are taken for granted and are charged accordingly. My Edge colleague Ed Wesemann has noted the same problem in law firms: discounts are offered to entice new business, but if the one-time client comes aboard and stays aboard, its rates soon go up and it’s relegated to the same “standard” treatment as the firm’s other “best” clients. Reward your best clients, give them discounts and freebies without being asked, simply to say thank you for being your relationship partner. As Seth puts it: make your best customers into your best marketers.

Lawyers resist change in many aspects of their work, but most of all in pricing: they try to pass all the risk of price miscalculation onto the client, a goal that the billable-hour system fulfills perfectly. Mature markets, however, allow (if not demand) more sophisticated pricing in which both the buyer and the seller accept some risk as a justifiable sacrifice to the greater goal of a stable, mutually beneficial relationship. DLA Piper is taking a risk with this new client minimum scheme, because it has both upside and downside: good for them, no matter how it works out.

Price is a conversation, not a command; it’s a journey rather than a destination. Lawyers with the wisdom to recognize that, and the courage to be flexible and creative in response, will emerge the winners from the new price wars that look poised to begin.

The new battlefield: convenience

Whatever happened to Napster? Depending on your age, you might remember it either as a piracy-enabling nuisance, a groundbreaking music-swapping service, or the dusty antecedent of iTunes. Time magazine caught up with Napster’s founder, Shawn Fanning, and three other pioneering hackers in a recent article that describes them as “The Men Who Changed The World.” Between 1997 and 2001, Fanning, Bram Cohen, Justin Frankel and Jon Lech Johansen invented Napster, BitTorrent, Gnutella, and a range of DVD encryption-cracking software. If you’re not familiar with all these programs, suffice to say that they effectively ended vendors’ longstanding control over the distribution of their content.

The title of the piece is meant to be a little ironic, because not only were these four not “pirates” in any persuasive definition of the term (they’re all now associated with legitimate enterprises), but they also failed to usher in an era of universal free content exchange — and they deny that that was ever their intent. What they really wanted, the article suggests, was for content to be “free” in the sense of “freedom” — that the purchasers of content should be able to do what they liked with that content once they’ve purchased it.

But the article also suggests that these four men laid the groundwork for what has become the first successful — spectacularly successful — application of online content distribution: iTunes. Steve Jobs’ masterstroke succeeds where the likes of Napster and LimeWire and Gnutella failed for a host of reasons, including Apple’s steely negotiating skills and marketplace leverage gained through the success of the iPod. But a major factor in Apple’s success lay in the simple, accessible, appealing design of its products: as I’ve written elsewhere, ease of use and pleasing design is the hallmark of all Apple products, and is what I think will propel Apple to the top spot in the future world of online applications. The article’s writer expresses that sentiment with a thought so simple and powerful that it merits its own paragraph:

It turns out that there is something that can compete with free: easy.

That should be a jarring thought for the legal profession, because the same thing is happening to us. No, we’re not being threatened by a Legal Napster that will allow clients to swap legal products they’ve already purchased (not yet, anyway). The threat we’re facing is convenience: the ability of a client to access legal services in an easy, frictionless, and user-friendly manner. Law firms are not convenient vehicles for the development and sale of legal services — well, they’re convenient for lawyers, but not for clients. Law firms of all sizes, from solos to globals, are set up to render legal services in as time-consuming, remote and painstaking a way as possible, partly because it’s profitable, and partly because we’ve never cared all that much about the legal consumer experience.

Well, now it’s game on, because convenience is the battleground where our innovative competitors are massing their troops. These competitors don’t have expensive partners and premises and marketing budgets, and they can’t bring the resources to bear on the market that lawyers can. So they’ve taken different approaches, and one of those is to offer services that are much easier and more convenient for clients. And it turns out that ease and convenience are incredibly important for consumers who are stressed for time, overloaded with options, and in dire need of accessible, personalized attention to help them make their law-related choices.

Convenience is a major part of what LegalZoom sells — check out the pricing structure for many of their products, and you’ll notice that they charge a premium for overnight drafting and delivery of documents. Convenience is a key aspect of contract-assembly services like WhichDraft and Kenneth Adams’ brand-new entry, Koncision. Convenience lies behind the appeal of Allen & Overy’s just-unveiled online tool to track banking compensation laws worldwide. Convenience for the client — making the process of accessing legal services as easy and painless as possible — is the new killer app for this marketplace.

This development is the latest example of a longstanding rule of business finally infiltrating the legal world. It’s called the Buying Hierarchy, and it was first developed by Windermere Associates as a way of explaining the process consumers go through when making their market choices. It’s widely known from its citation in The Innovator’s Dilemma and is summed up nicely here:

Most customers follow a four-phase buying pattern, with only the last phase being based on price. These phases are as follows:

Functionality: Where a product or service meets a certain need or does a certain thing that cannot be accomplished in any other manner.

Reliability: When two or more competitors offer similar products that have the same functionality, consumers turn to the competitor whose product offers the better reliability.

Convenience: When competitors have products or services that offer the same functionality and the same relative reliability, consumers turn to convenience – those products that are the most convenient to use and the companies that are the most convenient to work with.

Price: When competitors all have similar products or services that offer all the attributes above in very similar manners, then the product or service essentially becomes a commodity and at that point must compete on price (following the schools of thought outlined above).

The legal marketplace long ago passed through the first two stages: functionality is widespread (you can find more than one lawyer or law firm in almost any jurisdiction that can carry out a given legal task) and so is reliability (you can also find more than one lawyer or firm that can be trusted to do excellent, reliable work on your legal task). But for decades, our marketplace has been stuck at convenience, and the reason for that is the one David Maister identified years ago: lawyers don’t need to innovate on practice management or client service because lawyers only have to compete with other lawyers.

Why bother adding all sorts of bells and whistles to make life easier for clients when you know full well that no other firm will force you to do so? Why bother investing in online service delivery, or training your lawyers to be fully responsive to client input, or creating systems that allow clients to access their ongoing legal purchases at a time and in a place and in a manner that suits their needs, not the firm’s? Why bother with convenience, when inconvenience is part of both the mystique and the profitability of the profession?

The answer, of course, is that we’re no longer competing just with each other. We’re competing with a host of providers — human and technological, local and foreign, lawyers and everyone else — who don’t make the same assumptions we do and who aren’t all working from the same decades-old playbook. If your firm hasn’t yet grasped the significance of the world’s largest legal information company buying the world’s largest legal process outsourcing company, grasp it now.

The ground rules have changed, and the Buying Hierarchy is coming to the legal marketplace. Convenience matters. Accessibility matters. Making things easy for the client matters. That’s the real New Normal we’re facing, and I suggest we respond to it with a little more urgency than we’ve shown so far. Because once convenience falls, as the Hierarchy demonstrates, the next and final stop on the road is price.

Will-writing and the redefinition of “legal services”

Last month, a BBC investigative program called Panorama exposed a wide range of illegal and unethical practices by “will-writers,” advisors who help people prepare wills and who are not lawyers. One result of that broadcast could be a significant clawback of lawyer regulatory power over the legal services marketplace in the UK, with implications for the future of this marketplace globally.

Here are some detailed accounts of the Panorama broadcast and of the resulting controversy. Briefly: the program uncovered several instances of will-writers who exploited their clients through massive overcharging, shoddy workmanship, and even outright fraud. The abusive will-writers were neither lawyers nor (evidently) members in good standing of one of the professional will-writing associations that have evolved with the 2007 passage of the Legal Services Act. That statute divides legal services into “reserved legal activities,” which are exclusive to lawyers, and “legal activities,” which are not exclusive to lawyers and are not otherwise subject to specific regulation. Will-writing is not included in the former category and, therefore, is considered an unregulated activity.

In the wake of the broadcast and the public recriminations that accompanied it, the relevant authorities are now under pressure to take swift action. The Legal Services Board, the overarching regulator of all legal professionals in England & Wales, has promised to fast-track a debate and decision regarding whether will-writing should be added to the list of “reserved legal activities” and given exclusively to lawyers. (The Law Society of Scotland is already pushing such measures forward.) An interview with two officials from the Law Society of England & Wales sums up lawyers’ concerns with the current situation (which will be familiar to all advocates of lawyers’ role in legal services provision):

It is the presence of untrained and unregulated people working in the area that has led to a range of problems that can adversely affect consumers, Clarke and Roberts insist. “A lot of clients don’t understand making a will can be a complex process. They think it should be simple, but often it’s much more involved due to the presence of step-children, property and other assets in other countries and lots of other issues which are a part of modern life,” Roberts notes.

Unregulated will writers who lack legal training often fail to understand the legal complexities themselves. “One I know was going to make a will for a large estate which would have been involved, so he merely suggested everything be left to a trustee who could sort it all out as he saw fit. All solicitors are not infallible, but experienced solicitors will understand how to deal with complex estates and take account of all the eventualities so the testator’s wishes will be realised and the estate can be properly managed,” says Roberts.

You can see where all this is likely to lead: to the designation of will-writing as a reserved legal activity under the Legal Services Act. In one respect, it’s difficult to argue against this turn of events. The abuse of unsophisticated consumers, many of them elderly or impoverished, is repugnant and needs to be stopped in its tracks. Solicitors, as noted, aren’t perfect, but they come with a guarantee of education and training and they are backed by insurance funds that can reimburse clients who’ve been poorly served. Wills and estates, in many cases, are not cut-and-dried matters and they can require sophisticated advice, especially at a time of generational change when demand for estate law help will only rise.

Given all that, making will-writing a reserved legal activity seems like a no-brainer. And yet, there are good reasons for the Legal Services Board to proceed with caution here.

To begin with, it’s not entirely accurate to call will-writing an “unregulated activity.” Consumer protection laws are in force precisely to protect the buyers of commercial services that fall outside specific regulatory schemes; moreover, the last time I checked, fraud is still on the books in Britain as a criminal offence. Provisions already exist in Acts and regulations to protect people from the incompetent and unscrupulous and to prosecute such predators where necessary.

Secondly, the current absence of a specific regulatory system for will-writing doesn’t mean that the only alternatives are full lawyer control or unfettered market freedom. The Institute of Professional Willwriters, one of the recognized will-writing groups, will happily remind you that it is the only organization of its type whose Code of Practice has been approved by the Office of Fair Trading. Self-regulation by the will-writing industry down the road is not out of the question, nor is the creation of a specific will-writing regulatory scheme that doesn’t restrict this area of practice to lawyers.

Thirdly, access to justice issues arise whenever a decision is made to restrict an activity to the legal profession. Part of the reason for the huge upsurge in will-writing services in the UK is that less than half of Britons have a will; considering that lawyers have had every chance to exploit this latent market and have failed to do so, it’s hard to make the case that they should now have exclusive rights to this practice area (especially since lawyer regulation tends to drive up costs). The legal profession and the government jointly own responsibility for a failure to educate the public in this area, with the result that, for example, 67% of consumers wrongly believe all will-writers are solicitors.

Fourthly and most importantly, the whole question of what should constitute a “reserved legal activity” hasn’t received nearly enough scrutiny. That’s the conclusion of a just-released report sponsored by the Legal Services Board and written by Stephen Mayson, the widely respected director of the Legal Services Policy Institute. In his report,

Mayson said he had found the origins of the six activities currently reserved to be “remarkably obscure,” with “little basis for suggesting a common policy rationale that justifies their existence”. For example, he discovered that the conveyancing monopoly came about in 1804 when Prime Minister Pitt the Younger wanted to appease a profession unhappy with his plans to increase taxes on articles of clerkship and practising fees. Professor Mayson said it would be “unwise to consider any particular legal activity for inclusion or exclusion in the absence of a broader set of criteria that could be generally applied.”

So there are good reasons for England & Wales to think twice before reflexively placing the writing of wills under the exclusive authority of the legal profession. But if you’re a North American lawyer who practises something other than wills and estates, and you’ve made it this far into this post, you’re probably wondering what possible relevance this has to you. I’d argue it has great relevance, because this looks like the first major skirmish in what will be a decade-long war over a crucial question: what should be classified as “lawyer services” and what can be classified merely as “legal services”?

We’ve tended to use “legal services” and “lawyer services” more or less interchangeably over the years, such that “legal services” has become a virtual synonym for “the practice of law” (lawyers have not hesitated to encourage this blurring of lines). But the will-writing controversy forces us to think about law-related services that, for reasons of both marketplace efficiency and access to justice, could and perhaps should be kept outside the strict ambit of the legal profession. Granted that a Wild-West free-for-all wills market serves no one’s interests: is the opposite end of the spectrum, wills kept under lawyers’ lock and key, the best alternative? Isn’t the middle ground worth at least some exploration and settlement?

Consider another example, a growing force coming from the opposite direction: legal process outsourcing. Three recent articles explore the impact of LPOs on the traditional big-firm business model, and I recommend a thorough reading of all three:

If I can try to summarize the thrust of three lengthy and insightful pieces, it seems to be that:

  • LPOs and other non-traditional legal service providers are taking a growing amount of once-profitable associate-level work from law firms,
  • the unbundling model upon which these new providers are based is changing client expectations about where and how certain types of legal services are purchased, and
  • the result will be law firms with work of less quantity but higher quality, which will inter alia benefit the quality of a legal career generally.

LPOs, essentially, are forcing law firms (and their clients) to ask the critical question of our times: is a lawyer really the best choice to do X? The answer in many cases is yes, especially when the job calls for the kind of judgment, nuance, skill and wisdom that lawyers bring to the best of their work. These are “lawyer services.”

But in many other cases, the answer is no: all or parts of tasks such as document review, due diligence, electronic discovery, document drafting and production, small-claims court representation, and basic transactions like house purchases, straightforward divorces, and as the current situation in England & Wales suggests, wills and estates, don’t always need a lawyer’s attention. Should the providers of these services, whomever they are, be qualified and trustworthy? Of course. Must they always be lawyers? I think the answer is: of course not.

As time goes on, “legal services” will come to mean “commercial services related to the exercise of law-related rights and the fulfillment of law-related responsibilities,” without the necessary inclusion of lawyers. “Lawyer services” will be a sub-category defined as “legal services that, for reasons of required skill and/or public protection, are provided exclusively by lawyers.” “Legal services” will be offered by a wide variety of domestic and foreign providers, none of whom need to be lawyers; their regulation will be specific to the competence required, and access to these services will be available more widely than when lawyers offered them more or less exclusively. “Lawyer services” will be the cream of what we now consider to be the very deep crop of lawyer activities, only the most challenging and the most valuable to clients.

There’s nothing novel about this kind of distinction in professional services.

  • Richard Susskind quotes the statistic that 4% of health-care services are provided by doctors, while 50% of legal services are provided by lawyers. We accept a distinction between “health” services (delivered by nurses, physiotherapists, massage therapists, psychiatrists, and many other “health practitioners”) and “medical” services (delivered by medical doctors — the word “medical” itself is derived from the Latin for “physician”).
  • When we go to have our teeth checked, we usually spend most of our time with a “dental assistant” and only the last few minutes with the “dentist.”
  • We use “architects” and “engineers” to design our homes and buildings, but we hire “contractors” and “tradespeople” to implement designs and renovations through actual construction — the heavy lifting, literally.

We accept all these situations as normal because the markets for these professional services have evolved to allow the most skilled professionals to do the highest-end, highest-value work and an army of other professionals, para-professionals and skilled craftspeople (usually under specific regulatory or quasi-regulatory regimes) to carry out the rest of the work. Doing it any other way — requiring medical doctors to give flu shots, obliging dentists to deliver teeth-cleaning, requiring engineers to lay bricks — would result in massive system backlogs, huge price increases, and widespread dissatisfaction by both the professional and the client — in other words, pretty much the situation we have now in the legal marketplace.

The legal marketplace, whether some lawyers like it or not, is heading towards the same kind of stratification as other professional fields, to a massive “sorting out” of what lawyers need to do and what they don’t need to do. It’s immaterial whether this is brought about by regulation or the marketplace; in the end, these two forces will be working in virtual lockstep to effect change. There will be a period of disruption, maybe even chaos, as we figure out how certain legal services are best delivered by non-lawyers; it won’t be a tidy process, and there will be damage of the kind suffered by will consumers in the UK (and associates in large law firms). But every marketplace has had to go through this, and if doctors could see their way clear to allow non-doctors to take on the sacred duty of preserving life and promoting health, I think lawyers can bring themselves to make a similar commitment.

This is what the next decade will bring: a Great Sorting Out of demand for legal services, as the market reviews its choices and decides where and from whom it wants to acquire what it needs. As time goes by, the category of “legal services” will grow by volume, while “lawyer services” will shrink by volume; but both categories, paradoxically, will grow in quality. Lawyers in particular will benefit from a task list that requires more sophistication and higher-level skills. For that reason alone, but also because of the ultimate interests of clients, we should be working to narrow our focus on the highest-level work while simultaneously supporting the development of practices and regimes to oversee the more basic work we used to do. It’s anyone’s guess whether our profession will step up to that challenge.

The evolution of outsourcing

Still in its relative infancy, legal process outsourcing has already had a huge impact on the legal services marketplace: scoring major deals with the likes of Microsoft and Rio Tinto, garnering the attention of private-equity investors, and helping to expose the degree to which law firms have overcharged for the simplest legal work, among other accomplishments. But this impact has set off two important chains of events. The first affects LPOs themselves: they now need to move their value proposition beyond cost savings in a market they helped to make more sophisticated. The second affects everyone: the legal profession’s response to LPO is having an unexpected effect on how legal work is distributed and how legal resources are allocated.

The first development is summed up in a question framed by an LPO Savvy blog post: what does LPO do for an encore? It’s not fair to say that the value of legal process outsourcing lies entirely in its vast price differential with traditional law firms; but it is fair to say that that’s where many LPO conversations start. Saving money, especially on the scale that LPO offers and in this economic environment, is not to be dismissed lightly; but as LPO Savvy notes, “cost competitiveness alone is not going to propel the industry’s longevity.” Asian upstarts in other industries like cars and electronics often began by offering basic services at low prices; but they didn’t stop there:

Japanese automakers have been able to achieve [success] largely due to their ability to innovate. They did more than just maintain their competitiveness when they set up their manufacturing processes onshore. They brought with them their processes and managerial tools … fresh ways of managing Lean Manufacturing operations such as Kanban. Kanban was an innovative means of managing inventories in the manufacturing process unseen in the industry. It took cost and unnecessary steps out of the supply chain processes that went into producing automobiles.

Putting this back to the LPO perspective, I struggled with what the Indian LPO’s Kanban could be? What is the innovative game changer that we possess and can bring to the table? … The creative minds behind Kanban developed the practice through many trials of error and rework. But the need and desire to change how their processes were carried out was apparent to them, thus driving their need to explore ways to change.

There is an acute need to bring innovation to how legal services are carried out — a need that LPOs helped to highlight, and an area where they’ve already made much progress, but one that they themselves must now tackle head-on. LPOs have contributed to a slowdown (if not a dead stop) in the previously unstoppable rise in law firm fees; but are they also leading the way in re-engineering the means by which legal work is done, finding and implementing the new “killer apps” for law? And if so, are they successfully advertising and selling that fact to clients? LPO companies are still ahead of many law firms in applying process improvements and reducing costs, but their lead is not insurmountable.

Consider this example: legal process outsourcers have had greater difficulty cracking the Australian market than the UK or the US, in large part because in-house counsel there are apparently more reluctant to try new approaches and more fearful of LPO quality and security failures. So LPO provider Pangea3 is trying a different tack: a partnership with Australian law firm Advent Legal that will see the two collaborate on a wide spectrum of “junior work.” Advent and fellow Australian firm Balance Legal have to some extent already filled the LPO role in their country by their widespread use of secondments to reduce client costs and increase client integration, and have reaped the reputational benefits. LPOs have had to adapt, and this partnership — reminiscent in some ways of the alliance system between Indian and western law firms — is an example.

If I were an LPO, I’d be nervous every time I read about a law firm that provided secondments, gave legal project management training, managed its workflow, unbundled its services, used decision trees, or even employed Lean Six Sigma, because it means they’re starting to adopt some of my stock in trade. The critical battleground in the legal services marketplace is not price, but innovation: inventing and implementing more efficient and effective ways to carry out legal work. That’s a tougher and far more important assignment than simply lowering the cost of associate work, and whoever figures it out first and best could, like Toyota and Sony, dominate this market. LPOs are in a strong position to compete in this race, but they’re not the only contestants.

The second development emerging from LPO’s appearance is that a surprising number of law firms are adopting — and adapting — the outsourcing model themselves. They’re figuring out that the important question isn’t which type of provider (law firm, LPO, whoever) gets to do what kinds of legal work; the question that matters is who will serve as the primary liaison to the client and direct the allocation and assignment of legal work.

The days when legal work flowed from a client exclusively to a law firm and back again are over; the reality now is that numerous providers are in play and numerous models are on offer. While a number of UK firms have embraced LPO providers as a means to get legal work done more cost-effectively, some firms remember the words of Rio Tinto’s one-time GC Leah Cooper, who said law firms should think of Rio’s LPO partner CPA Global as an extension of the company’s in-house department. Law firms don’t like anyone — offshore LPO, procurement department, accounting firm — coming between them and their client. So in future, what really matters is this: who sits next to the client, receives its instructions, and decides how its legal resources are to be allocated among myriad providers? Smart law firms are taking steps now to ensure that that answer is never in dispute.

Here are two examples of what I mean.

Mexican Waves. Despite its name, law firms involved in a Mexican wave system don’t send work back and forth across national or continental borders; instead, the work circulates between firms in bigger cities and those in smaller, less expensive locations. The system was pioneered by UK firm Lovells — now transatlantic giant Hogan Lovell, and interestingly, the term no longer appears on the new firm’s website.  Clients like the Royal Bank of Scotland prefer a Mexican Wave arrangement to a pure LPO because they can cut costs while still retaining a long-term relationship with their primary law firm. Eversheds has adopted a sort of internal Mexican Wave by outsourcing work to its own firms’ lower-cost locations worldwide. And Magic Circle firm Freshfields rejects suggestions that its recent discussions about “referral arrangements” with smaller law firms is a Mexican Wave arrangement, but it’s hard to tell the difference. Meanwhile, some UK firms are outsourcing directly to law firms in foreign jurisdictions: Lewis Silkin, for example, is sending litigation work to Minter Ellison’s New Zealand office.

Outsourced law departments. One of the most interesting developments of the past several months has been a pair of joint ventures between UK law firms and public-sector law departments. In February, Geldards LLP and the Kent County Council created a new entity called Law:Public that will handle not just all of KCC’s legal work, but will also seek out work from local governments and public sector agencies across England. Law:Public’s 100 lawyers (80 from KCC) will charge below-market rates to these increasingly cash-strapped clients and will boast unparalleled experience and expertise in this sector. Then in March, large UK utility Thames Water essentially transferred its legal function to London firm Berwin Leighton Paisner, leaving behind a core group of in-house lawyers to provide strategic legal advice to the company. Here’s the key quote from a BLP partner: “With this model, we’re able to say that BLP’s embedded in the business. Other models such as LPO take you a certain way, but [they] don’t necessarily do what clients want, which is complete alignment.” In both cases, a law firm has completely integrated its operations and interests with those of a key client, ensuring continuing control of the assignment of legal services.

What these developments share in common is the law firms’ recognition that when clients say legal work has to be carried out differently and more efficiently, they mean it. Clients are putting all their options on the table and studying them closely, and many of those options don’t involve law firms much if at all. Some firms have therefore come to realize that they need to (a) find different ways of getting clients’ work done that (b) still leave the firm as the conduit through which that work flows and as the primary provider of the highest-value services.

What we’re starting to see now is an industry-wide jostling for position by legal services providers, each competing not just for the client’s attention but also for the coveted “quarterback” or “foreman” role that directs work to the other players, supervises its production, and takes ultimate responsibility for the result. Law firms used to hold that conduit position by default; they can’t count on that anymore, and the threat of losing that position is as close to an existential one as the legal profession should care to come. Clients are going to have more and more options for their legal work in the next several years, and managing all those options is a difficult and demanding job; but whoever holds that job will have an extraordinary amount of influence with the client and over the other providers. That’s the new Holy Grail for law firms, and I think that’s why a few smart firms are now taking outsourcing seriously: because they need to get very good, very quickly, at managing the production of legal work by a multitude of different providers.

Two specific sets of players should be concerned by all of this. The first is LPOs and other upstart providers of legal services, because if law firms (a) figure out how to manage legal work more effectively and (b) become entrenched as clients’ primary legal services overseer in a multi-provider environment, these entities risk a serious clipping of their wings. And the second is North American law firms: all the examples in this post and almost all the examples I’ve seen of this trend are in the UK, Australia and New Zealand: if any US firms are working on this, they’re keeping an extremely low profile. That’s risky, because this trend won’t take long to metabolize and it won’t take long for some clear winners to emerge. Law firms that don’t recognize this trend might find that an important and decisive war ended before they even knew it had begun.

The end of inevitability

If you want an example of how the legal profession likely will respond to new competitors and a future marketplace very different than today’s, take a look at how Canada’s real estate agents are coping with change in their market. (Short answer: not well). The Globe & Mail reports on a rising wave of sell-it-yourself home realty, prompted by both Canada’s Competition Bureau and its intention to deprive Realtors of their near-monopoly as well as technological advances that allow people to buy and sell homes without professional assistance. Realtors — and this might sound familiar — have responded by fighting the Bureau’s efforts to open the market, scaring homeowners with the dangers of proceeding without professional assistance, and confidently predicting that these amateurs’ mistakes will simply produce more work for Realtors in the end. A few excerpts:

The letter, which comes from the Nova Scotia Association of Realtors, warns homeowners that they are “accepting with open arms increased risk of liability, threats to you and your family’s safety. Realtors protect you and your family from any ill-intended strangers that will come in to your home under the pretense of wanting to buy,” the letter advises, before it goes on to warn of lower sale prices and longer sale times. …

Jim Carragher insists a lot of his new business comes from private sales gone bad. “I’m telling you that it is so terribly sad when I get that phone call at the 11th hour from someone who was trying to sell their home who suddenly realizes they have made a terrible mistake,” he says. “Their deal falls through, they already bought something unconditionally. I try to help, but I tell you sometimes it’s just too late to undo the damage.”

Nonetheless, as the article explains, sell-it-yourself realty continues to grow, in part because the times are passing Realtors by. Read this excerpt from the article (and change “real estate agent” to “lawyer” throughout): Real estate agents … tend to be middle aged or older, and growing out of touch with a younger generation that prefers online options and is more comfortable with the idea of private sales than their parents would have been. “These kids aren’t going to use an agent,” he says. “That’s just the way this is going. The agents are older and the buyers are younger, and they’ve had the Internet their whole lives.”

Lawyers also are under regulatory pressure (in England & Wales through the Legal Services Act, in Canada by the Competition Bureau, and the Missouri lawyers suing LegalZoom for the unauthorized practice of law better hope their suit doesn’t produce the wrong kind of finding). But still we resist new competition through UPL restrictions, we seem to regard technology as a nuisance more than a service facilitator, we routinely warn clients of the dangers of going it alone, and we maintain (patronizingly) that we always end up fixing the messes left by unrepresented clients. And like Realtors, we remain amazingly confident, even smug, about our indispensability. I once sat through a focus session in which lawyers, asked what would happen if laws and their practitioners disappeared, solemnly predicted that anarchy and blood in the streets would follow.

The one thing that concerns me most, as an observer of the extraordinary change in this marketplace, is that the majority of the profession has no idea what’s coming. Most of the lawyers with whom I’ve dealt over the past several years simply can’t envision a world where lawyers aren’t considered essential to the social and economic fabric. They might recognize that times are tougher and costs are rising and prices have topped out and clients are more demanding. They might be resentfully aware that providers outside the profession are entering the market with lower-price offerings, and they might grudgingly accept that technology allows things to be done faster and cheaper than they used to be. But they’re not putting it all together. They’re not following this road to its conclusion, because they can’t really see how the world could get along without us. The inevitability of lawyers is our fundamental precept, and it has become a mental block.

It’s this sense of inevitability that we need to shake to pieces, because it seems to lie at the heart of the profession’s blasé attitude towards change. Lawyers are far too complacent for the circumstances we’re facing, maintaining a sense of privilege born from decades of profitable work in a protected environment. I’m not trying to persuade anyone that lawyers will disappear (although I’m no longer prepared to discount that possibility 100%), but rather to help lawyers understand that we face an immediate mandate of transformation in order to remain relevant to and valued by the marketplace. We can’t charge according to our time and effort anymore. We can’t use a model that sets our financial interests in opposition to our clients’  anymore. We can’t tell our clients who may and may not offer them legal services anymore. We can’t serve the market on our unilateral terms anymore. Many lawyers don’t believe any of those things, and very few lawyers believe all of them. But I believe them all to be true, and I’m not the only one.

The plight of Canadian Realtors probably matters little to us — in fact, to the extent we hear about changes in the real estate marketplace that increase consumer choice and lower prices, we’re probably cheering on the trust-busters and the innovators. It doesn’t seem to occur to us that we’re as vulnerable as they were — just as secure in our monopoly, just as highly rewarded for our efforts, just as dismissive of the potential power of the market. The inevitability of lawyers might once have been a fact. But now it’s fiction, one that’s sustained in our minds but less often in anyone else’s. The sooner we abandon that fiction, the better our chances of responding in time to survive in some recognizable and profitable form. And it has to be soon. Lawyers should know better than anyone else what a ticking clock sounds like.

Frugal innovation and the law

Lawyers need to learn a very important lesson from a salad spinner.  Specifically, we need to understand the implications of the Sally Centrifuge, developed by students at Rice University in Texas:

The necessary parts: one salad spinner, some hair combs, a yogurt container, plastic lids, and a glue gun. The finished product: a manual, push-pump centrifuge that could be a lifesaver in developing world medical clinics. … A team of college students invented this low-cost centrifuge, which can be built for about $30, as a project for a global health class at Rice University. The teacher challenged them to build an inexpensive, portable tool that could diagnose anemia without access to electricity, and the tinkerers got to work.

The students, Lila Kerr and Lauren Theis, found that spinning tiny tubes of blood in the device for 10 minutes was enough to separate the blood into heavier red blood cells and lighter plasma. Then they used a gauge to measure the hematocrit, the ratio of red blood cells to the total volume. That information tells a doctor whether a patient is anemic, which can in turn help to diagnose conditions like malnutrition, tuberculosis, HIV/AIDS, and malaria. … “We’ve pumped it for 20 minutes with no problem,” Theis said. “Ten minutes is a breeze.” It has proven to be fairly robust. “It’s all plastic and pretty durable,” Kerr said.

If you think the multinational makers of expensive medical devices would fight a cheap innovation like this, then let me also introduce you to the Mac 400, a hand-held electrocardiogram developed by General Electric’s health-care laboratory in Bangalore, as reported in The Economist:

The device is a masterpiece of simplification. The multiple buttons on conventional ECGs have been reduced to just four. The bulky printer has been replaced by one of those tiny gadgets used in portable ticket machines. The whole thing is small enough to fit into a small backpack and can run on batteries as well as on the mains. This miracle of compression sells for $800, instead of $2,000 for a conventional ECG, and has reduced the cost of an ECG test to just $1 per patient.

The Economist goes on to explain, in a special report on innovation in emerging markets, what these developments represent: a reinvention of the product development cycle for markets with very limited resources. Like Japan before them, which developed lean production systems to compensate for a lack of physical space and material, India and China (and a few other smart entities) are developing production systems for buyers without much money, mobility or infrastructure:

[Companies] are taking the needs of poor consumers as a starting point and working backwards. Instead of adding ever more bells and whistles, they strip the products down to their bare essentials. Jeff Immelt, GE’s boss, and Vijay Govindarajan, of the Tuck Business School, have dubbed this “reverse innovation”. Others call it “frugal” or “constraint-based” innovation.

Chances are that you, like me, live in an affluent society and are familiar with unnecessary options. Most of us have more consumer choices than we need or could hope to sample, choices that don’t make our lives that much better or happier. Most of us have never used 80% of the buttons on a standard remote control or could even identify what they do. Most of us with elderly parents wish someone would invent a computer with only four functions: “Read email,” “Write email,” “Send email,” and “Check the weather forecast.” Most of us can, for a few cents, supersize the meal we just ordered, even though what we ordered was enough to satisfy us just a few moments earlier. Collectively, we’re hooked on the idea that more is better — and in our low-cost, resource-rich world, that’s an idea both easy to indulge and profitable to sell. Continue Reading