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

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

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

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

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

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

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

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

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

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

Simplify The Law joins several other British companies that are setting up chains or franchises of sole practices and small law firms. Quality Solicitors (QS) was one of the first out of the gate — it describes itself as a collection of “the UK’s best law firms who have come together to create a national legal brand with locations nationwide.” Not precisely a franchise, QS already boasts well over 100 firms in its orbit and made a significant breakthrough earlier this year when it signed a deal to open kiosks in 150 WH Smith bookstores throughout Britain (with an eye on an eventual total of 500). These “Legal Access Points” represent a key approach of consumer-oriented franchises: go where the customer is and meet him or her on familiar ground.

Then there’s face2face solicitors (f2f), which specifically self-identifies as a franchise and, like other franchisors, offers small law firms the benefits to match, including IT infrastructure, case management, billing and collections support, time recording, IT backup and disaster recovery, and perhaps most importantly, centralized marketing and branding. f2f essentially promises to relieve franchisees of the burden of running their business so that they can focus on practising law. f2f focuses on smaller firms than STL or QS, targeting those with annual turnover of £1.5 million or less. As an example of the financial arrangements between law firm franchisors and franchisees, firms pay f2f a one-time fee of £25,000 and 8% of their annual income thereafter.

Other franchises like Lawyers2You and High Street Lawyer have already come out, and more will establish themselves in future. They are driven in part by the very difficult economy in the UK, but even more by the advent of Alternative Business Structures and the specter of massive chains like The Co-Operative getting into the consumer legal business through its banks and potentially its supermarkets. (Disclosure note here: STL has received business plan and start-up advice from Chris Bull, a partner of mine in Edge International).

There are at least two likely conclusions we can draw at this stage of the emergence of law firm franchises. The first is that this looks very much like the future of the small and solo law practice. The challenges facing small law firms these days — including downward price pressure, non-lawyer online competition, and the same range of business, technical and regulatory requirements that large firms can tackle with far more resources — will only be exacerbated by the difficult economic decade ahead. More ominously, solos in particular are older than average, are disproportionately based in smaller, stagnating or declining populations, and have few younger practitioners to whom their practices can be passed. New lawyers who might otherwise welcome the chance to hang out a shingle are discouraged by heavy debt loads, a lack of business experience, and the well-known risks of running a small enterprise.

Franchises are in a position to counter many of those concerns. They promise to take away the hassles of billing and marketing and file management. They provide the security of a branded name and logo and the advertising budgets to go with them. In some cases, they even provide training and a degree of knowledge management that all franchisees can take advantage of. Those are the kinds of lifelines that existing practices need and the kind of safety nets that could attract new practitioners by reducing their startup risks. Franchisors figure, probably correctly, that the same lure of reliable, secure, well-known brands can draw not just clients but also lawyers into their orbits.

There are potential downsides, to be sure. One of the reasons that marketing is so important to a law firm is that it forces the lawyer to give some real thought to identifying his or her personal and professional attributes and scanning the marketplace to determine the clients he or she should be targeting; it’s not something to be outsourced lightly. Taking the financial side of a law practice out of a lawyer’s sight can lead to taking it out of the lawyer’s mind; there are great risks to a small business whose owner is too distant and disconnected from cash flow and other daily financial realities. And any lawyer who practises franchise law will tell you that relationships historically between franchisors and franchisees have been, shall we say, a little fraught. But the pros of this sort of arrangement appear to give the cons a good run for their money.

The second observation is that this trend is by no means limited to the UK. The challenges facing solos and small firms in Britain are scarcely different from those bearing down on similar practices in the US, Canada and elsewhere. Solos value their independence, but they also recognize that the flip side of independence is isolation, and they know the harsh reality that if you start to sink, no one’s going to extend a hand to catch you. The benefits of franchising look intriguing no matter which side of the pond you’re standing on. (I recall, back in the mid-1990s, an attempted national law firm franchise called First American Law that wasn’t able to gain traction outside its native Florida; but it might simply have been ahead of its time in both market and, more importantly, technology and connectivity terms.)

Significantly, to my way of thinking, franchises also represent a way to bring in outside non-lawyer support to small firms in North America without running afoul of the rules on non-lawyer ownership of law firms. ABSs are now legal in the UK (although thanks to hangups with certification at the Solicitors Regulation Authority, only one conveyancing firm has so far received ABS approval). ABSs might eventually expand globally enough that US authorities will need to respond; alternatively, the Jacoby & Meyers lawsuit could be the powder keg that blows it all apart. But assuming that non-lawyer ownership restrictions remain in place in the US for the foreseeable future, franchises could be an alternative to outright non-lawyer control that still manages to give small firms an infusion of well-financed professional business support.

I still believe that solos and small firms have a bright future — brighter, in many ways, than most of the national and international giants whose business models are too archaic to survive a new century and too rigid to allow adaptation to new market demands. Small law firms, far more than big ones, can be financially and systematically structured with the kind of client focus that will be required for survival in the years to come. When I speak to law students — as I did again just last week — I advise them to plan their future legal careers as if they’ll be solos, because the skills they’ll acquire in that process will serve them regardess of their eventual work lives, and because it really is pretty great being your own boss.

But increasingly, the future for solos and small firms need not exclusively be the free-wheeling, fully independent entrepreneur of yesterday and today. In the long run, large consumer chains will be allowed to sell at least basic legal services in all major jurisdictions, and the challenges facing solos and small firms at that point will be similar to what your local variety store faced when Wal-Mart moved into town.

A number of small firms — not all, by any means, but more than a mere handful — will become part of a branded chain or franchise with centralized marketing, management and administration. These solos will find themselves in a franchised suburban or shopping center law office, or operating a purely virtual firm from home under a centralized brand. In the new legal marketplace, there will be worse places to wind up.

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

What 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tomorrow, I’ll look at what’s happening inside the legal profession. Today, I want to talk about what’s happening outside it, starting with last week’s most dramatic news: $18.5 million in venture capital announced by online legal service Rocket Lawyer.

Rocket Lawyer, if you’re not familiar with it, provides legal forms that online users can fill out, store and share on the Web. For $20 a month, reports Forbes, consumers can also have their documents reviewed by a real lawyer and even get legal advice at no additional cost. It boasts $10M in annual revenue and 70,000 visitors a day. The $18.5M figure, by itself, is less significant — rival LegalZoom recently announced a $66 million VC infusion — than the identity of the secondary investor in Rocket Lawyer, Google Ventures.

It’s important to note that this is not Google Inc. we’re talking about — Google Ventures invests in (it does not acquire) companies independent of Google, and it supports a range of startups that develop things like carbon-neutral fuels and yeast-based antibody discovery platforms. No one is suggesting that Google Inc. will take over Rocket Lawyer, make its forms free and sell ads on the content — although you know what, that’s more than merely plausible. But note what Google Ventures’ Wesley Chan says in Rocket Lawyer’s press release:

We see a large market opportunity for legal solutions that are easily accessible and affordable to users. Rocket Lawyer’s combination of an intuitive user-driven front-end with a strong technology-based platform uniquely positions the company to scale and deliver the type of “wow” user experience that online customers love.

Note the drawing cards for GV: ease, accessibility, affordability, user-driven, user experience. They have nothing to do with the intelligence of the lawyer or the quality of the legal offering and everything to do with the manner in which clients find and access legal services. As I’ve said before, convenience is the new battleground, a fight for which law firms still haven’t even shown up.

Those same features are what drew Google Ventures to its first foray into the legal sphere: Law Pivot, a legal Q&A website that allows companies (especially startups) to confidentially (or, as of yesterday, publicly) receive low-priced, crowd-sourced legal answers from a roster of private lawyers. Similar to Rocket Lawyer, LawPivot gives lawyers a platform to market their legal services by sharing advice and engaging in discussions (the company’s personalized search algorithm provide users with relevant lawyers to provide answers to their specific legal questions). Again, note the words of Wesley Chan in the announcement:

There are inefficiencies in the delivery of legal services, and there is a huge opportunity for a technology-driven disruption in the legal industry. The LawPivot team has created an intelligent online solution that connects companies to the legal answers they need.

Those are the two key terms we need to focus on: inefficiencies and disruption. Those of us who scan this marketplace have been warning for years that the legal profession’s backward business model is in the gunsights of aggressive entrepreneurs that want to exploit those inefficiencies and push lawyers out of the driver’s seat. Well, Les voila.

Because here’s the thing: neither Rocket Lawyer nor Law Pivot are doing anything that even an average law firm couldn’t have done already. The former has created a client-facing document assembly system that provides channels to licensed lawyers who can review the completed documents and answer more complex questions. The latter offers lawyers the opportunity to engage directly with potential clients and demonstrate their expertise through the dissemination of their real-world knowledge. Law firms have had the capacity to create these services for years, but they’ve been unwilling or unable to risk changing the nature of their business.

Both Rocket Lawyer and Law Pivot (and LegalZoom and Epoq and many others both present and future) have recognized that the production of legal documents and the provision of legal insight have become so systematized, routinized or borderline-commoditized that their market value has fallen below law firms’ profitability thresholds. So they have converted the legal advice process and legal document assembly system into marketing and business development opportunities for lawyers. And they have one simple goal in mind: to replace the law firm as the primary platform by which clients find and engage with lawyers. That is a realistic goal, and both their ideas and their execution have been good enough to interest Google Ventures and other investors.

I guarantee you will see more of these deals financing more of these operations in future, and when the UK finally launches Alternative Business Structures, watch the stream turn into a flood. But the fundamental trend to understand here is the legal marketplace finally recognizing and responding to the inefficiencies lawyers have created in the delivery of legal services. The result will be disruption for lawyers and upheaval for law firms. Tomorrow, I’ll talk about what that’s going to look like.

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.

Doing what everyone else is doing will get you everyone else’s results. This is patently obvious, and lawyers are more than smart enough to recognize it. So the continued insistence by many lawyers that new and better results must be obtained by employing the same old approaches will have to remain one of life’s great mysteries.

Happily, there’s a sufficient (and growing) number of lawyers and law firms breaking that habit to enhance my own confidence that some members of the legal profession really are starting to get it, from the smallest solo practice to the largest global firms.

Back in the spring, for example, I announced a contest seeking five examples of 21st-century solo practice, which would be rewarded with a free one-year scholarship to Solo Practice University, courtesy of Susan Cartier Liebel and the rest of her team at SPU. I’m now very happy to announce the winning entries!

Our winners range from virtual family law practices focused on low-income clients to a special-education niche firm and an online environmental law practice. Our winners are June Gold of Connecticut, Jack Lebowitz of New York State, Diane Littlejohn of North Carolina and Neal Rice of Pennsylvania (the fifth winner will be announced at a later date). My best wishes and congratulations to these scholarship winners, and my thanks again to Susan and SPU for helping launch five more innovative law practices!

I also spent the spring and summer helping promote the College of Law Practice Management‘s InnovAction Awards, which recognize law firms and legal organizations that are committed to doing things differently and better in this marketplace. Today, I can announce that out of a near-record number of entries, we have three InnovAction Award winners from three different countries:

1. Law Without Walls, a multi-school initiative to rethink legal education, spearheaded by the University of Miami Faculty of Law
2. Lawyers on Demand, a brand-new legal service delivery model pioneered by London-based law firm Berwin Leighton Paisner
3. The Internationally Trained Lawyers Program, a bridging program for qualified foreign lawyers at the University of Toronto Faculty of Law

Yes, you read that right — two winning entries from law schools, confirming that the legal academy is part of the changing legal landscape as well.

I’d be seriously remiss, though, if I didn’t also recognize the excellent entries from law firms and legal organizations worldwide, especially from large law firms, that didn’t take home an award but that definitely merit your attention. They are:

This isn’t entirely a propos of nothing: the National Football League lockout recently ended with a 10-year collective bargaining agreement, and a frenzy of free-agent signings has followed. But I actually want to go back several decades and tell you about an upstart operation in the 1960s called the American Football League, because the AFL has something to say about a legal process outsourcing (LPO) industry at a crossroads.

Here’s a brief summary of the AFL’s short but extraordinary history, from Wikipedia:

The American Football League (AFL) was a major professional football league that operated from 1960 until 1969, when the established National Football League (NFL) merged with it. The upstart AFL operated in direct competition with the more established NFL throughout its existence. Though downplayed by the NFL as inferior, the AFL signed half of the NFL’s first-round draft choices in 1960, including All-American Billy Cannon, perennial All-Star Johnny Robinson, and Hall of Famer Ron Mix. Overall, AFL teams signed 75% of the league’s draft choices that first year. It continued to attract top talent from colleges and the NFL by the mid-1960s, well before the Common Draft which began in 1967.

A merger between the two leagues was sought by the senior league and announced in 1966, but was not finalized until 1970. During its final two years of existence, the AFL teams won upset victories over the NFL teams in Super Bowl III and IV, the former considered one of the biggest upsets in American sports history. When the merger took place, all ten AFL franchises became part of the merged league’s new American Football Conference (AFC), with three teams from the original 16-team NFL (the Pittsburgh Steelers, Cleveland Browns, and Baltimore Colts) joining them. The remaining 13 original NFL teams became the inaugural members of the National Football Conference (NFC). The AFL logo was incorporated into the newly minted AFC logo, although the color of the “A” was changed from blue and white to red. The NFL retained its old name and logo and claims the rights to all AFL products including the eagle logo.

This tells most of the story, but the key learnings lie in the details. The AFL originated with the NFL’s rejection, in 1959, of attempts by eager would-be owners to add expansion franchises and share in the growth of a prosperous league. Undaunted, these entrepreneurs started their own league, and despite shaky beginnings (and lower-quality offerings), persevered to the point where the NFL was forced to take the upstarts seriously. The AFL succeeded by entering markets overlooked by the NFL (such as Kansas City, Houston and Buffalo) and by raiding the NFL of talent: first by drafting and outbidding college players previously bound for the NFL, then (by mid-decade) poaching established players (especially quarterbacks) from NFL rosters. Striking a lucrative TV contract also gave the AFL access to outside capital it needed to compete with the incumbents. Eventually, in order to control runaway salaries and stem the talent bleed, the NFL agreed to a merger with a league barely six years old.

You can probably see where I’m going with this. The legal process outsourcing industry shares a remarkable number of characteristics with the 1960s’ American Football League: reacting against established providers who refused to allow new competitors, they start up their own business catering to under-served markets with lower-budget offerings. But then they start making talent inroads, first with raw recruits and eventually with respected veterans. The real break comes with access to outside equity that allows them to fully compete with the incumbents, and eventually, head-to-head competition proves the quality gap isn’t so great after all.

But there’s more. The AFL didn’t just force its way into an established league: it changed the way that league did business. The NFL was never glamorous or especially exciting, whereas the AFL went out of its way to market itself that way; today, excitement marketing is the foundation of the NFL brand. Even by the time the merger took place, many of the AFL’s innovations (arguably including the Super Bowl itself) had spread to the NFL:

• Players’ names on the backs of their jerseys
• Stadium scoreboard clocks to track the official time
• A 14-game schedule (up from the NFL’s traditional 12)
• More colourful uniforms
• More passing attempts per game (though not as much as legend would have it)
• And perhaps more importantly, more black players

Real agents of change don’t just disrupt the marketplace position of incumbents: they change the nature of what that market provides. This is the opportunity, and the challenge, that lies before outsourcing companies in the legal market right now. If all they intend to do is offer the same basic services in the same basic way as law firms, but at lower prices, these companies will have a very short lifespan. The key to LPO’s survival is not just to evolve upwards from the traditional law firm model, but to be so successful that law firms have no choice but to adopt their innovations.

We’ve seen very small degrees of innovation and adaptation from lawyers in private practice, and even smaller responses from lawyers in corporate law departments, and it’s not enough. Law firm and in-house lawyers are, for the most part, trapped in the same closed, cyclical eco-system, perpetuating an unsustainable business model out of short-term self-interest. Only an outsider can break that system, and only by coming at it with sufficient force and from the correct angle. The best opportunity for powering real change in the legal marketplace today lies with LPOs — and behind them, with the business and corporate entities awaiting the arrival of Alternative Business Structures in the UK — ready to do things differently and better.

But the critical questions are: will they decide to be pioneers, or merely opportunistic entrepreneurs? Will they come up with enough crowd-pleasing innovations to attract financial support within and outside the legal industry? Will they build a better model, one that law firms eventually will have to adopt simply to safeguard their own livelihoods?

Those are the three strategic challenges that outsourcers and other would-be change agents need to answer. How they respond could very well determine the nature of the legal marketplace for decades to come.

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.

• Allen & Overy, whose FIG Global Compensation Tracker helps banks and hedge funds monitor compensation reform initiatives
• Campbell Law Group of Boulder, Colorado, which is developing a global distributed legal support infrastructure for social enterprises
• Choate Hall & Stewart and WilmerHale in Boston, which provide financial investment services for their clients
• Clearspire of Washington, DC, and Radiant Law of London, two outstanding examples of the future high-value law firm
• Face2Face Solicitors, a nationwide British franchise operation for small law firms and solos
• Harrison Pensa LLP of London, Ontario, which has created an online, customizable corporate privacy policy generator
• LawLab, a regional Australian boutique that has created Launch in-house, a client-empowering online conveyancing program
• Marque Lawyers of Sydney, Australia, a fixed-fee business law boutique that cheerfully breaks every rule in the Law Firm Book
• Pannone of Manchester, UK, whose standalone Affinity Solutions division offers “white-label” legal services
• Reed Smith, whose new general counsel practice group offers GCs inquiry hotlines and “instant networking” opportunities
• Solo Practice University, whose new “Building Bridges to Professional Excellence“  program creates innovative partnerships with law schools
• Temple Bright LLP of Bristol, UK, a no-staff, paperless business law boutique that promises no delegation to junior lawyers
• Upstart Legal of Philadelphia, a startup that delivers customized legal documents to entrepreneurial clients
• Venable LLP, with 7 US offices, whose Venture Services program defers 50% of startup clients’ fees based on funding success

These are just some of the most innovative developments in the legal marketplace over the past year — this short list doesn’t touch on the increasing use of alternative fees in law firms, the development of low-cost non-lawyer service providers, and the continuing evolution of legal process outsourcing providers. Innovation in the legal market is real, and if you’re not actively pursuing innovations of your own, you’re in danger of missing out on a critical period in the profession’s history.

But if you’re currently pursuing or have implemented innovations in your law firm (or law department, law school, startup company, etc.), then you have less than three weeks left to submit a nomination for a 2011 InnovAction Award, sponsored by the College of Law Practice Management. The InnovAction Awards, of which I’m proud to serve as Chair, recognize outstanding innovation in the delivery of legal services, the managing or marketing of a law firm, or the conduct of client relationships.

This year, as this Inside Legal announcement explains, the Awards have slightly altered their criteria. No longer is it required that winning entries do something that has “never been done before” — we recognized that innovation is too widespread and too viral in the marketplace to continue to require absolute lack of precedent. Instead, we’re now applying a more nuanced four-part criteria:

• Disruption: Does this entry change an important element of the legal services process for the better, and marketplace expectations along with it?
• Value: Is the client and/or legal industry better off because of this entry, in terms of the affordability, ease, relevance or its effect on legal services?
• Effectiveness: Has this entry delivered real, demonstrable or measurable benefits, for the provider, its clients, or the marketplace generally?
• Originality:  Is this a novel idea or approach, or a new twist on an existing idea or approach?

If you’ve undertaken and accomplished an innovation within your enterprise within the last three years that fits these criteria, I strongly encourage you to seek out the peer recognition you deserve. More details and an entry form are available at the InnovAction website, and I’m available anytime to answer any questions you might have.

It’s time to go innovate. If you’ve already done so, it’s time to come collect your reward.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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:

• “Bet-The-Farm” vs. “Law Factory”: Which one works? started the ball rolling, a pair of posts by Toby Brown of 3 Geeks and a Law Blog and Ron Friedmann of Strategic Legal Technology that consider the future ability of law firms to serve either or both of the high-end, high-value market and the more commoditized low end.
• Law Firm Investment Portfolios built on Ron and Toby’s work, a post by V. Mary Abraham of Above and Beyond KM that suggested firms adopt a diversified investment portfolio approach to their choice of practice areas and market segments and raised key issues regarding law firms’ cultural ability to withstand such radical change.
• The Law Factory Debate: Another Perspective and a companion post, Apple Meets the Law Factory came from Steven B. Levy of Lexician and raised the specter of once-dominant companies in the technology and electronics space that saw their market share drain away to simpler, lower-cost competitors, with clear implications for law firms.
• Legal Billing Rates: The Next Wave by John Wallbillich of The Wired GC came next, setting out a new “law firm pyramid” structure wherein certain types of legal work commanding ever-declining hourly rates are divided up among a range of legal service providers (not all of them lawyers), with constant price pressure pushing up from below.
• Inside Straight: In Praise of Mediocrity completed the septet, a column at Above The Law by Mark Hermann that provided, to my mind, a critical perspective on this topic not previously solicited: that of the client. Mark provided a blunt assessment of the law firm talent pool and some insights into in-house lawyers’ outside counsel decision-making process.

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.