The end of the beginning

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Posted in: Competition, Law Firms

I’d like you to consider the following list. It’s a compilation of several prominent alternative legal services providers (ALSPs) and the year they were founded.

  • 1999: Integreon
  • 2000: Axiom
  • 2001: Relativity
  • 2002: Consilio
  • 2003: Exigent
  • 2004: Pangea3
  • 2005: Novus Law
  • 2006: UnitedLex
  • 2007: Lawyers On Demand
  • 2010: Neota Logic
  • 2011: Elevate
  • 2011: Radiant Law
  • 2012: Ravel Law
  • 2014: Premonition
  • 2014: ROSS Intel
  • 2015: Diligen
  • 2015: Kira Systems

You’ll probably notice a couple of things here. One is that there are two distinct “waves” of foundings, one from 1999 to 2007, and then another from 2010 to 2015. The gap between these two waves is likely due to the financial crisis and Great Recession of 2007-08 — as is, I would suggest, the second wave itself, which rapidly developed in response to the widespread demand for better value from corporate clients following the recession. This list of ALSPs is far from comprehensive, of course, but even as a blurry snapshot of new legal services providers, I think it’s interesting.

The second thing worth noticing, from my perspective anyway, is that all these companies are young. None of them is even old enough to legally drink in the United States. (Y’all need to come north across the border.) Compare that list with this one:

  • 1998: Google
  • 2002: LinkedIn
  • 2004: Facebook
  • 2005: YouTube
  • 2006: Twitter
  • 2007: iPhone
  • 2010: Instagram
  • 2010: iPad
  • 2011: Snapchat

UnitedLex is the same age as Twitter. Neota Logic is as old as Instagram. Half the ALSPs on that first list are younger than the iPad. This entire segment of the legal market flat-out did not exist 20 years ago.

Yet today, according to the Thomson Reuters 2017 Alternative Legal Service Study, alternative legal services provision (“non-law-firms,” basically) is an $8.4 billion industry worldwide — and that figure doesn’t include companies that make legal technology to carry out legal tasks, which is probably at least another couple billion and change. So we’re talking about a sector that has generated many tens of billions of dollars over the last couple of decades, at least 1% of global legal spend annually, from a standing start the year Titanic was released.

I think that’s pretty impressive. And like many people, I’ve not seen much reason why this sector couldn’t continue to grow just as fast  in the years to come. Yet there’s at least some data out there to suggest that that growth has stalled recently.

In an important post last month, Ron Friedmann noticed an apparent disconnect between the conventional legal industry wisdom about ALSPs and the actual data about client spend. The conventional wisdom is that ALSPs have cracked the code of the legal market: they’ve seen how the traditional law firm’s archaic approach to producing and delivering legal work creates gaping market inefficiencies begging to be exploited, and they’ve figured out how process improvement, technological investment, labour arbitrage, and system overhauls can enable that exploitation. There are 8.4 billion reasons to think this is a pretty persuasive case.

And yet, Ron points out that the Altman Weil 2017 Chief Legal Officer Survey asked respondents to estimate the percentage of their total legal spend allocations according to type of provider: internal, outside law firm, and non-firm vendor. Here are the results:

Whoopsie.

“Spending on non-firm vendors, which includes alternative legal service providers, remains in the mid single digits with a shrinking share since 2014,” he wrote. “Many reports and commentators says ALSP is growing absolutely and taking share from law firms. Yet, the only time series data I have seen that asks about actual spending (not intent to spend) is [in this chart].”

Ron notes that this is hardly a definitive disproval of the theory of the Unstoppable Alternative Provider. We don’t have as much spending data as we’d like, to help us establish a case either way. But he also notes that ALSPs received the lowest rating from Altman Weil respondents on the question of which type of provider possesses the best “knowledge and understanding of the challenges of leading a law department.” So there’s at least some reason to ask whether ALSPs have maintained and can maintain their initial launch angle into the legal market. And if ALSPs’ growth in market share has in fact slowed or even stalled out altogether, we should try to figure out why.

Here’s one possibility. It might be that we’re nearing the end of the legal services disintermediation process. It might be that the supply side of the legal market has now broken, irreparably, in two.

The limits of disintermediation

The steady rise of the ALSP since the year 2000 — the legal process outsourcer, the flex-lawyer platform, the managed legal services company, and advanced legal software — has enabled the movement of millions of hours’ worth of routine, straightforward legal work off lawyers’ desks and out of law firms. That work has migrated into both ALSPs and law departments themselves, where it is performed faster, less expensively, and often to a higher degree of quality and reliability. The cost savings cannot be underestimated: Ray Bayley, founder of Novus Law, famously observed that for every dollar his company makes, law firms lose four. It’s not just that this routine work left law firms — it’s that it was streamlined, structured, and shrunken on the way to its new home.

This result is a testament to the fact that law firms were carrying out mind-boggling amounts of legal work inefficiently, haphazardly, and wastefully. It was work that didn’t really belong in law firms anymore and that is no longer part of many firms’ inventory (as unemployed would-be associates and poorly leveraged partners can both ruefully attest).  Twenty years after it first emerged, the ALSP sector no longer has to prove itself. Disintermediation of routine work from law firms has been a success.

But how much longer can it continue? How much more work of this type is there to disintermediate? Probably there’s still a decent amount — many corporate clients have yet to take advantage of what ALSPs have to offer. They haven’t moved far enough along the Rogers Diffusion Curve, or they haven’t accepted the fact that unless they ask for better options, they’re not going to get them. It’s possible that the lowest-hanging fruit has now been picked, and that clients who want better deals on their legal services spend are going to have to stretch themselves to reach it. I do think that will happen, in fits and starts, over the next several years.

The consequences of disintermediation

But what about all the legal work that has not been disintermediated, that remains behind in law firms? Because some work will remain — I don’t know anyone who really believes that everything law firms do can or should be bled off to ALSPs or “robot lawyers” or whatever. Some quantum of legal work requires skilled, trained, sophisticated lawyers to do it properly. Those companies in the ALSP sector are helping us define the quantum — whatever they can siphon off isn’t part of it — but they’re probably not going to be angling to get it. Law firms will be the default provider — but there’s good reason to think that they won’t hold that position for long.

Because the foundation of the traditional law firm is exactly all the routine, repeatable, hours-burning work that ALSPs are taking away. Law firms aren’t set up to perform only high-value, highly sophisticated work. Law firms are dependent on leveraging lower-cost labour — not just associates anymore, but also non-equity partners and even some junior equity partners — to carry out lower-value work. That’s the whole point of leverage. That’s where the partners’ profit is, and always has been. The sale of hours is the lifeblood of law firms — but the kind of work that could sustain 2,000 hours of lawyer effort every year is leaving the building. ALSPs aren’t just siphoning basic work from law firms; they’re siphoning off the lower levels of the law firm pyramid.

The problem is not that law firms are losing all the work they were overqualified to perform. The problem is that law firms are keeping all the work that requires highly skilled lawyers working in close collaboration using sophisticated tools on a multi-disciplinary platform to generate high-value outcomes for a previously agreed price. That, ironically, is the type of work that many law firms always say they aspired to do. But that sort of platform is not what most law firms are. And it is not what most law firms can easily transition to become.

Two legal supply sectors

It looks to me, then, like the supply side of the legal market has broken into two segments.

1. Routine Legal Work. This segment is occupied by alternative legal services providers using technology and processes to disintermediate basic legal tasks from complex, expensive law firms — in many cases, the kind of work lawyers really shouldn’t be doing. When the flow of that work from law firms to ALSPs finally dries up, we’ll have reached the effective end of disintermediation. The ALSP sector will have matured, consolidation will set in, and sector giants will eventually emerge.  That will be an amazing event, an historic correction to the legal services market and a major victory for the legal consumer.

2. Complex Legal Work. This segment is devoted to more complex, higher-value work — tasks that need good lawyers to perform — but it’s occupied by traditional law firms still reeling from the splitting of the supply side of the market. They are finding themselves increasingly bereft of their inventory and unsure of their future. How will they cope? And if they can’t cope, who will perform all the important and sophisticated legal services that require a lawyer’s attention, but that can no longer be effectively served from the traditional law firm?

Ten years after the financial crisis, we may have reached “the end of the beginning” of legal market change.  ALSPs, young and vibrant and exciting, are solidifying their grip on the routine legal work market. Law firms, older and disoriented and vulnerable, are eager to obtain the high-value work, but are struggling to figure out how they can perform it sustainably and profitably with their existing structures and systems. More than a few ALSPs, it should readily be admitted, will fail and fall apart in the churning waters of their new market segment. But more than a few law firms, equally, will fail and fall apart because they’re just not built to deliver what their newly demanding market wants.

And if these law firms do fail, who — or what — will replace them? New and better law firms, designed for the new market to be the kinds of platforms described above? I sure hope so — that’s what I’ve spent the last several years trying to encourage, at any rate. But there’s no guarantee that a new and better platform will arise to sustain lawyers in this segment of the market. And I don’t think anyone knows what will happen if they don’t.

Who’s your biggest competitor?

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Posted in: Clients, Competition, Uncategorized

That’s a question I sometimes like to ask when visiting a law firm or speaking to an audience of lawyers: “Who is your biggest competitor?” I usually let the respondent decide what “biggest” means — sometimes they interpret it to mean the competitor who poses the greatest threat to their book of business, or who has the kind of clients the lawyer wishes he or she had, or who keeps them up at night worrying about what they’ll do.

Take a moment to think about it yourself. Who’s your biggest competitor? If your colleagues happen to be walking past your door, flag them down and ask them. Come back to this post when you’ve written down your answer and/or collected others.

So, here are the most common answers to that question, in no particular order:

  • A specific lawyer in another firm
  • A specific lawyer in my own firm (surprisingly common in larger firms)
  • An entire practice group in another firm
  • An entire firm (managing partners think along these lines)
  • A legal provider outside my jurisdiction (LPOs, for example; not too often)
  • A non-lawyer substitute, such as LegalZoom (more common for smaller firms)
  • Me (the clever answer from lawyers who take pride in always pushing themselves harder)

I don’t dispute any of these responses, and some of them are absolutely correct. Sometimes a lawyer might identify the right category (a lawyer in another firm), but the wrong specific answer (it turns out that Attorney B, rather than Attorney A, is her biggest competitor). Nonetheless, I think that many of these responses are wide of the mark, because they overlook what I consider to be almost every lawyer’s biggest competitor, now and especially in the future.

  • My client.

We have entered the era of do-it-yourself lawyering. Clients of every type — individuals, families, businesses, corporations, non-profits, and governments — have taken their lead from Annie Lennox and Aretha Franklin: they’re “doing it for themselves.” They are self-navigating their way, in whole or in part, through the legal system to achieve their goals — not because they love the experience or because it delivers better outcomes, but because (a) the price of a lawyer’s full-time guidance is beyond their means or disproportionate to the value of their needs, and (b) products and services are emerging to help them self-navigate.

Consider:

There’s a lot more going on here than simply an “access to justice crisis,” although that’s certainly part of it. What we’re seeing, partly in response to that crisis, is the gradual acquisition by both individuals and businesses of the skills, confidence, and willingness to manage at least part of their legal affairs on their own.  [do_widget id=”text-7″ title=false]

The longstanding assumption at the heart of the legal system — one shared by lawyers, judges, and legal organizations — is that interaction with the system requires the assistance of a lawyer. We unconsciously assume that “hiring a lawyer” is the default setting. But as I’ve written before, that assumption is no longer shared outside the legal community — lawyers are in danger of becoming incidental to the legal system.

I think “self-navigation” is the fundamental trend driving much of what’s confounding lawyers and the legal system today. And I don’t really see that this trend will be thwarted or diverted anytime soon. Technology continues to develop useful and accurate tools for legal self-navigation, lawyers increasingly recognize the benefits of limited scope representation, and the spread of open and well-designed legal knowledge and information systems is constantly creating more sophisticated system users.

I suspect that this trend will result in a re-examination of the word “client.” We use this word to describe the people and businesses who hire us to guide them through the legal system — but when you think about it, “client” is an oddly possessive word for us to use. When we, as lawyers, call someone a “client,” we define them in terms of their relationship to us. That has several practical and ethical benefits for lawyers, but it also traps the person or business in a one-dimensional, lawyer-facing position regarding the legal system. What we’re starting to see is people and businesses struggling to free themselves from that straitjacketed, all-or-nothing position. And I think they’re getting the hang of it.

In future, people and businesses with justiciable issues will have a portfolio of options for addressing those issues, and at the centre of that portfolio will be not a lawyer, but the individual person or business. Lawyers will simply be one of the options in that portfolio, to be deployed selectively and appropriately when our skills match the present needs. Our “clients” are going to assert more independence, carve out a stronger position, gain more choice in understanding and resolving their legal issues. Instead of automatically coming to us and asking, “Can you do this for me?” they will increasingly bypass us while saying, “I can do this part myself.”

So don’t focus too heavily on what other lawyers, other firms, or even the dreaded “non-lawyers” are doing to take business from us. From now on, our own clients will be our biggest competitors.

Jordan Furlong is a lawyer, consultant, and legal industry analyst who forecasts the impact of the changing legal market on lawyers, clients, and legal organizations. He has delivered dozens of addresses to law firms, state bars, law societies, law schools, judges, and many others throughout the United States and Canada on the evolution of the legal services marketplace.

The incidental lawyer

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Posted in: Access, Clients, Competition

The South Carolina Supreme Court ruled this week that LegalZoom’s services do not constitute the unauthorized practice of law. As reported by Greg Lambert at 3 Geeks, LegalZoom’s press release celebrates the news, while also taking pains to note that the company’s documents have been reviewed by the state Supreme Court and that it frequently refers its customers to licensed lawyers for more complex work.

What interests me more than the outcome of the case, however, is that a lawyer (and he’s not the only one) felt compelled to spend time and money challenging LegalZoom in the first place. Think about the practical results that would have followed had this lawsuit succeeded.

A source of legal materials that, by most accounts, is at least adequate for the needs of its customers would disappear from the state, leaving those customers once again with the prospect of hiring a lawyer they know they can’t afford or seeking a lesser alternative (along with a chilling effect on any other business inclined to try the same thing). Would lawyers have reduced their fees in response, to become more affordable to the low-income market segment that LegalZoom serves? If so, it would have been history’s first recorded instance of a supplier lowering, not raising, its prices in response to reduced competition. If there’s a net social benefit here, I’m not seeing it.

What, exactly, are efforts like this designed to achieve? “The protection of the public interest” is the standard justification — even though the public has an equal if not overriding interest in having tools and processes with which to exercise its legal rights, is already protected by the right to sue an incompetent or fraudulent provider in court, and is comprised of adults who presumably can make informed decisions about their own lives with their own money. There’s a subtle but importance difference between “protecting the public interest” and “serving the public interest,” and we’re supposed to be pursuing the latter more than the former.

The likelier explanation, of course, is that these efforts are really trying to protect the interests of lawyers. But I think they’re actually achieving the opposite. Whenever we reflexively oppose “non-lawyer” legal service providers, we’re saying: “There is no place for anyone in this market except lawyers.” But that sentiment is not based in reality. If you believe it, then you ought to take a step back and consider just how incidental lawyers already are in in this market — how far we’ve drifted from the centre of the legal system and towards its periphery. And every time we try asserting our indispensability in the face of reality, we just accelerate that drift.

The American Bar Association, the Canadian Bar Association, the UK’s Legal Services Board, the World Justice Project, Stanford Law School, the Canadian Department of Justice, and the Canadian Action Committee on Access to Justice in Civil and Family Matters are among the groups that have released studies over the past several years demonstrating what a small and shrinking segment of the legal market is actually served by lawyers. A good example is the Department of Justice study from 2007, which asked thousands of Canadians if they’d had a “justiciable problem” over the past three years, and if so, what they did about it:

  • Slightly less than half dealt with it themselves.
  • About a fifth did nothing.
  • About another fifth got non-legal help (e.g., unions, government, friends or family).
  • Less than 12% got legal help.

Given that this survey was published a year before the financial crisis, I don’t see how that 12% figure has improved since then. And it’s not an outlier: the UK survey found a similar result, as only about 16% of small businesses with legal issues turned to a lawyer to help them. According to the ABA, courts across the United States report between 60% and 90% of family law matters involve at least one self-represented litigant. The legal market, viewed in its entirety, is like an iceberg, 85% hidden below the surface. Lawyers have concerned themselves only with the small fraction above water. Everyone else is down there on their own, holding their breath.

We normally use facts like these to illustrate the “access to justice” crisis, and we convene panels in which we sternly lecture the profession and the courts about our moral failure: “Your access to justice is bad and you should feel bad.” And that’s fine. But what these facts should also illustrate is something that we ought to take just as seriously: the “lawyer irrelevance” crisis.

With a few exceptions (principally criminal defence work), lawyers are simply not relevant to 80% to 85% of all individuals and businesses with legal issues. We’re off the table: we’re briefly considered and quickly dismissed. We need to recognize and absorb the fact that a huge amount of legal activity already takes place entirely without our involvement.

And that was the situation before the market began bringing forth new options for legal solutions. We were already peripheral before barriers to non-lawyer entry began falling, before legal technology began making such impressive strides, before LegalZoom was bringing in $200 million a year, before the legal startup sector received $458 million in outside funding last year. One startup I spoke with last month was just the latest to tell me that that its product was designed to “take lawyers out of the equation.” When you consider how few equations we’re already in, this ought to bring us to immediate attention.

Consider what’s going on in the market right now:

  • Australia approved “non-lawyer” law firm ownership a decade ago, England & Wales has issued 300 Alternative Business Structures licences since 2012, and Ontario will soon become the first North American jurisdiction to grapple with this option (aside from Washington State, which has already approved limited-license legal technicians).
  • Computers can now do the following things: draft commercial contracts, review contract provisions, assess electronic evidence for relevance, answer legal and regulatory questions interactively, predict the outcome of negotiations, and partition marital assets in a divorce. What will they be able to do in another five years, or ten?
  • Self-represented litigants are receiving growing levels of institutional support: courthouse kiosks provide them with guidance, lawyers unbundle services to support them through limited-scope retainers, and startups create systems and programs that maximize their ability to get the results they want. Self-representation is becoming normalized.

So let’s say that lawyers serve about 15% of the total potential market, and make a decent living doing so. As a lawyer, you might be satisfied with that: let the other 85% take care of itself, or use one of these alternatives. You’ll continue to serve the highest-level, most lucrative market segment, the small chunk of the iceberg above the water. So what if lawyers are peripheral to the entire market? We’re central to the richest part of the market, the one you care about, right?

Right. But what happens when all these “non-lawyers,” all this technology, all these self-represented litigants and their supporters, get better at what they do? What happens when, in addition to being cheaper than lawyers and faster than lawyers, they start to become almost as good as lawyers? Do you really think they’re not going to look up through the water at the tip of the iceberg and think, “I’d like a piece of that?”

This is what I mean when I talk about lawyers becoming increasingly incidental. A huge amount of legal activity already takes place without us — and what the foregoing should make clear is that that amount is growing. The ability of the legal market to function adequately and competently without the involvement of lawyers is increasing. Deprived of access to the best and most valuable asset available to assist them — lawyers — people have started to look for substitute assets, and where they can’t find such assets, to create them. Those substitutes are now here, and filing UPL lawsuits against them isn’t going to stop the process that spawned their development.

Because too often, that’s how we’ve been responding to what the market is telling us: with hostility, or with arrogance. I’ve lost count of the number of lawyers who’ve chuckled at warnings about “non-lawyer” providers, saying (sometimes literally), “Ka-ching! Every time a client tries to use one of these companies, it just means more business for me when they come looking for help to straighten out the mess they made.” What a selfish, unprofessional attitude we’ve developed: comfortably serving our 15% of the market, blocking the other 85% from accessing whatever help they can get, and smugly feasting off the problems of those for whom even these efforts went wrong. And we wonder why people are looking for alternatives?

But here’s the thing: I don’t believe that lawyers are doomed to the periphery of the market — after all, we used to be central to it. There was a time when we were intrinsic to the enforcement of legal rights and the execution of legal procedures, essential to a functioning market in legal services. But over time, we allowed ourselves to become optional, to become something close to a luxury good — content to serve the most well-heeled clients with the most interesting cases in the most convenient manner. We’re meant to be stewards of the entire legal system, but we’ve confined ourselves to our small gated grounds and let the rest of the property manage itself.

But that is not irreversible. I’ve met too many concerned, creative and compassionate lawyers, and I’ve seen too many praiseworthy change efforts already within the legal profession, for me to give up on lawyers as a universal legal solution. I believe that lawyers can and should serve more than 15% of the market. I believe we can because the tools and the procedures are now available to enable us to offer high-quality legal services more efficiently, effectively, and affordably. And I believe we should because we are still (for the moment) the most valuable and effective resource available for the resolution of legal problems, and it’s wrong for those resources to benefit only a select few.

Maybe not everyone needs the skills and expertise of a lawyer. But everyone deserves the opportunity to find out if they do. Let’s stop fighting the needs of the 85% and start figuring out how we can serve them instead.

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.  

ABS in Canada? Closer than you might think

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Posted in: Competition, Innovation

This post was originally published as two articles in the October 25 and November 1, 2013 issues of Canada’s The Lawyers Weekly newspaper. Reproduced here with thanks.

Unless you’ve been making a special effort not to notice them, you’re probably aware of Alternative Business Structures (ABS), the most radical of several developments introduced in England & Wales by the Legal Services Act 2007. An ABS license permits ownership of a law firm, or of any enterprise delivering legal services, by people who are not lawyers. It’s exactly as paradigm-shifting as it sounds.

In the 18 months since ABS status has been made available, more than 200 ABS licenses have been issued in Great Britain by regulatory bodies such as the Solicitors Regulation Authority and the Council for Licensed Conveyancers. Most of these licenses went to existing law firms or into enterprises in the personal injury and road accident sectors, but not all. Here are a few ABS highlights worth considering:

  • Slater & Gordon is the Australian personal injury firm that became the world’s first publicly traded law firm more than a decade ago. S&G has gone on an acquisition spree since gaining its ABS license last August, most recently with its acquisition of Manchester-based Pannone, The firm now counts 460 staff in 12 locations throughout the U.K., and its CEO has confirmed that the firm is eyeing the broader consumer law market.
  • Riverview Law is a corporate law firm that charges fixed fees for all its services. While its original focus was small and medium-sized enterprises, it has drawn interest from large companies as well. Riverview is owned by holding company LawVest, which has applied to become an ABS and is itself owned in part by global giant law firm DLA Piper. Riverview already counts 100 lawyers and plans to double in size over the next several months.
  • The Co-Operative is a nationwide consumer goods and services company that sells groceries, financial services, insurance, travel and funeral services, among other things. Last year, the Co-Op obtained an ABS to convert its existing Co-Op Legal Services division into a full-fledged legal services provider in the areas of family law, real estate, wills, personal injury, and employment law. Its website offers a toll-free number to phone for locations in the caller’s area.

Among the other entities that have received, have applied for, or are known to have interest in an ABS license are legal expenses insurer ULR Additions, venture capitalists Smedvig Capital, the Direct Line Insurance Group, private equity firm Duke Street, legal textbook company Jordans, logistics company Stobarts, outsourcing giant Capita plc, and a couple of accounting firms you may have heard of: KPMG and Ernst & Young.

Many of the new ABS providers have gotten off to strong starts. But not all of them have, and there’ve already been some high-profile stumbles and even failures. Conveyancing ABS In-Deed Online closed down in June just two years after its debut, its demise perhaps spurred in part by an overly hasty stock-market listing after it premiered.

For its part, Co-Op Legal Services reported a £3.4m loss in the first half of 2013 after breaking even in 2012, part of an overall terrible year to date for the parent company. (In fairness, Co-Op Legal did record an increase in revenue over that period, and it plans to stay the course.) And although it’s not an ABS, small-firm franchise provider Quality Solicitors is backing away from its plan to operate legal information kiosks in WH Smith bookstores around Britain. [do_widget id=”text-8″ title=false]

So far, then, the ABS market is playing out much as you’d expect in a startup industry: many diverse players, several early successes, a few notable shortfalls. The important thing, to my mind, is that the early predictions of disaster — non-lawyer shareholders driving unscrupulous behaviour, senior law firm partners selling out their equity shares to private investors, the collapse of professionalism — have not come to pass. Nor do they appear to be on the horizon.

Now, this may be all very interesting to a Canadian reader, but surely, it’s also academic? Whatever the merits of England & Wales’s great experiment in legal services delivery, Canadian lawyers can rest assured that nothing this radical will jump the pond and land in the colonies anytime soon. Right?

Well, maybe not. Four separate provinces are looking closely at potential reform of their legal services regulatory regimes, reviews that include consideration of alternative business structures and the delivery of legal services by entities other than lawyers. Many Canadian lawyers are at least aware of the changes taking place in Great Britain; fewer are aware that we may be closer to similar developments here in Canada than they realize.

Ontario is at the vanguard of this process, of course, having become in 2007 the first jurisdiction anywhere in North America to recognize and regulate non-lawyer providers of legal services (independent paralegals). There are now more than 5,000 paralegals licensed to provide legal services in Ontario.

In the fall of 2012, the Law Society of Upper Canada set up an Alternative Business Structures Working Group, whose mandate includes studying new developments in alternative legal service delivery worldwide, developing criteria to assess these developments, and identifying any legal service delivery models and regulatory changes that the law society should be considering. The ABS Working Group has already heard from many people with an interest in these matters (including yours truly), and it published an interim report in June 2013.

That report recommended continuing study of the issue and engagement with the professions on the subject of (a) limited non-licensee ownership of law firms and (b) a review of existing rules regarding business structures (including the absolute ban on fee-sharing and referral fees with non-licensees). Any recommendations made by the Working Group would be subject to Convocation’s approval. The Group’s final report is slated for spring 2014. (Read this Storify collection of tweets from last month’s LSUC ABS conference, too.)

In British Columbia, the law society has already investigated ABSs, publishing its own report in October 2011, shortly before ABS licenses became available in England & Wales. That report stated that although there was much talk about the promise of innovation and access to justice arising from ABSs, it was too early to tell whether other jurisdictions should follow Britain’s lead in radically liberalizing their legal services regulatory regimes.

But the report did not close the door on ABSs, recommending further study as more evidence came to light. Indeed, this past June, the Law Society of British Columbia’s annual Bencher Retreat was devoted to the topic: “The business of law in the 21st century: Do we risk losing (or can we maintain) our professional values?” Guest speakers (including yours truly again) and benchers spoke at length about emerging issues such as ABSs, access to justice, and the impact of technology on legal service delivery.

In Nova Scotia, at its most recent annual meeting in July, the Barristers’ Society Council approved a project plan called “Transforming regulation and governance in the public interest” (PDF), and began discussing goals relating to another strategic priority, “Enhancing access to legal services and the justice system for all Nova Scotians.” An executive summary of the latter report (PDF) stated that “[n]ew and innovative models for the delivery of legal services would be an essential component of any access to justice strategy.”  This article describes Nova Scotia’s plans in more detail. [do_widget id=”text-7″ title=false]

And in Manitoba, the Law Society has established a committee of local innovators (both those who are lawyers and those who are not) with an intriguing mandate: assume there is no law society, and design a structure and system to regulate legal services. For instance: Should lawyers have a monopoly on legal services, or should they be simply one competitor among many? The innovators will also examine ABSs, law firm regulation, and the controversial issue of recertification (requiring lawyers to demonstrate competence every several years). This committee will report in March 2014, with implementation of its recommendations planned for that fall.

(Separately, it should be noted, Manitoba is also collaborating with Saskatchewan, Alberta and B.C. about a common approach to ABSs.)

As you can see, the issues that these four law societies are investigating go beyond the relatively narrow topic of ABSs. They’re really looking into whether and to what extent legal services regulation in this country requires a serious reconsideration, and maybe even a major overhaul. These concerns, in turn, are prompted by the very real crisis in access to legal services in Canada, and by a sense that we may need to fundamentally rethink how we define “the best interests of the public” in the 21st century.

Having had the opportunity to address Benchers in Ontario and B.C. on these issues, I’m encouraged by what I’ve seen and heard. Each of these four law societies (and, I’m sure, others across Canada) recognize that we’re entering a crucial period in the evolution of the legal market, and that traditional models of legal services regulation cannot and will not pass through this period unchanged. Our law societies are asking the right questions, and I’m optimistic that they’ll come up with good answers.

So this would be the worst possible time for lawyers to again circle the wagons, as we’ve done so often in the past, demanding the continued ring-fencing of our traditional protected territory. Forces far beyond the control of lawyers are now driving this market. I would like to see us work with these forces, not strive pointlessly against them, towards the twin goals of improving access to legal services and enhancing lawyers’ professional values.

Will we see alternative business structures approved in at least one Canadian jurisdiction within the next five years? I’d rate that as a strong possibility. But for us to even get close to that point, we’ll have to engage in an thorough and overdue reconsideration of the purpose lawyers serve in Canada’s legal market.

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.  

Losing the confidence game

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Posted in: Clients, Competition

Here are six observations about the legal marketplace for you to consider, each supported by a news report filed just in the last few days.

1. Fewer people want to be lawyers.

Number of law school applicants continues to slide: “[US law school] applications submitted are down 13.6%…. That translates to about 66,696 applicants and about 484,576 applications…. Over the past two years, there’s been a 24.1% decrease in the number of law school applicants and a 19.6% decrease in the number of law school applications submitted… [T]he legal market … is expected to have difficulty absorbing the 45,000 students preparing to graduate law school in each of the next three years.”

2. Fewer new lawyers are finding legal jobs.

Two law graduates for every lawyer: “The [US] Bureau of Labor Statistics [BLS] estimates that 212,000 jobs will become available for [US] attorneys over the course of this decade, mostly as a result of replacement rather than growth. If the number and size of ABA-accredited law schools remains the same, that means 48% of law graduates this decade can be expected to get (not keep, get) a legal job.

3. More clients are using lawyer substitutes.

The low-cost lawyer is not a lawyer: “The financial constraints of the last few years have forced companies and law firms to consider whether every legal problem must be staffed with attorneys who, thanks to the high costs of their education, demand higher salaries.  If BLS’ projections bear out, it appears that clients and firms may have found permanent low-cost substitutes for many legal jobs in the form of paralegals, legal assistants and even accountants.”

4. Lawyers’ monopoly over legal services is dissolving.

Co-Operative Legal Services granted license to practice law: “In the past six years, [the Co-Op] has built a £25m-plus, 500-person legal business without needing to be an ABS, but the licence opens up more opportunities.They include launching a fixed-fee family law service later this year, handling legal aid work, and offering face-to-face legal advice through the Co-op’s bank network.”

5. Clients have access to lawyer-like technology.

Disruptive technology in the hands of clients: “The Association of Corporate Counsel today launched ACC Contract Advisor, a contract-drafting tool built on what is described as a “vast collection” of sample contracts and thousands of real-world clauses. Launched in collaboration with kiiac.com, the new resource is, unfortunately, available only to ACC members. … A user can search all documents for specific language. Model contracts and clauses can be downloaded.”

6. More disputes are being resolved without lawyers.

Coming soon: a global ODR system: “Businesses that have a really well-developed resolution system make a lot more money. Customers trust them,” added Rule, former director of online dispute resolution for eBay Inc., and PayPal, which collectively uses ODR to resolve 60 million disputes a year. … “We built a civil justice system. We built a walled garden. Now the challenge is more and more transactions are happening outside the walled garden.”

You could draw any number of conclusions from these six data points. But my strong impression is that we’re experiencing a switch in the legal market’s default setting.

Watching the legal profession today is like seeing a champion golfer, previously considered invulnerable, struggling with his game for so long that at a key moment, his opponents experience a sudden switch from feeling intimidated to feeling empowered. It’s like seeing a global business smartphone giant, whose products were once ubiquitous, suffering so many consecutive reversals of fortune that at a key moment, the market decides that the company’s products are no longer the default standard and switches en masse. It’s like seeing a national leader, in power for so long that everyone accepts his rule as a fait accompli, make enough bad decisions that the streets are filled with opponents who suddenly believe today, as they haven’t for many yesterdays, that change can happen.

The aura of incumbency is far more powerful than we realize. Politicians who “can’t” lose, products that “can’t” be outsold, majority opinions that “can’t” be swayed — in these and similar situations, the “can’t” is most often rooted in the challenger’s state of mind. The simple act of observing those who occupy positions of power leads us to credit them with more merit than they probably deserve. The incumbents, in turn, sense and absorb this impression, making them feel and appear even stronger, while also making them more complacent.

But when the aura of incumbency flickers or fades — when, for a variety of reasons, the “natural” leader suffers a series of setbacks and loses momentum — then a switch invariably occurs, first in people’s minds and then in the market. That’s where the legal profession is, right now.

We’ve held down the primary (if not the exclusive) position in the legal market for so long that everyone — ourselves included — came to believe that this was the natural order of things. Then things changed, as things tend to do. We’ve found ourselves losing much of our momentum and with it, much of our confidence. The aura of our incumbency has slipped. Everyone sees it, and everyone feels the change. And suddenly, we’re foundering.

Can we regain that momentum, restore our aura? I’m not sure. Confidence is a scarce resource in a marketplace: rarely do both the challengers and the champions possess it. Right now, the momentum belongs to the challengers, who see an opening they’re never seen before and had perhaps believed they never would. Lawyers are vulnerable, both in mood and in market reality, to a degree that I think we’ve never experienced. We need to find our confidence and re-establish ourselves as the favourites — but confidence, like liquidity in a financial crisis, is always available except when you really need it.

We’ve entered a crucial period in the evolution of the legal market, one that could usher in a paradigm change, a platform shift, a change on the leaderboard. Are we up to the challenge? The answer to that question contains the future of our profession.

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.

The year of living dangerously

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Posted in: Big Firms, Competition, Globalization, Innovation

So there goes 2011, and from a legal marketplace perspective, you could probably call it the year of hanging on. Large law firms hung on in the face of flat-lined or diminishing revenues, in no small part through the wonders of de-equitization. Small law firms hung on despite an expanding sea of legal service providers targeting the consumer market. Corporate law departments hung on despite seeing their outside counsel budgets cut by as much as 25%, yet still managed not to force change in the market. Law schools hung on in the teeth of a growing storm of criticism that they had failed to look out for their students’ financial interests. Measured in terms of endurance and tenacity, at any rate, it was a pretty good year for the incumbents.

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.

Law schools and the law of supply and demand

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Posted in: Competition, Law School

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.

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.

Not wanted on the voyage

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Posted in: Big Firms, Competition

From the incumbent’s point of view, the only thing worse than a revolution that topples you is one that renders you irrelevant. You can mount a comeback from exile; you can’t mount a comeback from Nobody Cares. Law firms, pay close attention.

We’re now less than six months away from the implementation of the Alternative Business Structures (ABS) provisions of England & Wales’ Legal Services Act. This event has been forecast as law’s “Big Bang,” the equivalent of financial services deregulation in the UK in the 1980s, although I suspect this will be a long rumble of change rather than a sudden explosion. But as we get closer to October 6, signs are emerging that should be making British firms very uncomfortable and firms elsewhere in the world more than a little uneasy. It’s quite possible that the biggest change in legal marketplace history will pass law firms by.

The Legal Futures website reported last week that English and Welsh law firms are finally starting to take ABSs seriously and are becoming more amenable to external investment. The bad news: the investors may already have lost interest. “City solicitor Paul Harding, who heads ABS Advisory Partners, said he was ‘absolutely convinced’ that private equity firms were getting ‘cold feet’ because of the difficulties they foresaw from investing in partnerships. … Mr Harding said law firms do not really understand what an investor would require of them. ‘They’re thinking about creating capital value that they can buy and sell, and not looking any further than that. They’re in for a shock. If money is made available, they won’t like the terms.’”

Subsequently, at an ABS-themed conference sponsored by Legal Futures, Richard Susskind issued the same warning: most law firms will not be invited to this party. “Law firms hold few attractions to private equity investors because there is no obvious exit route and little profit, he said, predicting that external investment will be made exclusively in new forms of legal business: ‘These are the businesses that are growing; doubling, tripling, quadrupling every year. Of course they’re going to attract investment.'”

When you think about it, the idea that private equity will bypass law firms and roll straight into new business models makes perfect sense. As any managing partner will tell you, running a typical firm is a task that inspires mythic adjectives like Herculean or Sisyphean. Law firms resist corporate management the way cats resist baths. John Wallbillich at The Wired GC illustrates this perfectly by listing five reasons why law firms couldn’t adopt the Goldman Sachs model:

  1. They don’t hire the best and then invest in their development.
  2. They don’t honestly evaluate talent at all levels.
  3. They don’t make people leave who don’t perform.
  4. They don’t directly link pay with performance.
  5. They don’t accept downside risk for upside reward.

Savvy investors would balk at an operation that failed on one of these points; most law firms fail on all five. Why would investment firms take on the headache and heartache of trying to corral hundreds of independent lawyers who each insist on professional autonomy and consistently put their own interests ahead of the firm’s? Many law firm partners, if offered cash for an equity position in their firms, would likely take the money and run. Private investors are fully aware that six months after buying your average law firm, they’d be left with a logo, a lease, and an unfunded pension plan.

Much better, from the investment community’s point of view, to start from scratch. Finance a small greenfield firm where lawyers work efficiently, price by value and are committed to the cause. Alternatively, kick the tires on some of these virtual or distributed firms that deliver results without overhead and attitude. Better yet, never mind the lawyers: go find an LPO the way Thomson Reuters did, inject millions of dollars into its operations, and see what happens. Or throw your weight behind a document service company like LegalZoom or a small-firm franchisor like Quality Solicitors. In all these cases, investors will be looking for private companies that think and behave like private companies, not like country clubs with billable-hour targets.

The threat of irrelevance is not limited to either the UK or the ABS world: it represents a general marketplace shift away from the traditional providers of legal services and their bases. The Daily Business Review recently published an account of a conference where in-house counsel from Microsoft and Hewlett-Packard — not exactly lightweight clients — cheerfully described all the ways in which they were slicing millions of dollars off their annual legal spend.

But the Microsoft lawyer also threw in a statement that should make even the biggest and most “prestigious” firms shiver: “‘When I started,’ he said, ‘everything I did … all the regulatory work … was centered in Washington. Now the centers of power are Asia, Sao Paulo and Moscow. … All the complex legal issues these days are outside the United States.” In other words, complex legal issues — the ones that big firms pursue because they pay off so handsomely in money and prestige — are leaving the building. If you’re a US firm that stretches no farther than the continental 48, that’s a problem.

A year or so ago, I quoted a Seth Godin observation: “When the platform changes, the leaders change.” I think that process is now underway in the law: a shift in the marketplace environment that has a very good chance of deposing incumbents and producing brand new players. Twelve months from now, when the first ABS dollars start circulating through the system worldwide, we should start to see that shift manifest itself.

Law firms that want to survive this change could stand to do a lot of things, but they might be best advised to start with management. Specifically, they could junk a model where the owners manage the business, manage it according to their individual short-term interests, and treat the firm as a means to an end rather than an end in itself. The global legal market is about to hand down a verdict on that model: it doesn’t deliver what we need. It’s irrelevant.

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.

Lawyers and the red balloon

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Posted in: Access, Competition, Innovation

Like many parents of small children, I’ve gotten to know Thomas The Tank Engine, and the peculiar universe he inhabits, far too well. As an example, I’ve now read the story James and the Red Balloon so often that I’ve begun to draw lessons for the legal profession from it.

To summarize: among the trains that work the Sodor Island Railway is James, a generally decent but often fussy and sometimes belligerent engine. On this occasion, James is unhappy to learn that a new mode of transportation has come to the island: a big red hot-air balloon. While the other engines admire the new arrival, James is peeved. “Taking vacationers around the island is our job,” he complains. “What if the balloon takes our passengers away? What will happen to us then?” By the end of the (admittedly brief) story, James has brought his grievances to rotund railway boss Sir Topham Hatt:

“But now the passengers will ride in the hot-air balloon.”

Sir Topham Hatt laughed.

“You’re right, James,” he said. “But they will need a ride home — in a train!”

James was delighted.

Sir Topham Hatt was right. The engines were busier than ever taking vacationers to and from the airfield.

On Sodor, as the Thomas stories bear out, change is rarely welcomed — but once everyone understands the situation better, change is accommodated and in the end, usually turns out to provide a net benefit. This is a message aimed at children but that resonates in the grown-up world, where we all tend to resist change despite the fact that eventually, it usually makes things better for everyone.

Few grown-ups resist change as staunchly and successfully as lawyers, of course — we’ve always shot down red balloons as soon as they appear in our sky. That doesn’t just apply to new technology, where we were among the last professionals to adopt email and where many of us still insist that Facebook is just a fad about which 500 million people are sadly misguided. And it doesn’t just apply to new ways of doing business, where we still reflexively feel that selling our work in tenths of an hour is natural and sensible or that 1,000 lawyers in 20 law offices worldwide can call themselves “partners” with a straight face. It applies above all to our approach to the legal marketplace over which we maintain, in most jurisdictions, strict regulatory control.

Lawyers, as a matter of course, restrict the supply of legal services and enforce Unauthorized Practice of Law provisions. We rail against title insurers and do-it-yourself will kits and independent paralegals and downloadable contracts and legal process outsourcers and a host of other low-cost competitors. We say (and we often believe) that we do this to protect the interests of clients and the public — but outside the soundproof walls of the profession, we come across more as protectionists than as guardians with a selfless concern for the greater good. We come across as hostile to change simply because it’s different and threatening.

My point is not that all these new providers and approaches are inherently trustworthy and high-quality. My point is that we won’t so much as let them make their case — even if, over time, they could introduce changes and innovations that make the pie bigger and better for everyone. Take, for example, LegalZoom. Richard Granat at the E-lawyering Blog gives us one of the most arresting titles in recent law blog history: Will LegalZoom become the largest law firm in the U.S.?

LegalZoom has been beta-testing a concept which links its marketing capabilities to a network of law firms that offer legal services under the LegalZoom brand. With some state bar associations accusing LegalZoom of  the unauthorized practice of law, it might make sense for the company to seek deeper alliances with networks of attorneys who are able to offer a full and ethically compliant legal service. Solos and small law firms, leveraging off the visibility and prominence of the LegalZoom brand, could reduce their marketing costs and enable these firms to better capture consumers who are part of the “latent legal market”  on the Internet.

Richard goes on to list the challenges that this concept likely would encounter, and suggests a “safe harbour” provision that would allow experiments like this to operate on a pilot basis in a specific jurisdiction to test their application. Another approach might be to simply launch the service, await the inevitable regulatory challenge, and let the courts decide whether the legal profession’s anti-competitive rules really serve the public interest. But for me, the lesson here is that LegalZoom, a company regarded with contempt by many lawyers, could end up using its considerable brand power to work with law firms, reduce their marketing expenditure and increase their business (not to mention, as Scott Greenfield points out, doing something to improve access to justice). That looks to me an awful lot like a red balloon bringing more passengers to the railway.

Smart companies in mature industries encourage red balloons (new competition and innovative technology) because they see them as a way to enlarge the market, reach more customers and increase everyone’s bottom line. The people at Amazon could foresee the day when Kindle users began swapping their books much like music listeners once traded tracks on Napster. Rather than fighting the trend, they’re now leading it by allowing users to “lend” an e-book to a friend for two weeks. Isn’t Amazon cutting its own throat by encouraging people to read books without buying them? On the contrary, says the founder of a Facebook lending book club: it will increase sales because people will want to own the book they borrowed (e-books can only be loaned once, ever) or weren’t able to finish in the two weeks. Libraries didn’t exactly kill the publishing industry when they first opened up, either.

It’s a pretty sad comment on the legal profession to say that publishing has become a more mature and forward-thinking industry than law, but that’s where we appear to be. If we want to change that state of affairs — if we want to grow up as a market and as a profession — then we need to stop thinking like a selfish train in a children’s story, viewing new arrivals as a threat to our narrow, entrenched interests. We need to find ways to welcome and accommodate the red balloons that are now floating, in growing numbers, into the sky above our heads. Chances are, at least some of them will end up bringing more passengers our way than we think.

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.

The new battlefield: convenience

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Posted in: Clients, Competition, Innovation

Whatever happened to Napster? Depending on your age, you might remember it either as a piracy-enabling nuisance, a groundbreaking music-swapping service, or the dusty antecedent of iTunes. Time magazine caught up with Napster’s founder, Shawn Fanning, and three other pioneering hackers in a recent article that describes them as “The Men Who Changed The World.” Between 1997 and 2001, Fanning, Bram Cohen, Justin Frankel and Jon Lech Johansen invented Napster, BitTorrent, Gnutella, and a range of DVD encryption-cracking software. If you’re not familiar with all these programs, suffice to say that they effectively ended vendors’ longstanding control over the distribution of their content.

The title of the piece is meant to be a little ironic, because not only were these four not “pirates” in any persuasive definition of the term (they’re all now associated with legitimate enterprises), but they also failed to usher in an era of universal free content exchange — and they deny that that was ever their intent. What they really wanted, the article suggests, was for content to be “free” in the sense of “freedom” — that the purchasers of content should be able to do what they liked with that content once they’ve purchased it.

But the article also suggests that these four men laid the groundwork for what has become the first successful — spectacularly successful — application of online content distribution: iTunes. Steve Jobs’ masterstroke succeeds where the likes of Napster and LimeWire and Gnutella failed for a host of reasons, including Apple’s steely negotiating skills and marketplace leverage gained through the success of the iPod. But a major factor in Apple’s success lay in the simple, accessible, appealing design of its products: as I’ve written elsewhere, ease of use and pleasing design is the hallmark of all Apple products, and is what I think will propel Apple to the top spot in the future world of online applications. The article’s writer expresses that sentiment with a thought so simple and powerful that it merits its own paragraph:

It turns out that there is something that can compete with free: easy.

That should be a jarring thought for the legal profession, because the same thing is happening to us. No, we’re not being threatened by a Legal Napster that will allow clients to swap legal products they’ve already purchased (not yet, anyway). The threat we’re facing is convenience: the ability of a client to access legal services in an easy, frictionless, and user-friendly manner. Law firms are not convenient vehicles for the development and sale of legal services — well, they’re convenient for lawyers, but not for clients. Law firms of all sizes, from solos to globals, are set up to render legal services in as time-consuming, remote and painstaking a way as possible, partly because it’s profitable, and partly because we’ve never cared all that much about the legal consumer experience.

Well, now it’s game on, because convenience is the battleground where our innovative competitors are massing their troops. These competitors don’t have expensive partners and premises and marketing budgets, and they can’t bring the resources to bear on the market that lawyers can. So they’ve taken different approaches, and one of those is to offer services that are much easier and more convenient for clients. And it turns out that ease and convenience are incredibly important for consumers who are stressed for time, overloaded with options, and in dire need of accessible, personalized attention to help them make their law-related choices.

Convenience is a major part of what LegalZoom sells — check out the pricing structure for many of their products, and you’ll notice that they charge a premium for overnight drafting and delivery of documents. Convenience is a key aspect of contract-assembly services like WhichDraft and Kenneth Adams’ brand-new entry, Koncision. Convenience lies behind the appeal of Allen & Overy’s just-unveiled online tool to track banking compensation laws worldwide. Convenience for the client — making the process of accessing legal services as easy and painless as possible — is the new killer app for this marketplace.

This development is the latest example of a longstanding rule of business finally infiltrating the legal world. It’s called the Buying Hierarchy, and it was first developed by Windermere Associates as a way of explaining the process consumers go through when making their market choices. It’s widely known from its citation in The Innovator’s Dilemma and is summed up nicely here:

Most customers follow a four-phase buying pattern, with only the last phase being based on price. These phases are as follows:

Functionality: Where a product or service meets a certain need or does a certain thing that cannot be accomplished in any other manner.

Reliability: When two or more competitors offer similar products that have the same functionality, consumers turn to the competitor whose product offers the better reliability.

Convenience: When competitors have products or services that offer the same functionality and the same relative reliability, consumers turn to convenience – those products that are the most convenient to use and the companies that are the most convenient to work with.

Price: When competitors all have similar products or services that offer all the attributes above in very similar manners, then the product or service essentially becomes a commodity and at that point must compete on price (following the schools of thought outlined above).

The legal marketplace long ago passed through the first two stages: functionality is widespread (you can find more than one lawyer or law firm in almost any jurisdiction that can carry out a given legal task) and so is reliability (you can also find more than one lawyer or firm that can be trusted to do excellent, reliable work on your legal task). But for decades, our marketplace has been stuck at convenience, and the reason for that is the one David Maister identified years ago: lawyers don’t need to innovate on practice management or client service because lawyers only have to compete with other lawyers.

Why bother adding all sorts of bells and whistles to make life easier for clients when you know full well that no other firm will force you to do so? Why bother investing in online service delivery, or training your lawyers to be fully responsive to client input, or creating systems that allow clients to access their ongoing legal purchases at a time and in a place and in a manner that suits their needs, not the firm’s? Why bother with convenience, when inconvenience is part of both the mystique and the profitability of the profession?

The answer, of course, is that we’re no longer competing just with each other. We’re competing with a host of providers — human and technological, local and foreign, lawyers and everyone else — who don’t make the same assumptions we do and who aren’t all working from the same decades-old playbook. If your firm hasn’t yet grasped the significance of the world’s largest legal information company buying the world’s largest legal process outsourcing company, grasp it now.

The ground rules have changed, and the Buying Hierarchy is coming to the legal marketplace. Convenience matters. Accessibility matters. Making things easy for the client matters. That’s the real New Normal we’re facing, and I suggest we respond to it with a little more urgency than we’ve shown so far. Because once convenience falls, as the Hierarchy demonstrates, the next and final stop on the road is price.