Break the law firm business model

The ABA’s Center for Innovation, where I serve as an advisory board member, asked me to submit a post for its excellent new blog. I was happy to send them this takedown of the traditional law firm, which I’ve also posted here below.

“Innovation destroys hours.”

Those three words, written by Neota Logic founder Michael Mills in a 2014 blog post, summarize the fundamental challenge that every law firm faces today. They reflect two market realities that are inherently incompatible with each other.

1. Virtually every recent innovation in the legal services market — from automation to process improvement to multi-sourcing — has operated to reduce the amount of time and effort required to produce and deliver legal services.

2. Virtually every law firm in the legal market prices its work, bills its clients, compensates its lawyers, and rewards its shareholders on the basis of the amount of time and effort required to produce and deliver legal services.

This fact has to constitute the starting point for all our inquiries into “why law firms don’t innovate.” The hours billed by a traditional law firm’s lawyers represent the entire inventory of the firm — it’s what the firm sells and the sole means by which the firm makes money. When a law firm engages in any of the most common types of innovation, it eliminates hours, thereby reducing its inventory and lowering its lawyers’ revenue. It’s no wonder innovation is anathema within most law firms: it’s antithetical to the law firm’s foundational business premise. You might as well ask a ship to innovate by drilling holes in its hull.

Don’t make the mistake, therefore, of blaming lawyers for the lack of law firm innovation. Sure, lawyers are change-resistant and conservative and all the rest — but so are most people, to a greater or lesser extent. Since almost any worthwhile innovation in a law firm will destroy hours and therefore reduce lawyers’ stock in trade, lawyers will understandably fight those innovations. It’s an entirely rational response.

The true barrier to law firm innovation is the firm’s ironclad insistence on measuring value — both external to the client and internal within the firm — on the basis of lawyers’ time and effort.

Law firms maintain a direct, causal connection between the time and effort lawyers expend to deliver a service and:

(a) the money clients pay to receive that service, and
(b) the money lawyers receive as compensation for their services.

But there is no fundamental economic reason why either of these should be the case. These aspects of your business can and should be largely independent of each other.

(a) Clients need not be charged on the basis of lawyers’ time and effort. They can be charged on the basis of successfully accomplishing a task within previously agreed parameters for a previously agreed price (with both parameters and price established according to competitive market realities). Indeed, clients have been telling firms this for the last ten years: they don’t care how much time and effort was required to generate their legal services. All they care about is the result they received and the experience they enjoyed (or endured) to receive it.

(b) Lawyers need not be compensated on the basis of the time and effort they expended to deliver a service. They can (also) be compensated for other means of contributing value to the firm, including clients landed, business generated, relationships maintained, solutions identified, teams managed, projects led, efficiencies found, juniors mentored, and a host of other criteria. Should we really be surprised that law firms that incentivize maximum lawyer time and effort are filled with overworked male lawyers disproportionately prone to depression and substance abuse?

Law firms have trouble appreciating that their costs of production and their revenue from clients aren’t really supposed to be causally connected.

If you want to successfully introduce innovations into your law firm, therefore, you first need to recognize that these innovations pose an existential threat to the way the law firm does business. So your real challenge — the challenge every law firm faces, whether it wants to innovate or not — is to change the way the law firm does business. Break the causal relationship between the amount of time and effort required to render a client service and (a) the price clients are charged for those services, and (b) the rewards provided to lawyers who helped deliver those services.

That’s not going to be easy, obviously. In fact, it might seem like I’m just substituting one insurmountable challenge for another. But here’s the difference: You have zero chance of stopping innovation from destroying lawyer hours. But you have a non-zero chance of changing the way law firms charge their clients and compensate their lawyers.

You’re going to have to change your law firm’s business model eventually. Eventually might as well start today.



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