The law firm of the future: Thomson Reuters

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Posted in: Competition, Innovation, Publishing

Earlier this month, I wrote a blog post called “Destroying your own business” that explained why law firms, in order to adapt to the emerging marketplace, needed to blow up their own business models and essentially start over. I also lamented the fact that hardly any law firm was willing or able to do this. I asked, rhetorically: “Where are the law firms buying out LPOs and bringing them in-house?” As it turned out, it wasn’t a rhetorical question; I was just asking the wrong people.

Late last week, Thomson Reuters rocked the legal world (or at least, this corner of it) by announcing it was buying legal process outsourcing provider Pangea3. Coming on the heels of Norton Rose’s merger with/acquisition of firms in Canada and South Africa, it amounts to one of the most momentous weeks in recent marketplace memory. Neither side confirmed the price of the Pangea3 purchase, although sources estimated it between $35 and $40 million, and that would be a good price for Thomson. It’s difficult to overstate just how important this purchase is — it will transform at least two legal industries and quite possibly the whole marketplace. Here’s a quick summary.

1. The legal information market (formerly legal publishing) has been thrown for a loop. It’s been clear for a while that the end of “publishing” per se as a major product category was drawing near, so companies like Thomson and LexisNexis have been branching out into complementary areas. But bringing an LPO into the mix is a whole different story — it’s a gigantic gauntlet that other companies will have difficulty picking up. As Legally India points out, it’s difficult to find any trace of the LPO that Lexis set up in Chennai years ago. Thomson has taken a major step towards fully redefining the legal information sector, and everyone else will have to adjust and respond.

2. Equally, the LPO sector must be in some serious turmoil. This is still a very young industry — some of Pangea3’s original venture capital investors were among those Thomson bought out — and although several of the biggest are pretty well capitalized, Thomson is a financial colossus. If I’m an LPO competing for the same types of clients as Pangea3, I’m suddenly up against pockets much deeper than anything I’ve had to deal with before. This could drive a series of mergers within the industry (a consolidation process that’s already started with UnitedLex’s purchase of LawScribe) or a flight to find similarly global and well-financed partners or buyers. Pangea3’s founders were clear: they went looking for capital, but realized they needed a strategic partner.

3. The law firm marketplace cannot help but take notice of this: the company that used to sell lawyers their textbooks and caselaw databases is now, in effect, competing with them in the delivery of legal services. LPOs don’t need to exist in an either/or relationship with law firms — smart clients are using both, and smart firms and LPOs see each other as partners. But it’s also a fact that most law firms view LPOs, if they view them at all, as a threat to their ability to leverage billable junior work out of associates and “train” those associates (I use the word advisedly) in how deals and cases are structured. Law firms that thought of LPOs as a distant entity need to think again — especially because, with Thomson’s assistance, Pangea3 is going to open more offices in the US.

But for my money, the main event here is the transformation of Thomson Reuters from a company that provided legal support services to law firms and law departments into, well, something brand new. It’s not clear yet that we know what we’ve got on our hands here. Thomson has so many lines plugged into this marketplace that it is on the verge — it might already have tipped over — of changing from an information services company into a whole new beast.

Here’s a quick list of the companies, products and services that operate under the Thomson banner:

  • WestLaw: Legal research, legislative and case law resources
  • West KM: Knowledge management services for lawyers
  • ProLaw: Law practice management software
  • Serengeti: Legal task management and workflow systems
  • Elite: Financial and practice management systems
  • FindLaw: Website development and online marketing
  • Hubbard One: Business development technology and solutions
  • Hildebrandt Baker Robbins: Law firm management and technology consulting
  • GRC Division: Governance, risk and compliance services
  • IP Services: Patent research and analysis, trademark research and protection
  • TrustLaw: Global hub for pro bono legal work
  • Pangea3: Legal process outsourcing services

Missing from that list is BAR-BRI, the bar exam training and preparation company that Thomson purchased several years ago — and that, at the same time as it announced the Pangea3 purchase, Thomson also put up for sale. Above The Law drew some reasonable inferences from the fact that Thomson is getting out of the business of helping US lawyers enter the profession and is getting into the business of competing with the firms that would be hiring those lawyers. In terms of a clear signal about where Thomson thinks the marketplace is heading, it’s difficult to beat that.

Thomson has 55,000 employees in 100 countries worldwide, and although only a minority of those employees are in the legal area, that is still a number that dwarfs the world’s biggest law firms and is within shouting distance of the accounting giants that dominate the professional services landscape. Most importantly, Thomson is in the business of information and systems, and those are two of the keys to the future development of this marketplace. Peter Warwick, Thomson’s president and CEO, says that his company’s mission is “to help the legal system perform better, every day, worldwide.” Right now, Thomson is doing everything within that system other than the actual practice of law — and in a post-Legal Services Act age, Pangea3 is an awfully big step in that direction.

Something very big is going on, right now, in the legal services marketplace, and Thomson just became a major part of it. Get ready for a constellation of domino effects throughout the marketplace in response — and try not to stand in the way of any oncoming dominoes.

Destroying your own business

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Posted in: Big Firms, Competition, Innovation

Well before Blockbuster Video actually filed for bankruptcy protection earlier this fall, The Onion produced a prescient video about a museum tour based on the movie rental chain: Historic ‘Blockbuster’ Store Offers Glimpse Of How Movies Were Rented In The Past. One dazzled visitor remarks: “It’s like stepping into a time machine … it’s hard to believe people used to live this way.” The whole feature is well worth the two minutes, but the sting comes at the end, as the anchor adds: “Blockbuster joins a growing number of historical sites, including Buffalo, New York’s re-creation of a Virgin Records music store and Iowa City’s Borders Bookstore Museum.”

The only thing more striking than the dismantling of these former powerhouse franchises is the speed at which they’re coming apart. Blockbuster, Virgin and Borders were corporate giants with global reach and massive brand strength. Yet today, when you think of videos, music and books, you first think of Netflix, iTunes and Amazon, companies that launched in 2001, 1999 and 1995, respectively. How did the mighty fall so swiftly?

James Surowiecki asks that very question in a recent New Yorker column, citing not just Blockbuster but other former “category killers” like Home Depot, Toys R Us, and Circuit City, companies that dominated the “big-box” developments that spread like wildfire throughout suburbia over the last few decades. These stores were also giants in their day, but today each is either struggling badly in the new economy or has already sunk beneath the waves. Surowiecki puts his finger on the problem in three paragraphs that every law firm leader should read and take to heart:

The problem — in Blockbuster’s case, at least — was that the very features that people thought were strengths turned out to be weaknesses. Blockbuster’s huge investment, both literally and psychologically, in traditional stores made it slow to recognize the Web’s importance: in 2002, it was still calling the Net a “niche” market. And it wasn’t just the Net. Blockbuster was late on everything — online rentals, Redbox-style kiosks, streaming video.

There was a time when customers had few alternatives, so they tolerated the chain’s limited stock, exorbitant late fees … and absence of good advice about what to watch. But, once Netflix came along, it became clear that you could have tremendous variety, keep movies as long as you liked, and, thanks to the Netflix recommendation engine, actually get some serviceable advice. (Places like Netflix and Amazon have demonstrated the great irony that computer algorithms can provide a more personalized and engaging customer experience than many physical stores.) …

Why didn’t Blockbuster evolve more quickly? In part, it was because of what you could call the “internal constituency” problem: the company was full of people who had been there when bricks-and-mortar stores were hugely profitable, and who couldn’t believe that those days were gone for good. Blockbuster treated its thousands of stores as if they were a protective moat, when in fact they were the business equivalent of the Maginot Line.

What happened to Blockbuster and Virgin and Circuit City is now starting to happen to law firms, for all the same reasons. Firms have invested heavily in legacy costs like long-term leases of downtown offices with rich interiors, and have resolutely refused to take the internet seriously as a service delivery vehicle. They have thrived from the absence of client choice, but will suffer as new competitors offer more options and, ironically, more personalized service. Firms aren’t evolving because they can’t evolve: the lawyers within these firms are so invested financially and emotionally in the old structure that they can’t believe things could change.

It’s difficult to see how the outcome for our profession will be any different, because like Blockbuster, we aren’t even trying to adapt. Almost all the innovation in the legal marketplace is now taking place outside of law firms or on their periphery. Contract lawyers work from home, legal process outsourcers work from Mumbai or Manila, LegalZoom works entirely on the internet — these entities are the drivers of change today. The happy result for clients is a fractured marketplace in which they’ll have their choice of which providers to provide which services in which priority.

If you want to see what the client of the future looks like, in fact, take a good look at Colt Technology Services, a UK-based Europe-wide IT company profiled this week in The Lawyer. Colt’s GC uses a combination of providers, including law firms, an offshore captive operation, contract lawyers, and Berwin Leighton Paisner’s revolutionary Lawyers On Demand service, to meet his company’s legal needs. This is an established client trend towards using a portfolio of legal providers, and law firms should be aware of it by now.

But what really concerns me is this: where is the strategic response from law firms to the revolution outside their gates? Where are the signs that firms recognize the existential threats to their marketplace position and are reacting accordingly?

Here’s an example: last month, Bloomberg BusinessWeek published a cover story about Diapers.com, a sort of Amazon.com for baby and infant products that looked to be the next evolution in online shopping. Its founders were quoted in the article as saying they’d welcome a price war with Amazon, and the article was in fact titled “What Amazon Fears Most.” This week, Amazon announced it had bought out Diapers.com for a truly stunning $545 million. That is how you handle upstart competition that threatens your market position.

So what are law firms, facing the same kind of threat, doing these days? Merging with each other, of course: mergers within the United States, within Canada and across the Atlantic, with more surely to come. Same old response, same old thinking. Where are the law firms buying out LPOs and bringing them in-house? Where are the law firms adapting the online delivery methods of startups? Where are the law firms that recognize the peril of their position and are moving to thwart, or to transform themselves into, their smaller, swifter, hungrier new rivals? They’re nowhere to be found, and that’s why the future of law firms looks a lot more like Blockbuster than Netflix.

Surowiecki concludes his article with an observation that readers of The Innovator’s Dilemma will find familiar: “Sometimes you have to destroy your business to save it.” Law firms, unfortunately for them, don’t come with self-destruct buttons.

Will-writing and the redefinition of “legal services”

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Posted in: Clients, Competition, Governance, Outsourcing

Last month, a BBC investigative program called Panorama exposed a wide range of illegal and unethical practices by “will-writers,” advisors who help people prepare wills and who are not lawyers. One result of that broadcast could be a significant clawback of lawyer regulatory power over the legal services marketplace in the UK, with implications for the future of this marketplace globally.

Here are some detailed accounts of the Panorama broadcast and of the resulting controversy. Briefly: the program uncovered several instances of will-writers who exploited their clients through massive overcharging, shoddy workmanship, and even outright fraud. The abusive will-writers were neither lawyers nor (evidently) members in good standing of one of the professional will-writing associations that have evolved with the 2007 passage of the Legal Services Act. That statute divides legal services into “reserved legal activities,” which are exclusive to lawyers, and “legal activities,” which are not exclusive to lawyers and are not otherwise subject to specific regulation. Will-writing is not included in the former category and, therefore, is considered an unregulated activity.

In the wake of the broadcast and the public recriminations that accompanied it, the relevant authorities are now under pressure to take swift action. The Legal Services Board, the overarching regulator of all legal professionals in England & Wales, has promised to fast-track a debate and decision regarding whether will-writing should be added to the list of “reserved legal activities” and given exclusively to lawyers. (The Law Society of Scotland is already pushing such measures forward.) An interview with two officials from the Law Society of England & Wales sums up lawyers’ concerns with the current situation (which will be familiar to all advocates of lawyers’ role in legal services provision):

It is the presence of untrained and unregulated people working in the area that has led to a range of problems that can adversely affect consumers, Clarke and Roberts insist. “A lot of clients don’t understand making a will can be a complex process. They think it should be simple, but often it’s much more involved due to the presence of step-children, property and other assets in other countries and lots of other issues which are a part of modern life,” Roberts notes.

Unregulated will writers who lack legal training often fail to understand the legal complexities themselves. “One I know was going to make a will for a large estate which would have been involved, so he merely suggested everything be left to a trustee who could sort it all out as he saw fit. All solicitors are not infallible, but experienced solicitors will understand how to deal with complex estates and take account of all the eventualities so the testator’s wishes will be realised and the estate can be properly managed,” says Roberts.

You can see where all this is likely to lead: to the designation of will-writing as a reserved legal activity under the Legal Services Act. In one respect, it’s difficult to argue against this turn of events. The abuse of unsophisticated consumers, many of them elderly or impoverished, is repugnant and needs to be stopped in its tracks. Solicitors, as noted, aren’t perfect, but they come with a guarantee of education and training and they are backed by insurance funds that can reimburse clients who’ve been poorly served. Wills and estates, in many cases, are not cut-and-dried matters and they can require sophisticated advice, especially at a time of generational change when demand for estate law help will only rise.

Given all that, making will-writing a reserved legal activity seems like a no-brainer. And yet, there are good reasons for the Legal Services Board to proceed with caution here.

To begin with, it’s not entirely accurate to call will-writing an “unregulated activity.” Consumer protection laws are in force precisely to protect the buyers of commercial services that fall outside specific regulatory schemes; moreover, the last time I checked, fraud is still on the books in Britain as a criminal offence. Provisions already exist in Acts and regulations to protect people from the incompetent and unscrupulous and to prosecute such predators where necessary.

Secondly, the current absence of a specific regulatory system for will-writing doesn’t mean that the only alternatives are full lawyer control or unfettered market freedom. The Institute of Professional Willwriters, one of the recognized will-writing groups, will happily remind you that it is the only organization of its type whose Code of Practice has been approved by the Office of Fair Trading. Self-regulation by the will-writing industry down the road is not out of the question, nor is the creation of a specific will-writing regulatory scheme that doesn’t restrict this area of practice to lawyers.

Thirdly, access to justice issues arise whenever a decision is made to restrict an activity to the legal profession. Part of the reason for the huge upsurge in will-writing services in the UK is that less than half of Britons have a will; considering that lawyers have had every chance to exploit this latent market and have failed to do so, it’s hard to make the case that they should now have exclusive rights to this practice area (especially since lawyer regulation tends to drive up costs). The legal profession and the government jointly own responsibility for a failure to educate the public in this area, with the result that, for example, 67% of consumers wrongly believe all will-writers are solicitors.

Fourthly and most importantly, the whole question of what should constitute a “reserved legal activity” hasn’t received nearly enough scrutiny. That’s the conclusion of a just-released report sponsored by the Legal Services Board and written by Stephen Mayson, the widely respected director of the Legal Services Policy Institute. In his report,

Mayson said he had found the origins of the six activities currently reserved to be “remarkably obscure,” with “little basis for suggesting a common policy rationale that justifies their existence”. For example, he discovered that the conveyancing monopoly came about in 1804 when Prime Minister Pitt the Younger wanted to appease a profession unhappy with his plans to increase taxes on articles of clerkship and practising fees. Professor Mayson said it would be “unwise to consider any particular legal activity for inclusion or exclusion in the absence of a broader set of criteria that could be generally applied.”

So there are good reasons for England & Wales to think twice before reflexively placing the writing of wills under the exclusive authority of the legal profession. But if you’re a North American lawyer who practises something other than wills and estates, and you’ve made it this far into this post, you’re probably wondering what possible relevance this has to you. I’d argue it has great relevance, because this looks like the first major skirmish in what will be a decade-long war over a crucial question: what should be classified as “lawyer services” and what can be classified merely as “legal services”?

We’ve tended to use “legal services” and “lawyer services” more or less interchangeably over the years, such that “legal services” has become a virtual synonym for “the practice of law” (lawyers have not hesitated to encourage this blurring of lines). But the will-writing controversy forces us to think about law-related services that, for reasons of both marketplace efficiency and access to justice, could and perhaps should be kept outside the strict ambit of the legal profession. Granted that a Wild-West free-for-all wills market serves no one’s interests: is the opposite end of the spectrum, wills kept under lawyers’ lock and key, the best alternative? Isn’t the middle ground worth at least some exploration and settlement?

Consider another example, a growing force coming from the opposite direction: legal process outsourcing. Three recent articles explore the impact of LPOs on the traditional big-firm business model, and I recommend a thorough reading of all three:

If I can try to summarize the thrust of three lengthy and insightful pieces, it seems to be that:

  • LPOs and other non-traditional legal service providers are taking a growing amount of once-profitable associate-level work from law firms,
  • the unbundling model upon which these new providers are based is changing client expectations about where and how certain types of legal services are purchased, and
  • the result will be law firms with work of less quantity but higher quality, which will inter alia benefit the quality of a legal career generally.

LPOs, essentially, are forcing law firms (and their clients) to ask the critical question of our times: is a lawyer really the best choice to do X? The answer in many cases is yes, especially when the job calls for the kind of judgment, nuance, skill and wisdom that lawyers bring to the best of their work. These are “lawyer services.”

But in many other cases, the answer is no: all or parts of tasks such as document review, due diligence, electronic discovery, document drafting and production, small-claims court representation, and basic transactions like house purchases, straightforward divorces, and as the current situation in England & Wales suggests, wills and estates, don’t always need a lawyer’s attention. Should the providers of these services, whomever they are, be qualified and trustworthy? Of course. Must they always be lawyers? I think the answer is: of course not.

As time goes on, “legal services” will come to mean “commercial services related to the exercise of law-related rights and the fulfillment of law-related responsibilities,” without the necessary inclusion of lawyers. “Lawyer services” will be a sub-category defined as “legal services that, for reasons of required skill and/or public protection, are provided exclusively by lawyers.” “Legal services” will be offered by a wide variety of domestic and foreign providers, none of whom need to be lawyers; their regulation will be specific to the competence required, and access to these services will be available more widely than when lawyers offered them more or less exclusively. “Lawyer services” will be the cream of what we now consider to be the very deep crop of lawyer activities, only the most challenging and the most valuable to clients.

There’s nothing novel about this kind of distinction in professional services.

  • Richard Susskind quotes the statistic that 4% of health-care services are provided by doctors, while 50% of legal services are provided by lawyers. We accept a distinction between “health” services (delivered by nurses, physiotherapists, massage therapists, psychiatrists, and many other “health practitioners”) and “medical” services (delivered by medical doctors — the word “medical” itself is derived from the Latin for “physician”).
  • When we go to have our teeth checked, we usually spend most of our time with a “dental assistant” and only the last few minutes with the “dentist.”
  • We use “architects” and “engineers” to design our homes and buildings, but we hire “contractors” and “tradespeople” to implement designs and renovations through actual construction — the heavy lifting, literally.

We accept all these situations as normal because the markets for these professional services have evolved to allow the most skilled professionals to do the highest-end, highest-value work and an army of other professionals, para-professionals and skilled craftspeople (usually under specific regulatory or quasi-regulatory regimes) to carry out the rest of the work. Doing it any other way — requiring medical doctors to give flu shots, obliging dentists to deliver teeth-cleaning, requiring engineers to lay bricks — would result in massive system backlogs, huge price increases, and widespread dissatisfaction by both the professional and the client — in other words, pretty much the situation we have now in the legal marketplace.

The legal marketplace, whether some lawyers like it or not, is heading towards the same kind of stratification as other professional fields, to a massive “sorting out” of what lawyers need to do and what they don’t need to do. It’s immaterial whether this is brought about by regulation or the marketplace; in the end, these two forces will be working in virtual lockstep to effect change. There will be a period of disruption, maybe even chaos, as we figure out how certain legal services are best delivered by non-lawyers; it won’t be a tidy process, and there will be damage of the kind suffered by will consumers in the UK (and associates in large law firms). But every marketplace has had to go through this, and if doctors could see their way clear to allow non-doctors to take on the sacred duty of preserving life and promoting health, I think lawyers can bring themselves to make a similar commitment.

This is what the next decade will bring: a Great Sorting Out of demand for legal services, as the market reviews its choices and decides where and from whom it wants to acquire what it needs. As time goes by, the category of “legal services” will grow by volume, while “lawyer services” will shrink by volume; but both categories, paradoxically, will grow in quality. Lawyers in particular will benefit from a task list that requires more sophistication and higher-level skills. For that reason alone, but also because of the ultimate interests of clients, we should be working to narrow our focus on the highest-level work while simultaneously supporting the development of practices and regimes to oversee the more basic work we used to do. It’s anyone’s guess whether our profession will step up to that challenge.

Law firms and the JetBlue guy

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Posted in: Competition, New Lawyers, Talent

Even if former JetBlue flight attendant Steven Slater didn’t plan his famous chute-deploying resignation in advance, he seems ready and willing to exploit the moment, perhaps to land a reality-TV hosting gig. If it does turn out that his Big Quit was staged (like that of Elyse Porterfield, the “Dry-Erase Girl” whose hoax didn’t even last 24 hours), it will be a salient reminder to all of us about things that seem too good to be true.

But what’s real, and what remains, is the widespread public support these figures received and what they represent: a daydream about the courage to quit a job that treats you with less respect than you deserve. And it underlines a serious trend in the workforce to which law firms should be paying close attention. As Daniel Gross explains in a Newsweek commentary, “the poor labour market and workers’ antagonism toward employers and customers are actually connected”:

“The economy has been growing for a year, and corporate profits have surged — Standard & Poor estimates that income of the S&P 500 rose nearly 52 percent in the second quarter of 2010 over the same period in 2009. Much of that impressive growth has been driven by the remarkable gains in efficiency and productivity that corporate America has notched since the recession took hold. Last year, productivity — the ability to produce more with less — soared 3.5 percent, up from 1 percent growth in 2008 and 1.6 percent in 2007.

“Yes, companies have embraced the Gospel of Cost Cutting with missionary zeal — printing on both sides of the page, eliminating bottled water, turning off the lights. But most of the gains came straight out of payroll. Companies slashed salaries and curtailed benefits, all while asking shellshocked veterans to pick up the slack for downsized colleagues. Even as business picked up, companies have been extremely slow to hire; the private sector has added just 630,000 jobs so far this year. And when it comes to wages and benefits, corporate America’s bean counters could make Scrooge blush. Many of the firms that slashed pay or cut 401(k) matches haven’t restored them even though their balance sheets and profits are now healthy. …

“The last couple of years have been a golden era for employers — they’ve found that they can hire whom they want at lower wages, and that it’s easier to retain folks without having to boost salaries. But at some point, companies that want to grow will have to break down and hire new people, or turn part-timers into full-timers, or put contractors on the payroll. Many employers are treating existing and potential employees as if they’re desperate for work. And plenty of Americans are. But desperate times can lead to desperate measures. Push your workforce too hard without adequate reward, and someone just might tell you to take this job and shove it.”

I was reminded of this observation when reading the latest financial report from a large law firm: “Profits rose, revenue dipped at Baker & McKenzie in fiscal 2010.” I’ve seen a couple dozen of these stories in the mainstream legal press over the past few months, breathlessly announcing what amounts to the same thing over and over: firms are bringing in less money, but partners are reaping higher profits. That happy result comes from the important middle step that the headlines don’t include: “Revenues down, costs slashed in a surge of panic, profits up.”

We all remember the bloodletting committed by large law firms in the wake of the financial crisis, as staffers and junior lawyers found themselves out on the street. The firms that threw their most vulnerable over the side then are the same firms reporting rising profits now. It was ever thus — that’s how businesses work, chopping assets (including people) to ensure continued or improved profits for shareholders. But when you chop and chop, making abundantly clear that employees will always be let go at the first sign of profit trouble, then you also risk the full-scale alienation of your talent pool.

Tens of thousands of 2008-10 law schools grads are still deeply in debt and struggling to find law jobs to stay afloat, even to the point of moving to India to work for an LPO. Many law firm partners, I think, have forgotten just how frustrating and humiliating it can be to have no job and no prospect of finding one — and they never had to look for work in an economy like this, where unemployment shows every sign of becoming chronic. And to rub salt in the wound, the law firms that cast off their young lawyers love to blame the victim, castigating new grads for their “sense of entitlement” and “lack of work ethic.” This can’t continue without inflicting real damage.

There are plenty of archaic traditions in the legal profession that have no place in the 21st century. But one tradition that deserves its place of pride is the responsibility to help usher in the next generation of practitioners. The recognition that today’s juniors are tomorrow’s leaders was sufficiently widespread that firms took care of their people as a matter of course. As stewardship in the legal profession has faded, first gradually and then dramatically, lawyers’ trust in the firm and the partnership has faded with it. This isn’t just something we should feel bad about. This is a collective decision to exploit legal talent at the worst possible time.

Throughout this coming decade, we are going to see the continuous rise of lawyers engaged in legal services but employed by non-lawyer entities. Legal process outsourcers, e-discovery providers, document assembly companies, legal project management experts, legal knowledge professionals, and many other entities outside the law firm world will be hiring experienced lawyers to populate their offices. Law firms that took care of their people in the tough times will have nothing to fear; those that didn’t will be astonished and appalled at how easily their lawyers and legal professionals will be poached. Steven Slater’s real-life jump, no matter how contrived it might have been, reflects employees’ economy-wide readiness to jump from jobs that treat them as fungible, exploitable, and expendable. If that’s how you’ve treated your people, you can look forward to the day when they return the favour.

How to kill a law firm

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Posted in: Competition, Innovation

There’s a story told about Jack Welch, former GE president — it might be from one of his books, or it might be apocryphal; quite possibly it’s both. The story goes that soon after he took over the company, he called in his vice-presidents and other senior people and advised them that countless smaller companies and start-ups were out there gunning for GE, hoping to take down the top dog by finding the chinks in its armour and exploiting them. He directed his people to locate these companies, identify the disruptive innovations they were coming up with, and prepare defences against them.

Two days later, Welch called those same people back into the boardroom and told them he’d changed his mind. When his VPs and senior leaders found these companies and figured out what they were doing to destroy GE’s business, they weren’t to prepare defences against those innovations. They were to adopt them.

In a nutshell, that describes the challenge facing companies in virtually every industry today, especially legacy industries like music, automobiles and publishing where complacency has led to ruin. Very rarely, companies rise to the challenge: consider The Atlantic magazine, which is meeting this innovator’s dilemma by doing exactly what Jack Welch prescribed: reinventing its business model before competitors force it to do so. In the words of the company’s media president:

“‘If our mission was to kill the magazine, what would we do?'” said Smith, who added that a digital competitor was going to do that anyway, so they did it themselves.”

The article continues: “There are so few companies that realize this needs to be a key element of their strategy. Someone else is out there trying to kill them. So do it yourself and reap the rewards.  … [The Atlantic] recognized that digital wasn’t just an adjunct to the print product, but a core element of the brand and the publication. So, they … looked for ways to make the digital product be fantastic on its own. And, now, nearly 40% of the brand’s revenue comes from its online properties….

What GE and The Atlantic saw and responded to, most lawyers and law firms cannot or will not see. Most lawyers are blissfully unaware that they’re in the cross-hairs of numerous entities outside the legal profession, entities that have set their sights on the legal marketplace intending to own some or all of it. These entities know the history of this market very well, and they know that lawyers and law firms own a near-monopoly on legal services thanks mostly to ancient regulatory circumstance. They believe those accidents of history have run their course, and that the field will belong in future to whoever best delivers what the market wants and needs.

Accordingly, these entities are now sizing up the legal profession, looking for weaknesses and soft spots to exploit. They have several advantages, including financing, business savvy, and patience. But their most powerful weapon is their attitude: unlike most lawyers, they believe there’s nothing natural or pre-ordained about lawyers’ domination of the legal services marketplace, and they believe it can be ended within the decade. Very few lawyers believe this, and very few law firms are taking the Jack Welch approach of both knowing your enemy and adopting its methods.

So here’s a primer on your enemy and its reconnaissance efforts. When these entities sit around a table and say, “How can we kill off law firms? What key weaknesses can we exploit?”, here are three answers they’re most likely to come up with, the jugular veins they’re aiming for.

1. Price. Simplest and easiest. Clients of all types and sizes will tell anyone who asks (a group that rarely includes lawyers) that they dislike what they perceive as the high price of legal services and the uncertainty surrounding what the final price will be. Competitors outside the profession have looked at this carefully and concluded that lawyers’ prices are high for two reasons: (1) lawyers are incredibly inefficient, the equivalent of candlelight-workers in the electric age, and (2) lawyers are accustomed to a certain income and lifestyle and, in the absence of real competition, charge high prices to maintain them.

These new entities are hyper-efficient, partly because they come from start-up tech-aligned backgrounds, and partly because they never worked in law firms and weren’t raised in all the assumptions by which lawyers operate. And because they’re outsiders, hungry and ambitious, they start from a much lower level of “necessary income” expectations (it helps that they’re not burdened with tens of thousands of dollars in law school debt from the start). Lawyers can rattle off many reasons why we charge what we do, failing to recognize the fundamental marketplace rule that customers don’t care, not one inch, how much it costs you to provide a product or service. Price is a gaping strategic exposure for lawyers, and competitors have already locked onto it.

2. Intelligence. I don’t, of course, mean this in the sense of raw brain power; lawyers are plenty smart. (One of lawyers’ strategic weaknesses, by the way, is our failure to recognize that we’re not the only or the most gifted smart people in the room). I mean this in the sense of industrial or competitive intelligence, the ability to understand and manipulate the ways in which we and our competitors do business and the costs at which that business is carried out. Most lawyers and law firms have only a rudimentary grasp of these things: business is done the way it’s always been done, from our forefathers’ time: it works and it makes money, so what’s not to like?

Law firms with rich intelligence capacities would know how much it costs them to deliver their services, how much their rivals charge and why, what knowledge its people and systems collectively possess, and how to apply that knowledge in a systematic way. This describes very few actual law firms; but it describes perfectly the competitors now entering the marketplace. They employ elementary principles of business process engineering and more advanced methods of project and knowledge management, they have a knack for getting work done both cheaply and well, and they know their clients and other competitors cold. The legal profession’s counter-intelligence efforts in this regard have been virtually zero, and we are terribly vulnerable as a result.

3. Responsiveness. This concept has several different dimensions, some of which will be familiar to lawyers from client complaints. We don’t call clients back quickly enough or stay in touch often enough; no matter what we may believe of ourselves, client surveys consistently state that as far as our customers are concerned, we’re pretty terrible communicators. It also applies in the sense of lawyers’ failure to properly immerse ourselves in clients’ worlds and priorities, such that our services could be provided in a more timely, appropriate and targeted fashion. These are not insurmountable obstacles: these are simply choices lawyers have made regarding how to go about our work. These new entities, seeing an opening, are choosing otherwise.

But even more fundamentally, “responsiveness” describes a category of weakness that applies to our whole approach to the marketplace. If there’s one thing that strikes competitors from outside the profession about our marketplace, it’s this: why don’t lawyers care that 75%-80% of the population, civilian and corporate, can’t afford lawyers’ services? Never mind the moral argument: what kind of industry or profession is content to let so many fields lie fallow? How can you possibly not care about billions of dollars’ worth of legal service opportunities that go begging to be met (with more to come, as the economy surely worsens)? The legal profession, from all outward appearances, is either clueless about or indifferent to the latent legal market. Rest assured, our new rivals are not.

How do you kill a law firm? Assuming the firm doesn’t die of natural causes or commit suicide, you identify its weaknesses and you exploit them mercilessly, over and over again, until the firm is helpless to defend itself or its client base. Believe me when I say that as targets go, most law firms present themselves as fat, immobile, complacent victims-in-waiting. It’s not too late to prepare defences, and it’s not impossible, no matter how it might seem from the inside, to take the necessary, disruptive-innovation steps to turn your firm into the kind of world-beating champion your rivals hope to become. But time is running very short. Jack Welch took two days to change his mind. How long will it take you?

How to compete on price

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Posted in: Competition, Marketing

One of the oldest pieces of marketing advice in the legal profession is: “Don’t compete on price.” Wiser heads than mine constantly warn lawyers not to cut their prices to match what other sellers are providing, that engaging in a price war for legal services is as potentially ruinous as getting involved in a land war in Asia. There are at least three reasons for this:

1. Price wars are a death spiral. Every time you reduce your fees for a service to undercut a competitor, you set off a chain reaction whereby everyone in the market goes one step lower until even the “winners” can’t turn a profit. (Although read this James Surowiecki column for a counter-intuitive take on price wars.)

2. Price-cutting leads to quality reduction. It’s simple: if you’re not bringing in as much money for the same work, you need to cut back somewhere else: firing an able assistant, scrimping on new supplies, taking on more files than you can competently handle. (Although read the rest of this post for my thoughts on cutbacks.)

3. Price is an important marketplace signal. Unsophisticated buyers (and in the law, that’s most buyers) want the best deal, but they also worry about services that seem too cheap to be true. Lawyers offer a top-quality product, and a robust price for that product gives buyers confidence in its quality. (Although it’s perilous to count on the continuing ignorance of your customer base.)

So it’s both sensible and logical to tell lawyers not to compete on price. Yet for all that, I’ve come to believe that it’s not good advice anymore. I think we need to learn, as a profession, how to compete on price in ways that sustain our businesses.

It’s fine, in the abstract, for a lawyer to refuse to match or beat a rival’s lower price for a given product or service. The first few times a lawyer loses a client that way, she can content herself that she held the line against the devaluation of her services and that a client who only cares about price will be a difficult client throughout. But what happens when she loses the fifth client, or the tenth, or the fiftieth, because of price? What happens when clients start to consistently say, “I can get these services at a substantially lower price down the street,” or “I like working with you, but I can’t justify the premium that you charge”?

Many lawyers are already in this boat — much of the residential real estate bar, for instance. For these lawyers, refusing to compete on price is not a practical option, because their clients have made clear that price is the most important factor in their purchasing decision. There’s little point in charging what you believe is a fair price if no one’s buying at that price. Worse, more lawyers are going to join that boat over the course of this decade, as technology, collaboration, globalization, and regulatory change combine to rearrange the competitive landscape. We may complain about low-priced “non-lawyer” competitors and denigrate the quality of their work, but if clients buy what they sell at those prices, that’s going to affect what everyone else can charge. And not only will the quality of their offerings improve over time, but it also won’t be only “non-lawyers” doing it. Whether we like it or not, price will become a significant competitive factor, and it will be dangerous to run our businesses pretending otherwise.

So what can we do? The risks of constant price reductions detailed above are all too real, yet the day will soon come where we have to lower our prices just to stay in the marketplace conversation. If you can upgrade the type and quality of your services to premium or luxury levels and therefore maintain or even increase your prices, good for you. But there’s only so much room at the top of the mountain and not everyone can stand there; and in any event, raising the quality of what you offer often requires increasing what you spend to offer it, getting you no farther ahead.

But you don’t need to compete on price if you can go one better: compete on cost. Reduce the inefficiencies in your practice, streamline your processes, systematize where feasible, outsource if possible, reallocate resources to match the appropriate level of talent to the appropriate sophistication of tasks. This isn’t about freezing salaries or eliminating positions or taking away free coffee or all the other myopic expense-reduction steps many law firms took during the financial crisis. This is about restructuring your business in smart ways that reduce waste, cut down on system leakage, fine-tune your engines and upgrade your capacity.

Competing on cost means you spend less to get the same results as your law firm competitors, and puts you on an even footing with the non-firm competitors currently storming the gates. No matter what happens in the marketplace, one rule never changes: profit = revenue – expenses. Even if your revenue is down, you’ll still turn a profit if your expenses are down further: the lawyer who charges $500 for services that cost him $200 is doing better than the lawyer who charges $1,000 for services that cost him $900. You can’t control what the market will pay you; but you can control, to a large extent, what you spend to compete in that market. If you ever expect to seriously offer fixed fees to the marketplace, you absolutely must start by competing on cost.

Here are some examples of how you can compete on cost:

– Install a legal project management system. Probably the simplest way to introduce business efficiencies to your law firm is to adopt the principles of legal project management. From a basic back-of-the-envelope process for doing certain tasks systematically all the way up to a full-scale Lean Six Sigma re-engineering of your entire operation, you’ll wind up with clearer goals, more explicit processes, more efficient systems and increased productivity.

– Automate anything repetitive that moves. Your client intake system, your most frequent inquiries, your most common procedures, your most familiar routines: if the same basic task occurs more than occasionally in your firm, it should be converted into a template, a checklist, a document assembly system, or some other means by which completion is made faster, variation is made more difficult, and fewer resources are expended needlessly.

– Move work up and down the talent chain. Move dictation and transcription from secretaries down to voice-recognition devices. Move legal research to freelance specialists across town or outside the country. Move administrative tasks to virtual assistants. Move e-discovery to people or systems actually qualified to do it. Then train the people who used to do low-value work in high-value skills like project management, business development, human resources and so forth. Same people, same resources, but better allocated and with new capabilities.

– Use technology wherever possible. Practice management software, on your server or preferably in the cloud, delivers huge efficiency gains. Specialized accounting software for law offices reduces errors and improves productivity. Take advantage of low-cost, internet-based contact management systems. Give serious thought to going paperless, or at least paper-less. If you’re already using these tools, constantly train your staff to become more proficient with them. Exploit what Dave Bilinsky calls the “new leverage”: using technology to achieve higher rates of return on each hour of work.

– Give serious thought to outsourcing. There’s one reason big firms like WilmerHale and CMS Cameron McKenna have struck deals with legal process outsourcing firms to move millions of dollars worth of business and back-office functions to smaller centers: efficiency gains that help them compete on cost. To be sure, there are human costs to be dealt with, but if you take a hard look at the numbers, you might find the logic of outsourced operations to be inescapable.

– Come up with a non-hourly billing and compensation system. It probably goes without saying that the single biggest inefficiency in most law firms is the fact that tasks are worth more the longer they take and the more resources they consume. Hourly billing — and more importantly in this context, hourly compensation — is a productivity hemorrhage that’s becoming far more damaging to firms than to clients. And it is not sustainable.

You can probably look around your office right now and find five ways that costs could be reduced or efficiencies could be introduced without a corresponding drop in quality (and maybe even an increase). Most often, the reasons why your firm avoids dealing with these inefficiencies are personal or political or both. But it’s not mission impossible, as the saying goes; only mission difficult. And I would suggest that as of right now, it’s also mission critical. Getting a grip on and eliminating inefficiency in a positive, sensible way is probably the most under-valued tool law firms possess to increase their productivity.

If there’s a downside to this approach, I don’t see it. Suppose that none of these dire warnings come to pass, and that the legal marketplace remains the safe, cozy, bloated anachronism it’s always been. By making cost competition a strategic priority, you’ll have increased your profitability vis-a-vis your rival firms, channeled more money to your partners, become more attractive to potential lateral hires, and given your firm the leverage, if you ever wanted, to make your rivals compete on price on your terms.

But say the marketplace erupts in the ways I’ve been describing, and hyper-efficient competitors emerge that can beat your usual fees by 30, 50, 70 percent or more. Without a streamlined operation in place and no time to install one in the chaos and pressure facing you, you run the serious risk of becoming another victim of market change. But if you’ve already prepared to beat these new entrants at their own game, you’ll at least have a fighting chance. Competing on price might be a necessary evil, but competing on cost can be the key to your success.

The end of inevitability

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Posted in: Clients, Competition

If you want an example of how the legal profession likely will respond to new competitors and a future marketplace very different than today’s, take a look at how Canada’s real estate agents are coping with change in their market. (Short answer: not well). The Globe & Mail reports on a rising wave of sell-it-yourself home realty, prompted by both Canada’s Competition Bureau and its intention to deprive Realtors of their near-monopoly as well as technological advances that allow people to buy and sell homes without professional assistance. Realtors — and this might sound familiar — have responded by fighting the Bureau’s efforts to open the market, scaring homeowners with the dangers of proceeding without professional assistance, and confidently predicting that these amateurs’ mistakes will simply produce more work for Realtors in the end. A few excerpts:

The letter, which comes from the Nova Scotia Association of Realtors, warns homeowners that they are “accepting with open arms increased risk of liability, threats to you and your family’s safety. Realtors protect you and your family from any ill-intended strangers that will come in to your home under the pretense of wanting to buy,” the letter advises, before it goes on to warn of lower sale prices and longer sale times. …

Jim Carragher insists a lot of his new business comes from private sales gone bad. “I’m telling you that it is so terribly sad when I get that phone call at the 11th hour from someone who was trying to sell their home who suddenly realizes they have made a terrible mistake,” he says. “Their deal falls through, they already bought something unconditionally. I try to help, but I tell you sometimes it’s just too late to undo the damage.”

Nonetheless, as the article explains, sell-it-yourself realty continues to grow, in part because the times are passing Realtors by. Read this excerpt from the article (and change “real estate agent” to “lawyer” throughout): Real estate agents … tend to be middle aged or older, and growing out of touch with a younger generation that prefers online options and is more comfortable with the idea of private sales than their parents would have been. “These kids aren’t going to use an agent,” he says. “That’s just the way this is going. The agents are older and the buyers are younger, and they’ve had the Internet their whole lives.”

Lawyers also are under regulatory pressure (in England & Wales through the Legal Services Act, in Canada by the Competition Bureau, and the Missouri lawyers suing LegalZoom for the unauthorized practice of law better hope their suit doesn’t produce the wrong kind of finding). But still we resist new competition through UPL restrictions, we seem to regard technology as a nuisance more than a service facilitator, we routinely warn clients of the dangers of going it alone, and we maintain (patronizingly) that we always end up fixing the messes left by unrepresented clients. And like Realtors, we remain amazingly confident, even smug, about our indispensability. I once sat through a focus session in which lawyers, asked what would happen if laws and their practitioners disappeared, solemnly predicted that anarchy and blood in the streets would follow.

The one thing that concerns me most, as an observer of the extraordinary change in this marketplace, is that the majority of the profession has no idea what’s coming. Most of the lawyers with whom I’ve dealt over the past several years simply can’t envision a world where lawyers aren’t considered essential to the social and economic fabric. They might recognize that times are tougher and costs are rising and prices have topped out and clients are more demanding. They might be resentfully aware that providers outside the profession are entering the market with lower-price offerings, and they might grudgingly accept that technology allows things to be done faster and cheaper than they used to be. But they’re not putting it all together. They’re not following this road to its conclusion, because they can’t really see how the world could get along without us. The inevitability of lawyers is our fundamental precept, and it has become a mental block.

It’s this sense of inevitability that we need to shake to pieces, because it seems to lie at the heart of the profession’s blasé attitude towards change. Lawyers are far too complacent for the circumstances we’re facing, maintaining a sense of privilege born from decades of profitable work in a protected environment. I’m not trying to persuade anyone that lawyers will disappear (although I’m no longer prepared to discount that possibility 100%), but rather to help lawyers understand that we face an immediate mandate of transformation in order to remain relevant to and valued by the marketplace. We can’t charge according to our time and effort anymore. We can’t use a model that sets our financial interests in opposition to our clients’  anymore. We can’t tell our clients who may and may not offer them legal services anymore. We can’t serve the market on our unilateral terms anymore. Many lawyers don’t believe any of those things, and very few lawyers believe all of them. But I believe them all to be true, and I’m not the only one.

The plight of Canadian Realtors probably matters little to us — in fact, to the extent we hear about changes in the real estate marketplace that increase consumer choice and lower prices, we’re probably cheering on the trust-busters and the innovators. It doesn’t seem to occur to us that we’re as vulnerable as they were — just as secure in our monopoly, just as highly rewarded for our efforts, just as dismissive of the potential power of the market. The inevitability of lawyers might once have been a fact. But now it’s fiction, one that’s sustained in our minds but less often in anyone else’s. The sooner we abandon that fiction, the better our chances of responding in time to survive in some recognizable and profitable form. And it has to be soon. Lawyers should know better than anyone else what a ticking clock sounds like.

The platform is changing

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Posted in: Big Firms, Competition, Innovation

Seth Godin calls it the WordPerfect Axiom, and he’s exactly right: When the platform changes, the leaders change.

WordPerfect had a virtual monopoly on word processing in big firms that used DOS. Then Windows arrived and the folks at WordPerfect didn’t feel the need to hurry in porting themselves to the new platform. They had achieved lock-in after all, and why support Microsoft. In less than a year, they were toast.

When the game machine platform of choice switches from Sony to xBox to Nintendo, etc., the list of bestelling games change and new companies become dominant. When the platform for music shifted from record stores to iTunes, the power shifted too, and many labels were crushed.

Again and again the same rules apply. In fact, they always do. When the platform changes, the deck gets shuffled. …  Insiders become outsiders and new opportunities abound.

This is happening, right now, in the legal services marketplace. The platform for legal service delivery is changing, and if you’re standing on it — and most lawyers are — you’re going to find it very difficult to keep your balance.  The platform used to be the traditional, top-down, hourly-billing, pyramidic law firm, where lawyers set the parameters for where, how, and at what price their services would be made available. Other potential platforms were either underfunded, impractical, or unauthorized. The legal profession as we know it today grew up secure and well-fed on this platform and has flourished as a result. Now, a platform shift is occurring.

We’ve already felt some tremors; now the full-scale quakes are arriving. Howrey LLP is preparing to cut 10% of its partnership after experiencing a 35% drop in equity partner profits. Clifford Chance has changed its governance structure allowing it to do the same thing. A major report from Hildebrandt and Citibank warned that more de-equitizations are coming this year because there’s nothing else left for firms to cut. Respected New York IP boutique Darby & Darby disappeared without warning (and, if you believe the accounts at Above The Law, it went out poorly). Corporate law departments are pulling work back in-house, spending less on outside counsel and turning to alternative fee arrangements. Law firms across the United States are cutting back radically on law student and new lawyer hiring (sample stat: median summer offers per firm dropped from 30 in 2008 to 8 in 2010). And looming over everything is the prospect, now little more than a year away in England & Wales, of full-scale non-lawyer equity ownership of law firms.

We can’t blame this on the recession anymore — what we’re seeing is more fundamental than that. The traditional platform for legal service delivery is giving way, overburdened by its own inefficiencies, inflexibility, and market-unfriendliness. In its place is emerging a new platform — the internet. And on that platform is springing up a multitude of new models by which clients can purchase the legal services they want, whether through virtual or distributed law firms with minimal overhead, advanced software for the completion of simple documents or the facilitation of basic transactions, process-savvy lawyers in other countries or quasi-lawyers in our own jurisdictions, and other platforms yet to emerge that we can’t currently envision. The common thread is client customization: the type, quality, and timeliness of service you want at the price you’re prepared to pay. Law firms will emerge and compete on these bases as well, but they’ll be far from the only game in town.

It’s a revolution, and like all revolutions, the benefits will lag behind the costs. It’s going to be messy and even ugly for awhile — platform shifts are neither neat nor bloodless. Think back to the hassles we all went through with Word-to-WordPerfect conversions while the two programs battled it out. Remember the upheaval in the auto industry as electricity began to shove oil off its fuel platform and the damage that caused to gigantic automakers saddled with suddenly unsellable gas-guzzlers. Think of the carnage in the record and newspaper industries as the internet took away their platforms and rewrote the rules of their games. It may take longer, it may not be as brutal, and it may not generate as much attention in the wider world, but the legal services marketplace is starting to go through something very similar. And there will be casualties.

It’s ironic that Seth chose WordPerfect for his lead example — the legal profession was one of the very last professional groups to abandon WP for the now-ubiquitous Word. Many lawyers to this day insist that WordPerfect was the better program, but when the platform changed for good, even lawyers eventually had to switch. The parallels are close enough to be striking and extremely uncomfortable.

When the platform changes, outsiders replace insiders and opportunities abound. Get ready.

Free and the GP

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Posted in: Competition, Innovation, Solo & Small Firm

Like Thomas Friedman and Malcolm Gladwell before him, Chris Anderson is becoming known for books that identify and name an evolving trend that connects business and society. You’ve probably read or head about his newest book Free: the Future of a Radical Price. It’s generating a tremendous amount of heat around the idea that the cost of many things is heading towards zero and the price of those things is following. Reviews from established providers have ranged from mixed (The New York Times and The Economist, to name two) to devastating (Gladwell himself in The New Yorker), while reaction from the blogosphere and Twitterati has, not surprisingly, been far more positive.

I try not to talk about books I haven’t read, and Free is still on my to-get list. But I did read the lengthy excerpt published in Anderson’s magazine Wired last February, and it seems to capture the book’s arguments nicely (and for free, no less). The gist is that technological advances have made the cost of creating one more copy of many products (the marginal cost) and the cost of distributing those products so small that they are effectively zero. Content that can be rendered digitally (almost all of it) is accordingly “too cheap to meter,” which in any kind of open marketplace means that competition will cut the price of those products to virtually nothing.

Of course, not everything falls into this category: products like shoes and TVs aren’t heading towards free. And even for products whose marginal costs are nearly nothing, that’s not the end of the story, as the Times review notes:

More precisely, the marginal cost of digital products, or the cost of delivering one additional copy, is approaching zero. The fixed cost of producing the first copy, however, may be as high as ever. All those servers and transmission lines, as cheap as they may be per gigabyte, require large initial investments. The articles still have to be written, the songs recorded, the movies made. The crucial business question, then, is how you cover those fixed costs. As many an airline bankruptcy demonstrates, it can be extremely hard to survive in a business with high fixed costs, low marginal costs and relatively easy entry. As long as serving one new customer costs next to nothing, the competition to attract as many customers as possible will drive prices toward zero. And zero doesn’t pay the bills.

Interesting as all this is, what does it have to do with the legal profession? Potentially, a great deal, as some legal bloggers have noted. Carolyn Elefant and Doug Cornelius both point to innovative new offerings from two well-known US law firms: Wilson Sonsini has set up an online term sheet generator, while Orrick has created a start-up forms library on its website. Both of these products (or are they services?) are entirely free, to anyone (client, non-client, other lawyer) who wants to use them. They’re also products from which these firms and others have traditionally made money. “But there’s a method to Orrick’s apparent madness,” Carolyn writes:

Orrick’s freebies help it capture a segment of the market which either couldn’t afford to hire Orrick or if they could, would not have  been worth Orrick’s time.  Consider the example of a small business — typically the type of client outside of biglaw’s demographic.   The business might download and fill in Orrick’s incorporation form and then say to itself “I’ve already filled out the data.  How much could it cost to pay an Orrick attorney to look this over?”  Likewise, Orrick could charge far less to eyeball a completed form which it prepared itself than if the firm were to begin the incorporation from scratch (in which case, it would have to invite the client to the office, interview the client, gather the data and prepare the incorporation papers).

Meanwhile, Doug points out that many law firms have already adopted the philosophy of Free, in their own law firm newsletters and “client alerts”:

When you had to mail these alerts, there was a dollar cost associated with that distribution. To better phrase that, there was a stamp cost associated with distribution. Now distribution are costs are minimal. The costs are the same whether you email it to 500 people or 50,000 people. The same is true with viewing it on the law firm’s website. … Lawyers and their firms are giving away this valuable legal insight in the hopes that you will hire them to represent you in a matter related to the information in their publication. They use the publications to showcase their expertise, but in the process give away some of their substantive knowledge.

Giving away something for free or ultra-cheap in hopes you’ll entice users to buy your other services is not a new phenomenon, even in law: smaller firms have been using items like wills as “loss leaders” for years. What’s significant here is what’s being given away.

Legal forms aren’t matchbooks or Bic pens — or at least, they didn’t use to be: they were once important elements of the lawyer’s inventory that required a lawyer’s skills. The fact that they’re now customizable and downloadable on the Net tells us that the skill to produce them is now available widely. That implies a lack of scarcity and a consequent inability to charge much of a price. Legal knowledge, as Doug points out, is already being given away free by law firms; now, it appears that legal processes like document creation are following suit.

But it’s not law firms like Wilson and Orrick leading the charge and blazing this trial; it’s non-lawyer entities. Companies like LegalZoom sell forms for low prices; start-ups like WhichDraft give them away for free; most tellingly of all, services like JD Supra encourage lawyers to donate them to the profession at large as, among other things, a marketing tool. “Lawyers need to recognize,” Carolyn notes, “that we are fast reaching a point where the kinds of forms that companies like LegalZoom offer – such as contracts, leases, incorporations and wills – may be available online to all for free.”

Lawyers’ marginal cost of document preparation has always been low, but in the absence of other alternatives for clients, document-focused products could be sold at a profit. Now, thanks to the Free effect, the marketplace value of these sorts of products — their price, in other words — reflects their marginal cost. That’s great for clients; it’s bad for a lot of lawyers. Specifically, it’s terrible news for lawyers whose practices depend on the creation and sale of documents, contracts, agreements and anything else that can be digitized, templated and algorithmed. In other words, for many general practitioners.

Think of the services your typical general practitioner provides: wills, incorporations, divorce papers, leases, standard contracts and so on. If all these things aren’t yet available for little or for nothing on the web, they soon will be. How will the lawyers who rely on this kind of work survive? If they can offer more in-depth services in a given area, they could give away the documents in hopes of attracting that higher-end paying work. Jay Flesichman explains:

Would you prepare the divorce paperwork if you could make the money in another fashion? Say, on a new estate plan for the client? Would you draft bankruptcy petitions at no cost if it would cause the client to pay you for post-petition services and give you the chance to handle all of the lucrative fee-shifting adversary proceedings that come out of the bankruptcy case? … [In bankruptcy,] the consultation is often free as a way to get the prospect in the door.  Maybe the credit report is free.  Perhaps credit counseling is built into the price, making it free.  But not much else.

The thing of it is, though, if you could provide these in-depth services, by definition you wouldn’t be a general practitioner. That’s why the future for GPs looks incredibly grim: there’s just no profit to be had in providing a wide range of basic legal services. And I’m not talking just or even exclusively about solos: urban office towers are filled with lawyers whose working days are spent creating and reviewing corporate forms and documents. They might be exquisitely complicated forms. They might involve huge sums of money. But they’re still forms and documents, and if the wave of this kind of work heading to India wasn’t a big enough clue as to its marketplace value, the people at Wilson Sonsini and Orrick are making it crystal clear.

Inevitably, the term “commoditization” is going to enter this conversation, and Jay Parkhill makes the connection from Free to Richard Susskind. In The End of Lawyers?, Richard is careful to mark five stops on the route from bespoke to commoditized work, including standardized, systematized and packaged work. For legal tasks, he wrote, a commodity is “an IT-based offering that is undifferentiated in the marketplace (undifferentiated in the minds of the recipients and not the providers of the service). For any given commodity, there may be very similar competitor products, or the product is so commonplace that it is distributed at low or no cost.” We seem to have reached the point where legal document work is becoming entrenched in the packaged and commoditized areas.

What this all comes down to is this: if your main source of value is your ability to craft a legal document — if you rely heavily on products with a very low marginal cost — you could be in serious trouble. And it may only have begun: recall the NYT review of Free that noted: it can be extremely hard to survive in a business with high fixed costs, low marginal costs and relatively easy entry.

Law firms have traditionally had high fixed costs — expensive lawyers and prime real estate, principally. Many practice areas have low marginal costs — once you’ve drawn up a prospectus for one client, you’re 70% of the way to drawing one up for the next one. What’s missing from the equation is the relatively easy entry: lawyers still decide who can offer legal services, and we prosecute for the unauthorized practice of law those whom we decide can’t. If that barrier ever falls, look out.