Playing the client’s game

Some years ago, when I was working for the Canadian Bar Association, real estate lawyers in Canada became deeply troubled about losing their lead role in residential real estate transactions. They complained that they undertook a great deal of work and expense to ascertain the validity of title, yet they made only a few hundred dollars per transaction, while realtors and title insurance companies did much less (in the lawyers’ view) and made much more. Many of the strategies drawn up to change this state of affairs aimed (ineffectively, as it turned out) to restore the lawyer as the “quarterback” of the real estate deal.

Maybe you're not quite right for this role.

Maybe you’re not quite right for this role.

My problem with that approach, as I expressed it at the time, was this: I don’t think lawyers are the quarterbacks in this market. Quarterback is the most powerful position in football, a big-picture strategist, personnel manager, and elite performer all rolled into one. But most lawyers are tacticians, not strategists, and they prefer neither to manage nor to be managed. More likely, I said, we’re the third-down fullback called on to blast through the line in a short-yardage situation, or the speedy wide receiver who goes deep on 3rd-and-22 to make a big play. We’re specialist performers who wait on the sidelines until we’re called upon to do one thing really well.

I was reminded of that observation this week when I read a column by Anthony Hilton in the UK’s Evening Standard with the galvanizing title, “Why their profession’s failures mean lawyers don’t win top City jobs.” Among his critiques of the commercial bar, Hilton had this to say:

[L]awyers have allowed themselves to be pushed further and further down the food chain, and away from the seat of power. In today’s commercial world, when there is a deal to be done, it is picked over by investment bankers, brokers and public relations consultants — all of whom have a share of the ear of the chief executive. Then when all the high-level stuff has been sorted by these experts, the package is tossed to the lawyer with instructions to sort it out and make it presentable. … 

[L]awyers have lost the glamour, the access and the special status that came with having opinions worth listening to. They have allowed themselves to be commoditised and to become the last port of call. They have allowed some of their best brains to move in-house as general counsel in the biggest companies, taking the interesting legal advisory work with them. … 

Now, when Hilton speaks of “lawyers” here, he means the private Bar, members of law firms engaged in private practice. But of course, “lawyers” are also working in-house, as the very corporate counsel he refers to here. They’re serving as the executive-level advisors and risk management experts in corporations’ corridors of power.

So it’s not a question of “lawyers” per se losing their power and value. It’s a question of where lawyers need to go these days if they want to develop real power and deliver real value in corporate affairs. Hilton suggests they need to go to the client side — and that, when you think about it, is an astounding turn of events. Remember when law firm partners would look down dismissively on those lawyers who “couldn’t cut it” in practice and had to take refuge in-house? It wasn’t all that long ago.

I don’t think there’s any question that power (and therefore prestige) is increasingly accumulating on the buyer’s side of the legal service relationship. How much power? Consider another column, this one by Alex Novarese of Legal Business in the UK, who was reflecting on whether anything in the legal market really posed a genuine threat to the world’s most elite law firms. He concluded that there was such a threat:

[I]t comes from those paying the bills, the clients. The sustained development of in-house teams means major bluechips already have legal teams that resemble global law firms in their breadth and resource. …  The drain of good people from private practice to in-house has become a feedback loop and a dangerous one for law firms as it remakes the legal industry. In the UK, more than one in four commercial lawyers works in-house. On current trends, it is not outlandish to imagine a 50/50 ratio in 20 years. What happens to the conventional buy/sell dynamic when the clients have as many providers in-house as externally? Why go to a law firm at all?

That last question is remarkable simply for the fact that it can reasonably be asked. And as the world’s largest legal buyers build more and more internal legal capacity, there’s no obvious answer.

Google’s in-house law department, for example, employs 1,000 lawyers to focus solely on legal issues, which is more scale and expertise than the vast majority of law firms can muster. But Google, like many other companies, also maintains a Legal Operations team, which handles legal technology, internal operations, and interestingly, “vendor management” — and the “vendor” category includes outside counsel. Law firms, increasingly, aren’t going to report to the General Counsel — they’re going to report to the Director of Vendor Management. What does that tell us about how power and prestige are shifting?

If you’re looking for the quarterback in the corporate legal market right now, I think you need to go visit Legal Ops. The skyrocketing growth of the Corporate Legal Operations Consortium suggests that Legal Ops will continue to take on more power and responsibility in the corporate legal services relationship. And as power continues to accumulate on the client’s operational side, a major change is occurring in how corporate clients view legal matters.

The ongoing trend towards insourcing legal work, and the consequent decline in the amount of work sent to law firms, confirm that corporations are now building up their internal legal infrastructure. But they’re not just adding more lawyers — that would amount to simply replicating law firms inside the corporation, which is not a smart way to go about it. Large corporations are instead re-engineering their legal infrastructure towards a new model, one in which Legal doesn’t seek to address every legal issue within the company (which is an impossible task in massive organizations). Instead, the new infrastructure aims to help the company and its people solve legal problems themselves — or better yet, anticipate legal risks and thereby avoid problems altogether.

That’s a significant strategic shift, because it re-envisions the role of “legal problems.” Law firms tend to regard legal problems as part of their inventory, providing solutions to those problems on an hourly basis. But corporations view “legal problems” as an obstacle to business continuity and corporate profit, and therefore as something to be minimized and eliminated. In this model, legal expertise reduces friction and therefore cost. It’s not something you buy, it’s something you integrate into your business to help it run better.

“There are no legal problems,” said Cisco’s Mark Chandler recently. “There are only business problems.” I don’t think that’s entirely correct. But it doesn’t matter what I think — it matters what the general counsel of one of the world’s largest corporations thinks. And he’s redefining legal issues away from law firms and towards the company’s legal infrastructure.

No, I’m not saying this is “the death of BigLaw,” obviously. What I’m suggesting is that the large, full-service law firm — the traditional business platform for private-sector lawyers serving corporate and institutional clients — is entering a period of existential crisis. What purpose will law firms serve in this market? Why will clients go to them at all? What do they offer that the buyer cannot either develop and deploy internally or acquire elsewhere at a competitive price?

I’ve heard it said that 80% of corporate legal work is going to either stay in-house or be directed to lower-cost third-party specialists, with the remaining 20% of high-end, high-stakes legal tasks (the “bespoke” work) delegated to outside counsel. But law firms developed as destinations for 100% of that work, and they have the size, overhead costs, and hierarchical structure to prove it. What does it look like when a supplier loses 80% of its business? How do you cope with that?

We’re entering uncharted territory here, and there are possibilities arising that we’ve not considered before. Maybe full-service law firms that performed every aspect of a legal matter, no matter how trifling or routine, were a temporary stop on the evolutionary road of legal services. Maybe such law firms are vestigial and will eventually fall away — to be replaced by smaller expert boutiques where legal shoppers go for occasional splurges, while the rote work that supported their predecessors is either claimed by software and systems or is performed by clients in the ordinary course of events.

Is that the future for BigLaw? Are large law firms destined to be simply a collection of third-down specialists, niche experts called in to perform a high-value task once in a while? And if so, is there necessarily anything wrong with that?

I really don’t know the answers to these questions. But what I do know is that law firms — at least, as they are currently owned, structured, and managed — are in the process of losing their status as the legal market’s power brokers. The center of gravity in this market is shifting to clients, and it’s not going back. The law firm is now just one more resource among many, a particularly fussy and expensive resource called in only when absolutely necessary. And someone else is going to decide what “necessary” looks like.

The last, ominous, word on this goes to Alex Novarese: “what your clients want is not always good for you. What your clients want can clean you out.”

football



8 Comments

  1. Murray Davis

    You cannot stop evolution; either adapt or go extinct.

  2. Carlos Valls

    I am not sure this is entirely applicable to civil law jurisdictions, as their system allows for much more competitive fees, particularly, but not only, in litigation. The fact that it is objectively not so applicable to our customers civil legal sustems does not mean that these ideas are not influential, but then we need to distinguish, and nobody is openly doing it yet, and clients may get confused. And what about individuals? They should not be told so boldly that the profession is not delivering, because there is no evidence of this, except that it is indeed expensive to litigate in certain countries. What if the whole profession was under extreme pressure? Would we want to be represented on a personal basis by a lawyer in true finacial difficulties, or facing a problem of professional existence? On a divorce matter? On an inheritance litigation with my brothers? I wouldn’t. I wuold prefer that he or she would be thinking on my best intersests, not on her ot his fiancial short term survival.

  3. Carlos Valls

    And I forgot, as a newcomer, to congratulate and thank Jordan for his inspiring long-lasting blog!

  4. George Beaton

    Of the many swinging insights in Jordan’s post, the Google story is the stand-our for me. It carries many overtones of what has happened in the advertising agency industry in the last two decades: “pushed down the food chain, and replaced to an increasing degree by substitutes”. Truly great post, thank you. Question: How many BigLaw leaders will read this? And how many of these will ‘get it’? Lots, I pray.

  5. Catherine J Moynihan

    Note that the Association of Corporate Counsel (ACC) opened a section for legal operations professionals in 2015. In ACC Legal Operations there is a hive of knowledge-sharing, including the External Resources Management interest group – avoiding the term “vendor” for law firms! Given how much has already been in-sourced, there’s also plenty of focus on using internal resources (people and technology) to deliver legal services faster, better and cheaper.

    Kudos on more great thought-leadership, Jordan!

  6. Skeptic

    I’m not sure it is completely inevitable that insourcing on its own is going to suck up that much capacity across the industry. Yes, Google is an “example” and a shining one. It is also somewhat of an outlier? A cutting edge Fortune 50 tech company with stupendous resources, a GC who totally gets it and a supportive C-suite. But just like every law firm can’t be Cravath, not every corporate legal department will be able to look like GE or Google. Resources, attitudes and needs with respect to legal services vary greatly even among the companies that have the necessary throw-weight to build that kind of capability. Not everyone can do it, and not everyone who can do it will necessarily want to do it.

    Just off the top of my head, financial institutions have much, much different views of outside counsel and their proper role in any number of roles than say, a big tech company. And both are different from a large retailer. And an energy company has still different legal needs than any of those other three verticals. And we are just talking about large, public companies. Private financial enterprises, like a private equity fund or a hedge fund, are different yet again. They don’t want to carry all of that overhead lest it drag their returns down. Family offices, 1 percenters and sovereign money have still different attitudes and resources available for legal capacity.

    The market for sophisticated legal services is not anywhere near as monolithic as a lot of commentators seem to think it is. Clients want change. But they seem to be all over the map on how much change is necessary, and what needs to be changed. Some want real structural change. Some want technological change. Some don’t care. Some just want to tweak a few things. Some acknowledge that there needs to be a little give and take by both the client and the firm. Some don’t care about anything but price. Some haven’t asked for change at all. I agree, law firms will lose market share over the next 20 years. But the market is likely going to be much more fragmented than anyone anticipates.

  7. Craig Burley

    As a tax lawyer, Jordan, I’d like to decry the culture of “necessity” that you’re describing. I see this too, and it saddens me, because its growth has resulted in an explosion of penny wisdom and pound foolishness.

    I am overwhelmed in my practice, currently (and, from the looks of current trends and events, long into the future), by the unfortunate results of a lack of advice, and from too many amateurs trifling with professional matters that can be resolved with a very small amount of quality early advice; even general advice that could be part of the knowledge bank of those “professional” advisors if they cared to listen.

    There is too much well-meaning, hugely costly amateurism when it comes to tax. Its result is to vastly increase existential risk to firms and taxpayers. I, like many other specialist lawyers, am not a third-down back. I should be the free safety.

    Nothing I can do about it; the stampede to cheap, non-specialist advice from lawyers and accountants working outside their knowledge base will never be overcome by any kind of warning. We leave in a disposable world where the cost of failure, as high as it is, won’t ever be taken into account because when it don’t rain, the roof don’t leak.


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