If law schools were publicly traded companies and you held some in your portfolio, I would be strongly advising you to sell. Fast.

Here’s a quick review of some recent news concerning the US legal education industry and the legal profession it is purportedly preparing its graduates to enter.

• As reported by the Wall Street Journal and Slate, applications to US law schools have fallen by 11.5% in the past year and now stand at their lowest level since 2001. This is despite the fact that the number of ABA-accredited law schools has jumped 9% in that same period.
• As The New Republic discovered, employment rates nine months after graduation (reported by schools to be around 90%) include part-time, temporary and non-law jobs. Actual full-time legal employment figures likely don’t even break 50%.
• The New York Times found that 80% of US law schools insert “merit stipulations” into scholarship offers that mean students can lose their grants if their GPA falls below a given level.
• The National Law Journal reported earlier this year that three small law schools have announced tuition freezes, while the New York Law Journal found two other small schools have chosen to shrink their class sizes.
• The NLJ also reports that some law schools’ graduates, including SMU Dedman and Duke, are having such trouble finding work that the schools are paying for placement assistance programs.
• The ABA’s plan to seriously overhaul the law school accreditation process (again from the NLJ) appears so radical to schools that the American Association of Law Schools is pleading with the ABA not to go ahead.
• Finally, Steven Harper at the AmLaw Daily has a treasure trove of grim stats: 20% of US law schools’ 2009 graduates are still looking for work; net US law job growth to 2018 will be only 100,000 while law schools graduated 44,000 new lawyers last year alone; half of all US law grads have more than $100,000 in law school debt, and on and on.

I don’t know about you, but I look at these and similar accounts and I see a bubble just waiting to pop, or a system on the verge of a crash. This isn’t about the recession or the financial crisis anymore; this is about a serious misalignment between the industry that trains new lawyers and the marketplace that employs them. (Canada, by the way, is headed merrily in the other direction, with three new law schools set to open shortly; whether this is a sprint towards a cliff is a subject for another day.)

What we’re seeing here is the law of supply and demand applied to the law. The future legal marketplace is going to require fewer, differently skilled lawyers than it has during the past several decades, so this market recalibration should really come as no surprise. The market is telling law schools: we don’t need all these new lawyers, and we definitely don’t need the skill sets you’re giving them. Law schools aren’t listening, because they can’t: the production of traditionally credentialed graduates has become the reason for their existence and the core of their business model. Companies whose products are no longer in demand either find new products or go out of business. I see extremely few law schools capable of changing their product lines.

That’s one side of the coin. Here’s the other: shrinking demand for lawyers is not the same thing as shrinking demand for legal services. If anything, the overall legal services market seems poised for strong growth over the next decade or so. This isn’t only because an increasingly global, complicated and cross-connected world will have an equally increasing need for legal help to navigate it successfully. It’s also for two other reasons:

• Many legal tasks that no longer justify the expertise of a lawyer to do them must still be accomplished, but at better-aligned prices.
• The latent legal market, left untapped by generations of lawyers and law firms, is ready to explode, as the DIY law trend illustrates.

This is real demand, and it can be met by low-cost lawyers, foreign lawyers, quasi-lawyers, para-professionals, corporate providers, and automated systems. At the moment, there is a relatively limited supply of these entities. But just as the changing market is punishing old suppliers like law schools, it will reward new suppliers such as virtual law firms, legal process outsourcing companies, freelance and contract lawyer organizations, e-discovery specialists, automated document assembly programs, consumer-friendly legal kiosks and outlets, and many other options still at the embryonic stage. These are the directions in which the investment funds triggered by the Legal Services Act will flow, not (for the most part) into law firms and most certainly not into law schools.

Historically, demand for legal services has meant demand for lawyers, and the legal education industry evolved to reflect that. In future, demand for legal services will be met by a greater diversity of providers with different training and new skills, crossing previously sacrosanct lines of status, geography and even technology. That’s what’s really going on here: an old supply chain is breaking down, and a series of new ones are rising to replace it. Place your bets accordingly.

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.