Victims of their own success

After two weeks away from the blogosphere, my RSS feeder has 756 unread posts for me to look at, not including my daily updates from Dilbert, Slumbering Lungfish, and the Astronomy Picture of the Day. One of those 756 posts appeared at LegalWeek’s Editors’ Blog and concerned UK managing partners’ cluelessness and complacency about the impact of the Legal Services Act, particularly regarding the coming ability of UK law firms to go public.

This theme was picked up by Paul Lippe in a (members-only) post at Legal OnRamp, where he acknowledged that successful law firms don’t have much incentive to explore innovative private equity options. But he argued that other kinds of firms will, such as old run-down name firms needing to overhaul, solid midsize firms looking to break out, and stable firms with contentious partnerships. Paul’s money quote:

Whether any of these firms will ever truly “Go Public” I would question; but certainly they can access the capital markets in ways that create liquidity and competitive advantage. The point is (and some lawyers seem almost congenitally incapable of understanding this) that disruptive innovation never comes from the super-elite, and doesn’t have to. The disruption will come from an outsider, but will quickly impact the elite – think Honda and General Motors over the last 40 years, think JetBlue and United Airlines. If these scenarios sound fanciful, remember they are exactly was has happened in a dozen other industries that have been impacted by a combination of global competition and private equity.

Here, with some amendments and additions, is the response I posted:

True enough; as the saying goes, revolutions don’t normally start inside the castle. But I think this is kind of the problem, because in the legal services marketplace, the castle is huge — it encompasses much of the kingdom, in fact. Most law firms consider themselves to be “successful,” which greatly reduces the number of “unsuccessful” firms that would be naturally motivated to try something innovative.

Most law firm lawyers fall into three general categories: those who are doing well financially, those who are doing really well, and those who are doing jaw-droppingly well. Innovation in any industry generally arises from those in serious trouble and/or with little to lose: the fourth-place network that green-lights the next big hit, the last-place team that allows the stat geeks to find diamonds in the rough, the startup with no legacy burdens that can deliver a lightning bolt of creativity. But there aren’t very many law firms in serious trouble and/or with little to lose — law firms, in fact, by and large are awash in money, and have been for years; it’s a question of degrees of profit, not of profit itself. The status quo‘s tremendous financial benefits give law firms huge incentives to maintain it.

But there’s another angle here that I think might be even more important. Certainly there are run-down name firms out there, venerable operations that are starting to leak or even hemorrhage clients and lawyers. But I think that rather than turning to complacency-shaking innovation, the likelier result is that the firm will simply fall apart: key rainmakers defect, practice groups calve off to start boutiques, client desertions become more frequent, and the firm experiences an internal and external crisis of confidence that sends it into a death spiral.

The internal cohesion that used to hold law firms together in both good and bad times — the glue of history, culture, stewardship, and shared notions of professionalism — has worn away in a lot of firms, such that partner loyalty to the enterprise extends only to the financial and reputational benefits of membership. Many firms consist of nothing more than highly mobile, money-driven talent, and that’s a recipe for institutional instability. I’ve seen firms go from respected to non-existent in shockingly short order, and I think we’ll see more in the next few years.

But the result might not be wholesale innovation; it might just be a shuffling of the deck, as individual lawyers submerge and resurface in other firms that play the profitability game better. Too many lawyers still regard innovation as unnecessary and disruptive to the profitable status quo. They have great difficulty accepting the concept — proven time and again by gutsier firms than theirs — that innovation can make their firms more profitable and more satisfying than they are now. They’d prefer to lateral over to another firm while the offers are still plentiful and good, and as far as they’re concerned, the firm they left behind can sink or swim on its own.

Before the change that Paul envisions really starts to happen — and for the record, I think that it can and it will — there needs to be (a) a lot more losers than winners among law firms, and (b) a certain number of proud firms that, when threatened, are willing to do whatever it takes to keep afloat an organization that stands for something more than annual partner draws. These are the conditions precedent.

The first condition might be met by a combination of the recession, the talent drought, and serious client pushback on costs. But the second is going to depend on whether or not lawyers remember why they came together to form law firms in the first place. In case they’ve forgotten, it wasn’t to achieve staggering year-over-year increases in profit per equity partner, and it wasn’t so that the firms could be flags of convenience under which they could sail in comfort until the waters got choppy.