The legal regulation revolution

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Posted in: Change, Innovation, New Lawyers, Regulation

Almost exactly three years ago, when hardly anyone was talking about a pandemic, I wrote about the California State Bar’s brand new Access Through Innovation In Legal Services Task Force, of which I remarked:

The chances that California’s task force will result in fundamental reform to law firm ownership rules in the United States are higher than they’ve ever been. That doesn’t mean they’re particularly high. … It would be foolhardy to bet against the lawyers [opposing change] here. But if you were ever going to make that bet, this would be the time to do it.

Sixteen months ago, hours before the NBA cancelled its 2019-20 season and North Americans finally began to realize how much trouble we were in, I wrote about a plethora of legal regulation reform task forces, of which I said:

By end of day on March 31, ten American jurisdictions, three Canadian provinces, the ABA, and the US Conference of Chief Justices will have either launched task forces to examine legal regulation reform or have taken significant steps towards encouraging such reforms or actually implementing them. … This wasn’t so much a series of cause-and-effect occurrences as a tectonic shift in the subterranean landscape of the law, manifested in several locations in less than a year.

Today, as North Americans venture briefly out of lockdown (rest assured, we’ll be back wearing masks and socially distancing throughout the fall and winter), we’re seeing the results of these committees, task forces, and other reform efforts arrive, during one of the craziest periods of upheaval the legal profession has ever experienced. It seems like the right time to step back and consider the extraordinary shock-waved landscape of legal regulation change, and what it means for everyone.

This is a long read, folks. Settle in as we look at four different dimensions in which law firm ethics models, legal services regulation, and lawyer licensing and competence standards are all beginning a process of transformation.

1. Regulatory changes that affect lawyers’ businesses

The star of this show is the state of Arizona, which last August repealed rules forbidding lawyers from sharing fees with, or making equity ownership in law firms available to, people who aren’t lawyers.

The state Supreme Court opened the doors to non-traditional legal services providers, and by the following spring, had authorized three such providers to begin operations, all of which were essentially multi-disciplinary partnerships with lawyer owners. Nine other applications were reportedly pending as of May, including one from online legal services giant Rocket Lawyer, although the Supreme Court’s Committee on ABS has convened just once since then and has issued no new approvals.

Setting aside for the moment Arizona’s other reforms (further below), note that three professional services firms whose owners included lawyers were the first to take advantage of the removal of Rule 5.4’s restrictions on non-lawyer ownership. This is not the apocalyptic scenario prophesied by ABS opponents — unethical fly-by-night “non-lawyers” pouring into the market to swindle unsuspecting clients with ten-dollar wills and empty promises.

But it is consistent with the experience in England & Wales, where the legal profession “has used the flexibility [of ABS] to innovate and diversify,” a British analyst observed. “Many firms convert to an ABS structure to enable non-lawyer (including corporate) owners, even as far as setting up Employee Ownership Trusts. … The profession has also used the opportunity to offer a greater breadth of services to clients through joint ventures and non-legal expertise. We’ve also seen other professionals, such as accountancy firms and financial advisers, become ABSs to add legal services to their menu of services.”

It took awhile for the English and Welsh legal profession to grasp that ABS was an opportunity for lawyers, rather than a threat to the profession or to the public. But grasp it they did, and today, more than 1,200 ABS licenses have been issued, many if not most to entities with lawyers owning or involved with them. The ABS reforms of the Legal Services Act 2007 are 14 years old. It’s not an “experiment” anymore. It’s just the way things work now, and they work just fine.

It should take the Arizona legal profession considerably less than 14 years to see the advantages of ABS status. Your law firm can bring in more professional talent; you can offer more professional services; you can deepen your capital pool; and you can spend more on marketing and technology. Arizona’s lawyers will get it, and once they do, other states’ lawyers inevitably are going to want the same opportunity. (See Florida, below.)

2. Regulatory changes that affect the wider legal market

(a) Sandboxes and Laboratories

As I told ABA Bar Leader the other day, the legal profession and the legal market are no longer synonymous, and the divergence of these two sectors is going to widen and accelerate in the coming years. As fascinating and potentially momentous for lawyers as Arizona’s move is, there are other developments in other states that will have a more profound impact on the supply side of the legal market, by opening doorways to the legal market for people who aren’t lawyers and companies that aren’t law firms.

You know about Utah’s groundbreaking regulatory sandbox (recently given an extended seven-year runway), which has already approved more than two dozen non-traditional applicants to deliver legal services in the state. Utah deserves immense credit for stepping forward as the first mover in the regressive and protectionist American legal market. But while they were first, they will be very far from the last or biggest.

California has been talking about a sandbox for a few years now, and I’m hearing some encouraging signals emerging from the State Bar of California’s Closing the Justice Gap Working Group that’s developing recommendations in this regard. California, with more than a quarter-million (!) licensed attorneys, would make a massive splash if it jumped into this pool, although that likely won’t happen before the Working Group’s reporting deadline of September 2022. Utah, meanwhile, is already out there swimming around, inviting others to come on in, the water’s fine.

Florida listened. And it’s hard to overstate how important is the Sunshine State’s entry into this space. The June 2021 final report of the Florida Supreme Court’s Special Committee to Improve the Delivery of Legal Services (note carefully the names given to these task forces) recommended the creation of a Law Practice Innovation Laboratory Program. Structured similarly to Utah’s sandbox, Florida’s laboratory would run for three years (based on experiences elsewhere, expect that period to be extended) and would invite both new and traditional providers to experiment with innovative legal services provision currently prohibited by regulation.

But the Committee went further. It also recommended allowing non-lawyer law firm employees who directly support the firm to take a minority ownership interest in the enterprise. This is a half-step towards true reform — “passive ownership” (e.g., outside investment), which is needed to really enable expansion at scale, remains verboten — but a half-step by a giant is still a long stride.

And Florida is a giant: The state has 77,000 lawyers, and although a surveyed majority of them don’t want to see anything change about legal regulation, lawyers don’t own or control the legal services sector, so while their opinions on these topics are interesting, they are not determinative. It’s to the Committee’s credit that it recognized that.

The Florida report’s Laboratory recommendation cited not only Utah’s experiment, but also two developments north of the US border. Last August, a British Columbia Law Society Task Force recommended the creation of a regulatory sandbox, which received the green light a few months later. BC’s innovation sandbox has already approved six applicants, garnering positive attention for its early commitment to increasing access to justice. Earlier this year, the Law Society of Ontario approved a report from its Technology Task Force recommending a regulatory sandbox in Canada’s most populous province, albeit one restricted to legal services that are “technology-based.”

These two provinces will help lead a much-needed transformation of Canada’s legal regulatory landscape (more on that below), but they’ll provide encouragement to US reformers as well. Those reformers might now also include the State of Washington.

Washington once held the unofficial title of the US’s most progressive legal regulatory jurisdiction, thanks to its late and lamented Limited Legal Licensing Technician project. Now, it’s climbing back into the race. In June, the Washington Supreme Court’s Practice of Law Board released a blueprint for a legal regulatory sandbox. The proposed sandbox would open the door to applicants with non-lawyer partners, although it also comes with a caveat: Successful candidates for the sandbox must show an access-to-justice component to their service. (A similar requirement was briefly floated for the proposed California sandbox, which I consider unnecessarily restrictive.)

I wrote about regulatory sandboxes at Slaw late last year, as well as earlier this year here at Law21, so you can peruse those posts for my further thoughts on this topic. But my overall view is that sandboxes’ most important contribution to the regulatory reform effort is to “normalize” change.

Every jurisdiction that develops a sandbox makes it easier for others to do so; every sandbox that finds a non-traditional legal services provider safe and reliable begins to reverse the demonization of “non-lawyer providers” that the legal profession has been engaged in for decades. Utah got things started; Florida has pushed ahead hard; and California could change everything next September. But I think other dominoes — North Carolina? Illinois? Connecticut? — will fall before then.

(b) Legal Para-Professionals

But wait, there’s more! Modelling their efforts on Washington’s LLLT program, and following (whether they realize it or not) Ontario’s groundbreaking licensing of independent paralegals in the 1990s), a number of American states have created and/or authorized legal paraprofessional programs as a direct response to the access crisis.

From New York State’s pioneering Court Navigator program, to Utah’s new Licensed Paralegal Practitioner program, to Legal Technicians in New Mexico, to Legal Paraprofessionals in Minnesota, to New York (again) potentially licensing social workers to perform legal tasks, to Ontario’s (again) potential Family Legal Services Provider Licence, regulators across North America are recognizing the vast range of legal needs that lawyers are either unable or unwilling to meet, and are arranging for technically trained professionals to start filling that gap.

Arizona requires special mention in this area, thanks to two innovative programs. The first is the establishment of a Licensed Legal Advocate, who can give limited legal advice on civil matters stemming from domestic violence, including protective orders, divorce, child custody, consumer protection and housing. LLAs are to be trained through a pilot program created by the Innovation for Justice Program at the University of Arizona College of Law.

Even more noteworthy are Arizona’s new Legal Paraprofessionals, authorized as part of the same reforms that swept away Rule 5.4 restrictions on law firms. The Legal Paraprofessionals will practice as affiliate members of the Arizona State Bar and be subject to the same ethical and rules considerations as lawyers.

Arizona Supreme Court Justice Ann Timmer has made the point that lawyers shouldn’t oppose legal paraprofessionals — they should hire them, to get basic work done more cost-effectively. And we come back again to the idea that lawyers and law firms — and ultimately, their clients — can be prime beneficiaries of these changes.

3. Reports recommending changes to lawyer licensing and bar admission

This topic intrigued me long before I wrote a report for the Law Society of Alberta last year recommending numerous amendments to the province’s licensing and competence assurance system. So when I read about the remarkable proposals delivered in June by the Oregon State Bar Board of Bar Examiners’s Alternatives to the Bar Exam Task Force, I immediately recognized them as potentially revolutionary.

The task force asked the state Supreme Court to endorse two additional pathways to licensure as alternatives to the bar exam:

I’m concerned that the initial reaction of the Supreme Court to the recommendations was lukewarm, judging from the comments of its chief justice. The task force was correct to note that these proposals do not seek to replace the bar exam and are, in fact, much more rigorous and reflective of practice-ready competence than is the exam. I hope the court’s “mulling over” period is a short one, because these proposals represent an extraordinary opportunity to overhaul the unfair and ineffective bar admission system.

The Oregon Supreme Court might take further notice that it is not the first judicial body to receive such a request. Also in June (what it is about that month?), the New York State Bar Association’s Task Force on the New York Bar Examination released its Third Report and Recommendations, which was approved by the NYSBA House of Delegates that same month.

Media coverage of the report centred on its call for the state to withdraw from the Uniform Bar Exam and develop its own bar admissions test, in a section that included a brutal takedown of the UBE and the National Conference of Bar Examiners. But more importantly for our purposes, the Task Force reiterated its belief that:

New York should consider providing two alternative pathways to admission: (a) a pathway for admission through concentrated study of New York law while in law school; and (b) a pathway for admission through supervised practice of law in New York.

Attainment of minimum competency to practice law in New York can, we believe, be demonstrated by law school achievement as well as by actual practice experience. An examination is not necessarily the exclusive means to judge minimum competence. Alternative pathways should be considered either as stand-alone alternatives or as complements to a written examination.

As far as I can tell, the report is now in the hands of the New York State Court of Appeals, which has been asked to appoint a working group in conjunction with the Board of Law Examiners to develop a New York Bar Examination. Will the Court of Appeals also consider the report’s recommendations concerning law school study and supervised practice? Your guess is as good as mine, but everyone, including the Supreme Court of Oregon, should watch closely. Because also watching New York is … California.

In June — of course — a Joint Supreme Court/State Bar Blue Ribbon Commission on the Future of the California Bar Examination was established “to develop recommendations concerning whether and what changes to make to the California Bar Exam, and whether to adopt alternative or additional testing or tools to ensure minimum competence to practice law.”

And the members of the California commission have made it clear they want to hear from the NYSBA Task Force — maybe because the first mandate given to the commission was to determine “whether a bar exam is the correct tool to determine minimum competence for the practice of law, and specifications for alternative tools, should the commission recommend that alternatives be explored and adopted.”

Hey, did someone say “minimum competence”? Say hello to the Law Society of Ontario’s Competence Task Force, which published a report (in guess which month) titled “Renewing the Law Society’s Continuing Competence Framework”. The report identified key themes that it might use to create new competence programs and requirements, and is actively seeking input from LSO members into these questions. As it happens, I’m an LSO member, and I do have some input, and I’ll address this report and its implications in my next Law21 post.

But suffice to say that the LSO has seized upon the fundamental underlying issue in all of these developments: What are the minimum competencies required to receive or maintain a license to practise law? Sooner or later, every inquiry into the nature of the law degree, the validity of the bar exam, and the effectiveness of the lawyer licensing process is going to come back to this question.

4. Developments relating to the structure and governance of legal regulators

One of the reasons — maybe the main one — that California has even been able to convene and support committees and task forces considering sandboxes and re-regulation is the massive restructuring applied to the State Bar of California back in 2017.

Formerly a unified bar, where lawyer membership was obligatory and the lawyer regulatory and advocacy roles existed uneasily side-by-side, the SBC was split into two organizations: the California Lawyers Association, to represent lawyers, and the newly re-commissioned State Bar of California, to regulate them. The new SBC immediately set about addressing governance reform to deliver on its public-protection mandate, commissioned a groundbreaking report into legal market dysfunction by Prof. Bill Henderson, and hasn’t looked back since.

We’ve not seen structural reform on this seismic a scale in any other US jurisdiction since California’s big split. But it’s worth noting an interesting recent development in Texas, where a circuit court of appeals ruled earlier this month that the Texas State Bar is mostly justified in requiring lawyers to pay membership dues.

As Prof. Milan Markovic noted, the court found the Bar could not apply mandatory dues to activities outside the Bar’s “core regulatory functions,” but most of the Bar’s activities were germane to those core functions, so they need only stop engaging in the “non-germane” ones (including law reform advocacy). Neither side got what it really wanted from the appellate decision, and the matter will return to the trial court.

But the circuit court did point to other remedies: “Texas can directly regulate the legal profession and create a voluntary bar association, like New York’s; or Texas can adopt a hybrid system, like California’s.” Several other major states also have unified bars, and litigation similar to this case is apparently underway there. It’s likely that the plaintiffs in those cases, and perhaps the courts hearing them, will take note of the circuit court of appeals’ suggestions in this regard.

The reason I’m going into such depth here is that I view California’s 2017 decision to split its unified bar into two organizations as immensely important for US legal regulation.

It seems unlikely to me that a state bar or court-appointed entity with both regulatory and representative functions will ever truly reform regulation, because reformation carries too many risks of potentially undermining lawyers’ dominance of the legal market. The conflicts of interest are too large to overcome. Lawyer regulation and lawyer representation simply don’t belong under the same roof.

The Clementi reforms in England & Wales that eventually resulted in the Legal Services Act 2007 were driven in part by a well-founded conviction that the Law Society of England & Wales was not dealing properly with client concerns and complaints about lawyers’ performance, precisely because of its dual role. Among Clementi’s recommendations was the separation of representation from regulation. Canada drew that distinction almost a century ago, vesting regulatory authority in statutorily created law societies and coming up with the Canadian Bar Association to represent and advocate for lawyers. Achieving the same outcome in the US — no time soon, I grant you — would truly be a paradigmatic change.

And even in Canada, longstanding regulatory traditions might be in jeopardy. Earlier this month, the Law Society of British Columbia announced it had retained British consultant Harry Cayton to “conduct an independent review of law society governance and how it meets the needs and priorities of a diverse public and legal profession.”

Mr. Cayton is well-known in BC, thanks to his Inquiry into the College of Dental Surgeons of British Columbia, which recommended a thorough overhaul of the governance and regulation of these and other regulated health professionals and which was accepted by the government soon afterwards. Key among those recommendations for our purposes was this: Regulators’ boards should be smaller, should be appointed not elected, and should draw only half their members from the profession they regulate.

This is dramatically different from the status quo in Canadian law societies, whose directors (“Benchers”) are almost all lawyers who are elected by other lawyers in public campaigns (a small minority of Benchers are appointed from outside the profession). Whether this system ever worked to benefit the public interest, it’s increasingly evident that some current and prospective Benchers represent only the interests of lawyers and use their campaigns to fight regressive ideological battles.

Canada’s regulatory system for legal services has always been dominated by lawyers. I have no idea what conclusions Mr. Cayton will come to when he analyzes governance at BC’s legal regulator in light of the law society’s public-interest mandate, and I would never presume to pre-judge.

But I’ve been advising law societies here for quite some time now that diminishing or even removing lawyer control of law societies’ boards of directors would utterly change the nature of legal regulation in this country — in my opinion, for the better. As was the case in California, and as was suggested by the Clementi Report, there is too much potential for disqualifying conflict of interest, and the appearance of regulatory capture, when lawyers are effectively in charge of deciding how legal services are to be provided, and by whom.

Conclusion

There’s little value in proclaiming a revolution is underway once the citizenry has flooded into the streets with banners and protest songs. It’s kind of obvious, at that point, that change is upon us. Likewise, I don’t see any point in waiting until a majority of North American jurisdictions allow non-lawyer ownership of law firms and the widespread delivery of legal services by non-lawyers is commonplace. That day is closer than it’s ever been, although it’s also not going to be tomorrow: Plenty of jurisdictions, like Indiana, are still holding the line against regulatory reform in legal services.

But I think the tipping point has been reached. In the same way that we’re not going back to the pre-COVID world or the pre-remote-work office, we’re not going back to the pre-sandbox, pre-Arizona era of legal services regulation. There’s too much momentum now. There’s too much genuine interest among lawyers in regulatory positions (not to mention in law firms) in doing things differently. There’s too many precedents set by other states and provinces for decision-makers (especially judges) elsewhere to ignore. This train is headed in one direction.

The pandemic is forcing every one of us to re-examine our lives, to rethink our assumptions about what we do and how we’re doing it. Revolutions are starting to break out all over, as big as generations and as small as you or me. I’ve been urging lawyers for years to look around at their businesses and ask, “If we weren’t already doing it this way, is this how we would do it? If we had never done this before, is this how we would start?” And now we’re all asking those questions, as a society. We’re all asking those questions, as a profession. I’m asking this question, of you.

I think today, right now, is the time. It’s time to leave behind who and what we were, and embrace who we want to be, what we can be, and what everyone else out there needs us to be. It’s time for change.

 

The legal sandbox tipping point

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Posted in: Access, Innovation, Technology

You’re familiar with regulatory sandboxes in law, right? If so, feel free to skip down a few paragraphs. If not, here’s how I described them in a recent podcast:

A regulatory sandbox is essentially a safe space for innovation. Think of it as a closely monitored laboratory where experiments can be carried out — except these experiments are new types of services that are prohibited by current regulations, but that look like they could be beneficial to the public.

The regulator wants to give these experimental services a try — but it doesn’t want to immediately authorize a service that doesn’t meet the established criteria for authorization, sight unseen. So it creates a “sandbox” where the service can be tried out under close supervision, to see whether the benefits it provides outweigh the risks or harms it creates.

I’ve written about legal regulation sandboxes recently, and I’m far from the only one. Read Margaret Hagan & Jorge Gabriel Jimenez, David Curle, Jayne Reardon, Monica Goyal, Yves Faguy, Amy Salyzyn, and the Center on the Legal Profession at Harvard Law School. Regulatory sandboxes are an increasingly talked-about topic in the legal sector, but at the moment, only two North American jurisdictions have actually launched one: Utah, which is off to a flying start, and British Columbia, which has also received significant interest. (In this, as in other areas of legal innovation, England & Wales are already well ahead.)

But that could be about to change. On April 13, the Law Society of Ontario’s Technology Task Force released a report calling for the establishment of a Regulatory Sandbox for Innovative Technological Legal Services (ITLS) for a five-year pilot program. The report includes a motion for approval to be brought before the law society’s governors later this month. British Columbia’s regulatory sandbox deservedly gets the credit for leading the way in Canada; but a sandbox in Ontario — home to more than one-third of this country’s lawyers — would have an even more significant impact.

Ontario’s sandbox would be open to “any person or entity that is prevented by current regulations from operating an innovative technological legal services tool or program.” In general, the trial period would be about two years (though I’d imagine entities that rapidly deliver clear benefits with little evidence of risk or harm could be approved more quickly). At the end of this trial period, the entity may be approved, with or without conditions, to continue operating freely in the open market, or the law society would amend its by-laws to allow for this exception to the rules, or it would be rejected.

Note that “innovative technology” is a required element — the sandbox is not for, say, a real estate law clerk who wants to provide legal advice over the phone about selling your house. But that’s not the barrier it might appear to be, since Ontario also licenses and regulates independent paralegals, so there’s already a framework in place for “a person, but not a lawyer” legal service options.

And Ontario is an ideal place to host a tech-based innovation sandbox, precisely because Toronto in particular is the headquarters for a large and rapidly accelerating Canadian legal technology industry. Legal tech folks have been saying for years that it’s immensely difficult to attract the kind of investment capital needed to build and scale accessible legal solutions without the confidence that’s created by regulatory authorization. A legal tech sandbox would be the first step towards making that happen in Ontario.

Above all, one key theme consistently surfaces throughout the Task Force’s report: Legal technology is accelerating fast and changing the legal market, and this is the regulator’s best (and maybe only) opportunity to play a role in its regulation.

“As with other sectors and industries, the proliferation of new market entrants and innovative technologies will continue to transform markets and gain users, with or without the regulator’s involvement. Inertia on the law society’s part risks allowing ITLS providers to proliferate in Ontario outside of an effective regulatory scheme. … The technologies will continue to develop, but the law society may lose the opportunity to have an influence if it does not act quickly.”

Now, what’s interesting and coincidental about this development is that, while Canada’s largest jurisdiction considers a legal technology sandbox, the United States’s largest jurisdiction is doing the same. Four days before Ontario released its report, the State Bar of California’s Closing the Justice Gap Working Group held its most recent meeting, with an agenda that considered recommendations on the structure, governance, scope, application process, and criteria for a regulatory sandbox in that state.

The California working group, as you probably know, has been assigned to study innovative ways in which the legal market could be reconfigured to expand access to justice for Californians. Chief among its mandates is to explore whether and how a regulatory sandbox would operate in the state. As I wrote back in the summer of 2018, significant regulatory change to the legal sector in California would be a seismic event, one that would almost certainly trigger rolling changes across the United States for years to come.

I’m not privy to the Task Force’s discussions, of course; but the supporting materials for the April 9 meeting make for interesting reading. The report of the Scope Subcommittee, for instance, reveals that there was some discussion about restricting the sandbox to “firms that offered services to the unserved and underserved,” which the subcommittee defines as including “members of the middle class and small businesses.” This raises more than one red flag for me.

Set aside for a moment the problem of trying to screen out sandbox applicants according to who will buy their products and services (which strikes me as highly impractical in a free market), as well as the flagrance of the effort to restrict scope so as not to threaten the interests of lawyers and to put up roadblocks against the Big 4. The real problem here is singling out only “the middle class and small businesses” as unserved and underserved, which hides from the reality that everyone is unserved or underserved by the current legal system, and everyone deserves a better choice of remedies than what’s now on offer.

Nevertheless, the inarguably good news is that the Closing the Justice Gap Working Group is making real progress. Observers of the process with whom I’ve spoken appear optimistic that although the wheels of this process are grinding slow, they are grinding in a good direction. I don’t pretend that decision-makers in California are remotely swayed by what happens in Canada, but the fact that their northern neighbours in BC have approved a sandbox, and that Ontario might follow suit, could have at least some normalizing impact.

But in addition to Utah’s trailblazing effort, California and Ontario should also seriously reflect on the fact that Arizona blew right past the “sandbox” concept and opened its legal sector to all types of providers. Arizona eliminated its ethics rules barring “non-lawyers” from having an economic interest in law firms or participating in fee-sharing, thereby demonstrating what real reform of legal services regulation looks like (again, following the lead of England & Wales). Thanks to Arizona, sandboxes can no longer be viewed as radical departures from the norm — they’re now the safe, slow, middle way, the unobjectionable road to reform.

And that brings me to my final point: a friendly warning to any lawyers in legal governance in Ontario and California who might be tempted to derail this process for their own purposes. Not only would that derailment remove from the regulator any practical means of influencing new legal services providers, it would also render obvious to everyone the starkly protectionist agenda of the profession’s lawyer governors. And that, inevitably, would accelerate calls for fundamental changes to lawyer self-regulation.

The tipping point of regulatory reform in the law is drawing near. The legal profession should be throwing its considerable weight behind reaching this point sooner, in order to truly and fully advance the public interest — and thereby prove itself worthy to continue governing not only the legal market, but also its own affairs.

Reflections from a parallel universe

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Posted in: Innovation

With the publication of Jack Newton‘s terrific new book The Client-Centered Law Firm: How to Succeed in an Experience-Driven World (glowingly reviewed by Bob Ambrogi at Above The Law), I thought I’d share with you an excerpt from the book’s foreword, which Jack graciously invited me to write. Then go order and read a copy of The Client-Centered Law Firm for some great insights into where the legal marketplace is going and what lawyers can do to keep pace with it.

= = = = = = =

I’ve recently returned from a trip to a parallel universe, where an alternative timeline of history has unfolded. It was a fascinating place, and I want to share with you some of what I saw there.

  • I saw the enormously profitable entertainment giant Blockbuster, which watched the internet develop and understood its potential as a movie distribution engine. Blockbuster used its vast collection of films and its data about customers’ buying habits to become the world’s leading source of movies online, and now even produces its own films. “We’re not in the business of renting videocassettes,” Blockbuster’s leaders told themselves. “We’re in the business of helping people enjoy the movie they want to see tonight.”
  • I saw the great photography multinational Kodak, whose researchers were among the first to develop the technology behind digital cameras — but rather than dismissing their researchers’ work, Kodak’s leaders saw an opportunity to develop an entirely new line of products. The company eventually invented digital photo technology that it now licenses to Microsoft’s popular “mPhone” at an enormous profit. “We’re not in the business of selling film,” Kodak’s leaders realized. “We’re in the business of helping people take pictures.”
  • And I saw the most powerful and valuable company in the world: Sears, the global online shopping colossus. Leveraging its long history as a source of convenient purchasing — from its catalogues to its distribution centres — Sears understood that the internet was the most convenient possible way for people to shop, and it invested heavily and successfully in the technology to make it happen. “We’re not in the business of running department stores,” Sears’s leaders said. “We’re in the business of helping people easily get the products and services they need.”

In our own universe, of course, things didn’t turn out quite this way. These longstanding market incumbents missed the opportunity presented by new technology to rethink just what business they were really in, and to re-design their companies in ways that could enable them to use this technology for greater growth and higher profits.

But this alternative timeline reminds us that established market leaders need not inevitably lose out to upstarts and challengers from the outside. Not only is it possible for incumbents to reap the rewards of technological changes, it is incumbents who are best positioned to do so. They already have the market dominance, the financial reserves, the brand power, and the proven track record of success. All they need is to be willing to think a little differently about themselves and about their customers’ actual needs.

This is exactly where the legal profession finds itself as we open the third decade of the 21st century. It is now beyond all doubt that technology has changed and will continue to change the conditions under which legal services are bought and sold. There is no going back to the way things used to be. And we shouldn’t want to go back, because we can now serve our clients better and faster and less expensively and with a higher degree of quality than we could before. We’re at the dawn of a golden age of legal services.

Lawyers can lead the way into that new age — if we are willing, if we have the courage and the foresight, to understand that technology and change and upheaval are not threats, they’re opportunities. Opportunities for us to give more help and better advice to more people and more businesses, faster and more effectively and more profitably than in the past. Opportunities to work fewer hours, connect more deeply with clients, run better legal businesses, and lead happier personal lives.

Are you in the business of billing hours? Are you in the business of filling out forms and signing documents and attending meetings? Are you in the business of measuring out your life in six-minute increments?

If you are the lawyer I think you are, then the answer is no. You are in the business of helping people solve problems, of putting lives back on track, of helping businesses grow and prosper. But it’s possible that your own law business has started to chase and measure and reward the wrong things — that it has forgotten its intended purpose, what and who it’s actually for. Because the purpose of your law business is your clients.

It’s time for the legal profession to develop client-centred law practices. It’s time for us to rethink and redesign our law businesses. It’s time for you to write your own alternative history.

The next top model: Law firm edition

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Posted in: Innovation, Law Firms

As you probably know, I wrote a book a couple of years ago strongly suggesting that the traditional law firm, shot through with various defects, is a poor fit for the new legal market and won’t survive competition from newer and better models for legal services. Smarter people than me have since asked: Okay, supposing you’re right about that — and we’ll know soon enough if you are or aren’t —  then what exactly is going to replace your much-maligned traditional law firm?

It’s a good question, and luckily for me, I’m not the only one pondering it. Managing partners, industry consultants, conference organizers, and venture capitalists have been kicking this one around for a few years now. The consensus answer, up to this point, has essentially been “something that’s not a law firm,” and there are plenty of candidates for consideration.

We’ve seen the emergence, over the past several years, of legal process outsourcers, legal technology platforms, flex-time and project lawyer companies, and managed legal services providers, These and other entities have collectively been grouped  under banners like “NewLaw,” “alternative legal services providers,” and the latest term, “law companies.” Together, they already represent about a US$10 billion slice of the legal market.

Most of these businesses share several common features, including:

  • corporate structure and governance,
  • investments of external funding,
  • extensive use of process and technology,
  • reliance on people who aren’t lawyers,
  • focus on efficiency and cost control, and
  • ability to leverage knowledge and data.

But you could more easily describe all these entities simply by saying that “they’re not law firms.” Because the characteristics of law firms are well-known: Lawyer-owned and -operated, expensive, elite, inefficient, lawyer-centric, risk-averse, kind of pretentious, and a little out of touch. Defining your new legal business by distancing yourself from these attributes is a pretty good way to get clients’ attention in a shifting market.

So it’s fashionable, and maybe even reasonable, to assume that traditional law firms will largely be replaced by their diametric opposites — the alternative legal business, the agile legal company, the AI-powered legal machine. I’m confident these businesses will secure a significant space for themselves in the new legal market, and I suppose it’s even possible that ALSPs and law companies will turn out to be the dominant species of legal services supplier in future.

But here’s another possibility. Maybe traditional law firms will be replaced not by law companies, but by law firms — radically different law firms, to be specific. Law firms that, while still lawyer-owned and -operated, are also:

  • efficient,
  • accessible,
  • progressive,
  • modernized,
  • collaborative, and
  • resolutely, enthusiastically client-first.

These won’t be old law firms with a fresh coat of innovation paint. They will be systematically distinct from old law firms, based on a whole new model, right down to their DNA.

I think there’s a place in the market for law firms like this — a really big place, in fact. And I want to find them. I want to identify, profile, and publicize law firms around the world that are — right now, today — throwing away the outdated attributes of their forebears while keeping the most important parts and adding new and better elements to their core function: allowing lawyers to truly meet clients’ most pressing and important legal needs.

In short, I want to conduct a search for the next law firm model. And I’d like you to help me.

Why should we do this? Three main reasons:

1. Tens of thousands of bright, hard-working lawyers worldwide, associates and partners alike, feel trapped inside traditional law firms, deep in debt and deeper in regret for having chosen what turned out to be a disheartening workplace. They can sense how dysfunctional their firms are, distant from their clients and often damaging to their employees, and they yearn for a better environment in which to exercise their skills and serve their clients. But they don’t know where else to go, or how they could go about building anything different and better.

2. Many more lawyers have walked out of those firms, or have been cut loose by them, or were never even hired in the first place — they’re exiles from the traditional platforms for practising law. But they can’t, or don’t want to, hang out solo shingles or get jobs with law companies — they want to work in law firms, just not at the cost of their personal and professional well-being. And they’re joined every year by thousands of law school graduates who have already heard about, or will soon learn, what’s in store for them. All these lawyers long for better, radically different law firms, too.

3. Clients still need law firms. No disrespect to law companies, which generate a wide range of high-quality legal solutions for clients in a timely and affordable fashion. But I expect most of them would readily agree that they can’t and don’t want to provide every kind of legal service. In particular, they don’t offer legal advice, personal advocacy, strategic counsel, complex legal opinions, and other mid- or high-level legal services, and most of them have no ambitions in that direction. Clients, both individuals and organizations, need mid- and high-level legal services, and I think they’d welcome with open arms the arrival of radically different and better law firms that can deliver them.

And one other factor, on the personal side: If this effort to identify radically different law firms succeeds, and if these examples can be used to design templates for building more such law firms in future, then I’m thinking of making this the subject of my next book.

So my request of you today is: Help me find the next law firm model. I’d like you to nominate law firms that meet the criteria described below, regardless of size or jurisdiction. You can add your nominees in the comments, or send them to me via the email contact form at the bottom of the page. Feel free to immodestly nominate your own firm if it qualifies. If I can accumulate a critical mass of nominees, I’ll list a selection of them in a subsequent post, and I’ll follow up with some of them to arrange more in-depth interviews for a book.

Here are my criteria.

1. The law firm must be no more than 15 years old. (Founded in 2004 or later.)

2. The law firm must not be a law company or ALSP of the kind described in the third paragraph above.

3. The law firm must feature at least one (and preferably more) of the following attributes:

a) New Structure: The firm is not a lawyer partnership, it divides ownership from management from labour, and/or it has a strict corporate decision-making governance system to which lawyers have surrendered autonomy over the firm’s decisions and direction.

b) Greater Accessibility: The firm is physically located, marketed, and/or priced for maximum client convenience, affordability, and relevance. The firm knows where its clients are, and it goes out to meet them there with offerings they can understand and afford.

c) Fresh Markets: The firm is heavily focused on markets that either are brand-new, or have been traditionally under-served, or have been locked out of the legal services world for all practical purposes. The firm has identified and is unlocking latent legal markets.

d) Serious Technology: The firm offers extensive client-facing technology that provides legal answers or solves legal problems, and/or it has used technology to build super-efficient internal systems for creating legal products and services that improve profit margins.

e) Outsourcing: The firm repeatedly partners with law companies or ALSPs (e.g., LPOs, flex agencies, managed legal services providers) to complement its more advanced offerings. The firm identifies what law companies can do more effectively than it can, and collaborates accordingly.

f) Better Pricing: The firm prices most or all its work on a subscription, fixed-fee, risk-sharing, and/or incentives-driven basis. Hourly billing of lawyer work does not necessarily disqualify a firm, but its overall pricing must be intensely client-focused and outcome- or value-based.

g) Smarter Compensation: The firm generously rewards lawyers for a wide range of activities and outcomes (including client satisfaction, contribution to productivity, mentoring of juniors, leadership and management) other than hours billed and clients landed.

h) Leveraged Knowledge: The firm makes extensive use of legal knowledge resources and business/competitive/client intelligence to create new services, serve clients better, improve internal productivity, and/or sharpen external competitiveness.

i) Diversified Sales: The firm applies resources other than lawyers to generate new business opportunities from new and/or existing clients, including sales professionals and industry data. Rainmakers and partners are not the sole or critical engine of the firm’s new business generation efforts.

j) Multiple Disciplines: The firm employs (or if permitted, extends equity to) “non-lawyer” professionals and technicians who play significant client-facing and/or revenue-generating and/or system re-engineering roles. And it doesn’t call them “non-lawyers.”

I want to be clear that this is not a “legal innovation contest.” I’m not interested in receiving a raft of submissions from firms that have added one or two innovative tweaks to a standard law firm partnership. I’m looking for law firms that are truly, radically different from the traditional law firm model, such that the criteria above exemplify that essential difference, rather than constitute mere bolted-on accessories to the old familiar model. And I’m looking for firms that have done this recently enough that they can serve as an inspiration and a template for today’s and tomorrow’s lawyers to follow their lead.

Also note my use of strong modifiers in the criteria: “intensely,” “repeatedly,” “extensive,” “maximum,” and so forth. Again, this is to separate traditional firms that are (admirably) trying some different things from the radically different law firms I’m seeking — those for which these attributes and activities are the everyday rule, rather than the exception.

We need new and better law firms to replace the old and struggling ones now littering the legal landscape. We need to give young lawyers and law students examples and templates to help them build their own sustainable, profitable, fulfilling, client-focused, radically new firms. We need to give the client world better mousetraps to whose doors they can beat a path. In short, we need to find and promote examples of the next great law firm model. Your help would be invaluable.

Law firms’ shopping mall problem

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Posted in: Innovation, Law Firms

The last time I went to a shopping mall was a week before Christmas. I had several people for whom I needed to acquire gifts (I’m an inveterate last-minute shopper), and I wanted to cover as little distance in as little time as I feasibly could to achieve that goal. The mall offered me convenient access to many different stores under one roof. But what’s interesting is that the mall itself did not sell me any goods or services of its own, other than two hours of parking. Everything I bought was from its tenants.

Joshua Kubicki argues persuasively that the same model applies to law firms. (Not a flattering analogy, given the state of malls in 2019, but a pretty apt one.) In his essay “The Emerging Competitive Frontier in BigLaw is Practice Venturing,” Joshua contends that a large law firm’s myriad practice and industry groups are, effectively, standalone service businesses housed within a single platform that really only exists to host these businesses. The law firm’s true “customers” are not the firm’s clients, but its equity partners:

The firm is providing an ecosystem in which buyers (clients) and sellers (partners) can more easily connect and transact business. The firm itself is not producing or making anything other than facilitating exchanges of value between these two interdependent groups. While clients of the lawyers are paying a fee-for-service, the customers of the law firm, the equity partners, are paying for access to a business platform, much like store owners pay to be part of a shopping mall.  

This seems like a good model for understanding some of the most vexing problems in law firm management. For example, look at all the difficulties firms have encountered with cross-selling across their practice and industry groups.

In theory, proximity to other legal specialists  with deep client portfolios should be a business development gold mine. In practice, however, firms struggle to cross-sell because few lawyers are willing to risk referring “their” clients to their colleagues in other practice areas. But once you consider that these individuals aren’t “colleagues” so much as co-tenants running separate affiliated businesses in the same location, the problem becomes easier to understand. Baskin Robbins has little interest in referring its customers to The Gap one level down. 

So if the firm’s only clients are the equity partners in its various business units, what does it provide to those clients? Joshua identifies five benefits firms sell to their equity-partner customers: risk pooling (to combat practice cyclicality), shared services, branding, access to other specialties, and a funnel for new talent. There’s enough real value in these benefits to justify an individual practice group’s (read: standalone business’s) decision to remain within the firm. Or at least, there used to be.

Joshua relates how the immigration law practice at Epstein Becker pulled up stakes recently and moved out — but not to another full-service firm. The lawyers and staff moved en masse to Berry Appleman Leiden, a specialist immigration firm. Joshua surmises that the equity holders within the immigration practice were finding the benefits of the broad full-service platform less appealing at a time when immigration practice requires serious investments in technology and process improvement to stay competitive. Since Epstein Becker seemed happy to facilitate this move, the firm appears to agree that parting ways was the best option.

Joshua’s article goes on to make a number of other insightful points, but I want to dwell on the implications of this one. Because it’s not only immigration law practices that will need significant customization to their business model to stay afloat in a more demanding and competitive market.

The same would apply, for example, to labour and employment law groups: They will struggle to compete with specialty shops like Littler Mendelson and Ogletree Deakins, which turn a profit on increasingly low-margin work by running their operations very efficiently and building systems to collect client data and turn it into a value-added service. The same would apply to IP groups facing off against specialty boutiques, insurance law practices taking on insurance-focused giants, and so on. Litigation practices will need e-discovery and outcome prediction capacities. Corporate law groups will require investments in due diligence AI and contract management and analysis software.

Every individual practice group within the firm, in other words, will eventually require some specialized application or technician or relationship that will have value primarily or only to that group. It’s one thing for partners to underwrite the firm-wide costs of marketing personnel and law libraries and IT functionality, because these are features that deliver more or less the same benefits to all groups. But when individual practice and industry groups (the mini-businesses) engage in what Joshua calls “practice venturing,” things can take a sudden turn.

Practice venturing is designing a new business model through the process of discovering, testing, validating, and launching (and perhaps buying or selling) a new strategy and value proposition, a new market or customer segment, and a new business model. …  It is about reengineering a practice to better address client needs and opportunities. When done completely, often something new that departs from the traditional legal service model is created.

Practice venturing does bend (and sometimes breaks) the law firm business model …  [T]o succeed at practice venturing, the groups not only need to focus on validating their changing business, but also have to focus on organization adoption of their changing business. This creates stress, dissonance, confusion, and often outright hostility toward the practice group.

The law firm can make only so many concessions to its individual “tenants” before its other customers (the other equity partners) start asking why they’re paying for so many features that have no relevance to their own work.

In time, evolving client demand and competitive circumstances could eventually require each specialized legal business inside the law firm “mall” to figure out what structure and model will make it most competitive and profitable in its market. If the law firm can’t find a way to accommodate those structures and models within the firm, then the group, like Epstein Becker’s immigration practice, will migrate elsewhere to find what it needs.

If this theory holds up, then there’s some serious turbulence on the way for those full-service law firms that are what we always suspected them of being: hotels for lawyers, malls for practice groups, farmer’s markets for legal services. They lack any real operational direction or managerial sophistication, and they are owned by people who don’t really value either one of these things. It’s probably not going to end well.

The winners, by contrast, figure to be those firms that are both culturally cohesive and operationally agile. The cohesion allows the firm to have a more mature and sophisticated relationship with its equity partners than simply landlord and tenant, and to persuade the partners that spending money to improve the competitiveness of one business unit will generate more profits and opportunities for everyone in the firm. The agility will allow it to assemble and plug into the firm’s infrastructure the specialized pieces that each business unit needs without bringing the whole platform down in a heap. 

Can we envision any firms with this combination of cohesion and flexibility that could make these kinds of adaptations? I think so. Here are a few headlines from the legal press that have turned up just in the last few months:

Subsidiary businesses, technology nurseries, data analysis applications, and lower-cost spinoffs are some real-world examples of what law firms can accomplish when they acknowledge and respond to growing competitive pressures on specific markets, practices, or industry groups. Some of these new initiatives will pay immediate dividends across the firm, which makes partner buy-in easier; but some of them — and I suspect in future, more of them — will have narrower applications whose immediate benefits will be clear only to certain segments of the firm. That’s when the real test of the firm’s leadership and cohesion begins. 

One last thought: The main reason why I go to malls so rarely, of course, is that I shop more frequently at the world’s biggest and most convenient mall at Amazon.com. There are still some purchases for which I need direct experience with the product and in-person service from an expert — shoes, clothes, maybe a “genius” at the Apple Store. But for most everything else, including a growing array of big-ticket items, I just go online. Law firms should think about that, too.

The ethics of innovation

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Posted in: Ethics, Innovation

Earlier this year, a legal periodical called me up and asked my opinion of third-party litigation financing. As you might know, my view of this particular innovation (detailed here on three previous occasions) is not a wildly enthusiastic one, and I said as much, at some length. Shortly after the article was published, I was contacted by a representative of a litigation financing company, who invited me for coffee to discuss the industry and exchange some facts and opinions about it. Since I’m partial to new perspectives and sworn to coffee, I agreed.

In the event, two people from the company met me at the local Starbucks, and we had what I think was a good conversation. They were sincere, well-informed and reasonable, and I came away more favourably disposed towards their company, given what they described as their careful evaluation of the kinds of cases they take on. I learned some things I didn’t know (for example, litigation financing emerged in Australia, where contingency fees remain prohibited). They shared my views on the shortcomings of our present litigation system and they cared about improving access to justice, so there was certainly common ground between us. (You can see the “But” coming, I’m sure.)

But, for all that, I don’t think either side managed to persuade the other towards its perspective, and I suspect much of that was down to the irreconcilably opposed premises with which we approached the subject. I have a baseline aversion towards the encouragement of litigation, as I think we should do what we can to discourage it; they believed legitimate cases should have the chance to be aired before the courts. I have philosophical and ethical objections to disinterested third parties financially supporting private litigation in exchange for a share of the proceeds; they did not. I feel that the proliferation of third-party litigation financing would put an end once and for all to public funding of access to legal services, as governments would come to say that “the private sector can address that”; they said the type of commercial cases they support wouldn’t be eligible for public funding. So while our talk was cordial and informative, there was probably never much chance our minds would meet.

But as we were gathering up our cups to leave, a thought occurred to me (much like Oscar Wilde, I often think too late of smart things to say). Over the course of our conversation, my interlocutors had consistently referred to litigation financing as a way to “level the playing field” between impecunious plaintiffs and rich defendants. And of course, that’s a powerful concept, and who could argue with it? But something about it had been nagging at me, and I finally figured out what it was.

“What would happen,” I asked them as we stood to leave, “if third-party litigation financing was used not to level the playing field between two unequal parties, but specifically and intentionally to imbalance the playing field between two otherwise equal parties? Is there any reason it couldn’t be used for that purpose?” If we’d had another hour, we might have taken that thought in interesting directions, but time was pressing and we didn’t have the chance to explore it further.

A few weeks after this conversation, a man named Terry Bollea won a defamation and invasion of privacy lawsuit in Florida against a company owned by a man named Nick Denton. You might know the case better as Hulk Hogan’s $140 million verdict against Gawker for publishing sex-tape footage featuring Hogan in 2012. What became apparent soon after the verdict was that Silicon Valley billionaire Peter Thiel had financed the litigation as part of a feud stemming from Gawker’s outing of Thiel as gay in 2007. “It’s less about revenge and more about specific deterrence,” Thiel told The New York Times. Denton has since declared bankruptcy and Gawker has shut down.

Now, there’s a lot to unpack here. I’m pretty much the last person who’ll defend the kind of “journalism” practised by Gawker, especially in its later years, when it seemed to lose any sense of what it was trying to accomplish beyond embarrassing people (I’m inclined towards Jeff Jarvis’s views on that subject). But it’s hard to escape the reality that a billionaire used the courts to kill a publication, not in a case that personally involved him, but in a case to which he had no connection other than sharing the plaintiff’s animus towards the defendant. There wasn’t even a financial return behind the “investment”: Thiel has been quite clear in interviews that Gawker’s destruction was not a side effect of the litigation, but its purpose. (And Thiel is now helping launch a litigation finance company himself.)

If you have any kind of rooting interest in a free press unafraid to uncover important things about powerful people and institutions, the Gawker case should thoroughly unsettle you. Gawker makes an easy villain; but suppose a local paper is pressing a powerful property developer a little too hard, or an online industry watchdog learns about a history of sexual exploitation by a major celebrity. Or go beyond media: if incredibly wealthy people can pursue personal vendettas by leveraging our dysfunctional litigation system to ruin someone’s life, and succeed, then I think we’ve completely lost sight of why we even have a litigation system in the first place.

But my larger point is this: we need to remember that every innovation is a double-edged sword, with the potential to do a lot of good and at least as much harm. We’ve always understood and accepted this in theory, but now we have to grapple with two additional, very practical considerations.

The first is that when considering any new innovation, no matter how highly sung its praises, we always have to ask ourselves: “What if bad people use it? What if reckless people use it? What if it were put to its least valuable and most destructive uses?” Because the worst case is going to happen — in law just as in the world at large. And we have to decide if, and to what degree, we’re morally ready to live with the consequences of that worst-case scenario — especially because we won’t always be the ones on whom those consequences will be visited.

I’m not looking to make litigation financing companies wear the goat horns for Thiel’s perversion of the justice system (from which they’ve striven to distance themselves). But I’d like to think the Gawker case would give the industry serious pause, and encourage it to reflect on whether it really is helping “turn the courts into casinos,” as its critics charge. If the industry chooses not to do that, then it will have missed a major opportunity and created significant future risk, not just for itself, but for a whole lot of other people.

And the second consideration is that innovation in the legal market has now progressed to the point that, in addition to principled arguments on these subjects, we now also have access to test cases. We can now start to see what the real thing looks like, and it’s not always pretty.

I don’t think most people in the litigation finance industry foresaw the Gawker case or would welcome it if they had, but there it is all the same. I doubt most of us who supported the ability of law firms to seek public financing foresaw or welcomed the smoking wreck of Slater & Gordon, but there it is all the same. I wrote, in that linked article, that the lesson to be drawn from Slater & Gordon’s catastrophic flameout is not to ban non-lawyer ownership, but to closely and carefully study its example. Conduct a thorough examination of both the first great success and first great disaster of public ownership, and learn whatever lessons are necessary to help the next firm to try this innovation get it right. I think we need to adopt that approach across the legal innovation spectrum.

I believe that selling shares in law firms should be allowed, because the ethical challenges have so far proven manageable (Slater & Gordon’s failure was caused by a business error, not an ethical one), and because law firms will need access to deeper pools of cash than partnership equity alone can provide. I also think that third-party litigation financing should be strongly discouraged, because at the end of the day, it’s really just an investment vehicle whose operating principle (give everyone equal access to enough cash to pay lawyers and continue litigating) would permanently entrench in the legal system its worst fault, the paramount and perpetual indispensability of money to any hope of obtaining justice.

Now,  I could be right or I could be wrong about both these things. I’ve had the arguments before and I’ll surely have them again. But we don’t have to debate this only in theory anymore. Let’s look at what’s actually happening and make whatever adjustments that honest and serious reflection demands.

I’m willing to take that approach to public financing of law firms after Slater & Gordon. I hope advocates for third-party litigation financing are willing to take that approach following Gawker. And I’d like to urge you, regardless of the legal innovation you favour, to do the same. “What’s the worst that can happen?” That line is usually read as a joke. Ask yourself that question in all seriousness — and in all seriousness, answer it.

Why law firms should focus on adaptation, not disruption

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Posted in: Clients, Innovation

In a post last month, Ron Friedmann poured cold water on the notion that large law firms were anywhere close to being “disrupted” — to losing the commercial legal services market to high-tech NewLaw raiders. Disruption? More Like Incremental Change for Big Law, he said, and it’s hard to argue.

Many commentators claim that tech, especially artificial intelligence (AI), will do something to Big Law. I disagree. Tech more likely will do something in it: incremental change. …

By the late 1980s, a few law firms had most of their lawyers using PCs. The market did not reward these early adopters. Nor did it punish late adopters. The same pattern played out for email, the Internet, and social media. Tech did disrupt legal secretaries. But that took an economic crisis and 15 years. Tech has enabled change – for example, the rise of boutiques and clients using alternative providers – but that has not disrupted lawyers or law firms.

An even bigger event than tech – the 2008-10 economic crisis – also failed to disrupt Big Law, notwithstanding widespread layoffs and a few dissolutions. In the aftermath, Big Law faces price pressure and more competition, but not disruption. Even with tech, with price pressure, and with clients bringing more work in-house, Big Law prospers as reported by recent Am Law 100 and Altman Weil surveys.

With this history, I just don’t see how the new technologies today will be any different than the past.

“Disruption” became a flashpoint term in the legal community a couple of years ago, when Clayton Christensen’s groundbreaking 1997 work The Innovator’s Dilemma belatedly reached the legal market and the “Reinvent Law” boom was at its loudest. Ron’s post suggests that it’s time we take another look at this concept and begin to parse the difference between disruption theory and on-the-ground practice in the legal world. Let’s do just that.

All market activity, obviously, requires two parties: a source of demand (purchaser) and a source of supply (seller). Market disruption requires the presence of a third party: a new, alternative source of supply that can appeal to the source of demand in ways that the primary supplier can’t. The alternative’s appeal lies in its ability to provide value to the purchaser to a degree or in a dimension that the incumbent supplier has overlooked, ignored, or believed to be impossible. The alternative supplier can generate this value because it has adopted a means of production profoundly different from the incumbent supplier’s, one designed to produce deliverables (in dimensions such as affordability, timeliness, convenience and quality) better aligned with what the source of demand really values.

Now, disruption theory states that given all these circumstances, the alternative supplier will steadily grow its market share — starting from the edges of the market and its least complex and lowest-value needs, then gradually working its way up and in to higher-value sectors as it develops and matures — until at a certain point, the established supplier fades away and the challenger becomes the new incumbent. The circle of life, and all that. Christensen cites numerous examples of this pattern from steel, computer chips, and many other industries. So how about law?

It seems to me that we have all the pieces in place right now, in the corporate/commercial legal market, for this kind of disruption to occur. (As George Beaton points out in a comment on Ron’s post, this process is further along in the consumer legal market.) We have demand on an enormous scale — several hundred billion dollars spent every year, by an increasingly irritable and cranky corporate client base. We have traditional supply — incumbent law firms with little imagination — by the hourly-billing boatload. And now we’re finally approaching a critical mass of the third ingredient: alternative sources of supply. You could group these options into three distinct categories.

  1. Alternative Options for Lawyers’ Services. It used to be that if you needed to buy a legal service or solution, you had to go hire a lawyer. Today, demand for some legal services can be met by viable substitutes for lawyers. These are primarily technology solutions (including ODR systems, e-discovery software, contract analysis programs, advanced document assembly software, expert applications, predictive analytics, and various cognitive reasoning systems), which can perform some tasks or achieve some outcomes that previously only lawyers could manage. The result: some legal work never makes it to a lawyer, going instead to a viable lawyer substitute.
  2. Alternative Platforms for Lawyers’ Services. Suppose that for your particular need, however, there is no viable substitute: you must have access to a lawyer. Well, it used to be that if you needed to hire a lawyer, you had to visit a traditional law firm (including solo practices) to find one. Today, demand for lawyers can be met by alternative platforms for lawyers’ services: project and flex lawyer companies, managed legal services providers, the legal divisions of accounting firms, and various self-identifying “NewLaw” firms, among others. The result: some “lawyer work” never makes it to a law firm, going instead to a viable law firm substitute.
  3. Internal Options for Addressing Legal Needs. The ultimate alternative to an external legal solution of any kind, though, is to remove the need for the external solution altogether. Corporate law departments have expanded their internal productive capacity — increasing lawyer headcount (insourcing), developing their legal operations (“legal ops”) capacity through software installations and process improvement techniques, and (to take another of Ron’s observations) “doing less law” and eliminating some legal demand altogether. The result: some legal work stays in-house and never gets shipped to any external provider, period.

It’s nothing short of fantastic that buyers can now access all these options. Kudos to them all. But so far, these alternatives have captured just a tiny sliver of the entire commercial legal market. A few worthy exceptions aside, large corporations and institutions haven’t significantly changed their legal buying patterns. That’s not because the alternative sources of supply have proven inferior to the incumbent suppliers — in fact, by most indicators of cost-effectiveness, quality, and value to the buyer, the opposite is true.

The real cause is that most front-line purchasers of corporate legal services (in-house lawyers) care more about what traditional suppliers (law firms) can offer them (strong personal relationships, a reliable brand, routine buying processes, and a familiar culture) than what they can offer the enterprise. Lawyers who buy legal services are just as conservative, risk-averse and change-resistant as the lawyers who sell them — probably more so — and they define “value to the buyer” much more narrowly and individually than their company does. Purchasers of commercial legal services, to this point, operate in a very different corporate environment than purchasers of steel or computer chips or other commodities. Their cultural influences and individual incentives reward low-risk decisions and prioritize personal relationships over enterprise results. The impact on buying patterns shouldn’t surprise us.

Now, corporate procurement personnel are currently hard at work infiltrating and influencing legal purchasing, either by persuading the legal department to exercise its buying power differently or commandeering that power altogether. Take the lawyers out of the equation, and maybe you start getting somewhere. But so long as lawyers are buying legal services from lawyers, and especially so long as both sets of lawyers emerged from the same type of law firm culture, there’s little reason to anticipate imminent change. While it still appears inevitable to me that commercial legal purchasing will be transformed — and with it, the entire commercial legal market — I’ve personally grown tired of its stubborn evitability. “Waiting For Procurement” is not a performance I feel like sitting through multiple times.

The larger point, though, is this: “Disruption” is a means to an end, not an end in itself. It’s not a goal towards which anyone in the legal market should be bending his or her efforts. It’s simply a process by which other goals — chief among them, a more effective legal market that serves its customers better — can be achieved. Disruption will come when it comes, and there’s not much more to say about it than that.

The more interesting and important question, I think, is how the traditional incumbents will react to the high-tech upstarts in the meantime. What law firms do in response to the market’s emerging “NewLaw” options will determine the long-term success of both groups.

It should be pretty apparent that the longer the “disruption” process takes, the more difficult life becomes for most of the innovative alternatives. The builders of better mousetraps can wait only so long for the world to beat a path to their door — eventually, the venture capitalists who funded the traps want to see some Return On Mice. A drawn-out disruption period is especially hard on smaller upstarts, who either run out of money or become ever more vulnerable to acquisition and consolidation by rivals with larger footprints and deeper pockets. And of course, if market resistance to innovative new options is strong enough and lasts long enough, there’s a chance that the whole concept of viable alternatives to traditional suppliers will fall out of favour altogether, and the revolution will be stopped before it can begin.

For all these reasons, you’d think that traditional law firms would have every incentive to prolong the “steady state” of the old legal market, with its toothless demand and monolithic supply, as long as possible. But if anything, the danger to law firms here is more acute than to the upstarts.

The longer disruption takes, the more comfortable life will seem for the incumbent suppliers, and the more likely that they’ll be lulled into a competitive slumber. But whether it arrives tomorrow or next year or ten years from now, change is gonna come. The value proposition of alternative suppliers is too strong, and the well-publicized process of adjustment is already underway within some of the biggest sources of legal demand (including Shell, Cisco, Honeywell, AIG, and Capital One). Just as importantly, the alternative suppliers that do survive will get bigger and stronger by the day, growing and consolidating into truly formidable opponents. Law firms that fall asleep will be shaken awake to the realization that the waters kept on rising while they slept, until the levees eventually gave way.

So for law firms, the concept they should be focused on isn’t disruption, but adaptation. How will they adapt to changing market demand? How will they adjust their offerings and rework their operations to compete against powerful rivals for the attention of sophisticated and aggressive buyers? Will they try to destroy high-tech providers, or integrate them? Will they ridicule process improvements, or adopt them? Will they keep trying to “out-lawyer” everyone or, as I’ve argued, start trying to out-customer them?

The more that law firms accept these realities and adapt to these new alternatives, the less business they will lose, and the less these new alternatives will advance: by co-opting their rivals’ best features, they will improve their own productivity and value and maintain their dominant market position. There’s no shortage of examples in this regard among established incumbents (including Wachtell, DLA Piper, Norton Rose Fulbright, Dentons, Baker Donelson, Littler, Akerman, Ashurst, Mishcon de Reya, Gilbert + Tobin, McCarthy Tétrault, and Stewart McKelvey), but you’ll also find some alternative providers going the same route (including Deloitte, LegalZoom, Riverview Law, and Lawyers On Demand).

Conversely, the more firms resist the advancement of substitute providers and stick to their old ways of doing things, the more time they’ll grant their most fearsome competitors, the more ground they’ll lose to them, and the faster the disruption process will proceed. For every day law firms fight adaptation, that’s another day in which the alternative platforms receive an extended lease on life — and that’s a dangerous game for law firms to play. If you give competitors with a better way of doing things enough time and oxygen to grow, then grow they will.

So this is a key moment for law firms. Viable substitutes to law firms have established themselves on the margins of the market, offering a genuinely better option for at least some legal services to (what is currently) a skeptical and conservative community of buyers. Most law firms seem to be betting that the market will remain skeptical and conservative — that the odds of real demand in market change are so small that the substantial payload of the corresponding risk can safely be ignored. That’s not a bet I’d care to place right now.

Disruption has not reached the commercial legal market, and maybe it won’t for a long time. But adaptation is here, right now. And for law firms, adaptation is by far the more pressing and important matter. Law firms can afford to put off worrying about disruption for the foreseeable future. I don’t see how they can put off thinking about adaptation one day longer.

BigLaw levels up

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Posted in: Big Firms, Innovation

My older brother used to give my teenaged self (with some justification) a hard time about playing Dungeons & Dragons. I eventually grew tired of the cracks about wasting time in a fantasy world, though, and I assembled what I considered a strong defence of the game. “D&D helps you build a lot of skills,” I said. “You develop your imagination and creativity; you practise your problem-solving abilities; you learn to collaborate with others and pool your unique resources in working towards solutions.” This triumph of rationalization clearly had “future law student” written all over it.

But here’s something else Dungeons & Dragons pioneered: It was one of the first games to reward a player’s success with greater abilities. You don’t gain powers throughout a game of Monopoly or Risk or Scrabble; you just amass more money or territories or points. But in D&D, every successful venture results in “experience points,” and when you reach a certain amount, your character moves up a level and gains new abilities as a result. Your capability increases as you gain experience — much, ironically enough, as in real life. It’s called “levelling up,” and today, so many games contain some variation on that theme that we take it for granted.

Of course, as you level up, your opponents become stronger and your challenges become greater — again, much as in real life. Large law firms, it seems to me, are now in the process of “levelling up” — through effort and experience, they’re forging successes that are increasing their effectiveness and helping them pull ahead of their peers. But as they do so, newer and tougher challenges are rising up to greet them — and it’s an open question whether the firms will be up to the task.

BigLaw has, in fact, been paying attention to what’s going on around it, and this should not really come across as a surprise. For all the grief that people like me enjoy giving them, large law firms are not actually hapless dullards stumbling backwards towards the edge of the cliff. They’re big operations with tons of money and some really smart people high in the org chart, and they’ve noticed that the legal environment is undergoing irreversible change that threatens their business model. Not every firm that recognizes its peril can do something about it; but those that see the challenge, and can execute to meet it, are more numerous than popularly believed.

A raft of examples has emerged just in the last few months to illustrate this. Prof. Bill Henderson highlights three large firms — Bryan Cave, Littler Mendelson, and Seyfarth Shaw — that have made great strides in technology, systematization, and workflow, and are revolutionizing the way they do business and serve clients.  The American Lawyer‘s Aric Press points out the rapid rise of pricing officers in BigLaw (76% of large US firms now have one) and its implications for changes to cost and profitability management, value definition, and partners’ pricing discretion. LeClair Ryan teamed up with LPO United Lex to create a Legal Solutions Center for doing routine, repeatable work with low costs and high systematization, just the latest in a line of firms to outsource straightforward work to a low-cost provider. Allen & Overy even commissioned and published its own report into the future of legal service delivery.

Ron Friedmann argues that far from being disrupted, BigLaw has begun to adapt to the new forces at work in the market: “Most US large firms continue to perform fairly well. While some firms do suffer, many thrive.” This undoubtedly is true. To a greater or lesser degree, many BigLaw firms have levelled up: they’ve learned, invested time and energy, and made adjustments that helped them improve their productivity and effectiveness. They should be commended for that, because it really is not easy to introduce change of any kind into large organizations with extremely diffuse decision-making authority and a deep ambivalence about innovation. [do_widget id=”text-7″ title=false]

But the thing about levelling up, of course, is that as your own powers increase, your quests become tougher too. Intermediate warriors don’t take on goblins and orcs anymore; they’re up against cave trolls and frost giants. It’s great that BigLaw is overcoming its initial challenges, because the next set will not only be tougher, they’ll be multi-dimensional. From my perspective, here are four forces with which large law firms will shortly have to contend:

The exponential growth of technology. I’m still relatively sanguine about the ultimate impact of technology on the legal sector — mostly because I’ve never yet had to reboot a lawyer. But it’s difficult to ignore the evidence that machines are becoming extraordinarily good at replicating many functions that firms traditionally assigned to their attorneys. Clio’s Joshua Lenon provided a useful overview of a panel at the most recent International Legal Technology Association meeting that featured insights from four accomplished legal tech leaders. Lawyerist’s Sam Glover explained Fastcase’s Bad Law Bot and its head-spinning implications for litigation. There are so many new applications now, from Shake and Fair Outcomes to Neota Logic and Picture It Settled, that it’s a matter of when, not if, tech will start seriously infiltrating BigLaw.

One name in particular keeps popping up in these conversations: Watson. The American Lawyer gave us a snapshot of what IBM’s machine-learning behemoth is now capable of (the version that won Jeopardy! could read 200 million pages in three seconds; the current iteration is 24 times faster). IBM’s GC, Robert Weber, believes Watson could pass the bar tomorrow. (Interestingly, he also believes non-lawyers shouldn’t be allowed to own law firms.) Watson’s potential legal applications are already emerging: a version called The Debater assembled arguments for and against banning video games based on a lightning-fast survey and analysis of existing content on that topic. Ron Friedmann described some reservations about the outlook for Watson in law; for my part, I think there are many more repositories of useful legal data than large law firms that would be willing to help create these tools. And when technology does finally penetrate BigLaw firms, one impact will be felt above all others:

The collapse of their compensation systems. Michael Mills of Neota Logic, a speaker on that ILTA panel, wrote an incisive article about legal technology and innovation, specifically about the one feature integral to law firms that blocks both these forces: the billable hour. “The elephant in the room is stamping and snorting and must be heard: Innovation destroys hours. Now, that’s bad wherever the majority of lawyers’ revenue is rates x hours. Every hour saved is a dollar lost. But it’s especially bad for law firms, and that is almost all of them, whose partner comp schemes set the income of individual partners with a formula that counts the individual partner’s hours, or the hours of her team. Because then she knows that she will be personally penalized for her own innovations.” Innovations reduce law firms’ inventory, the billed hours of their lawyers. But equally, innovations are inescapable. You can see where this is heading.

Technological automation, process management, and operational efficiency will all be essential to the ability of large firms to be profitable in the years to come. But virtually every new tool or system that increases a firm’s productivity reduces the time spent to complete a task, and “time spent” is the lifeblood of lawyer compensation systems. And as I wrote years ago, the traditional law firm simply can’t function without counting and maximizing hours; it’s built into their financial and cultural DNA. De-emphasize or remove time as a factor in productivity, and you remove the one card holding up the whole house. So law firms that hope to be both functional and profitable will have to find new, non-hourly ways to remunerate their people. I don’t know of a single BigLaw firm that’s even close to that point. Something’s got to give here — but it’s not going to be the market forces driving change. It never is.

The rise of colossal competitors. The legal market is at the precipice of unprecedented regulatory upheaval. Most everyone knows about the Legal Services Act and the licensing of more than 300 Alternative Business Structures in England & Wales over the last couple of years. Not everyone realizes that among the legal entities that have been authorized there are law firm businesses owned by a giant insurance company, a telecommunications provider, and a financial and consumer services company. Most significantly, three of the Big 4 accounting firms have considered or (in the case of PriceWaterhouseCoopers) already received an ABS licence. These are all entities that traditionally have retained large law firms or have referred work to them. Non-lawyer law firm ownership, already approved in Australia and Great Britain, has been endorsed by the Canadian Bar Association and will likely be considered by Canada’s largest legal regulator next spring. Sooner or later, at least one US jurisdiction will follow suit, and the world’s largest legal market will be changed forever. This is the future competitive landscape that BigLaw needs to start anticipating today.

Take a closer look at the accounting firms, because if there’s any potential new player in the market that should keep BigLaw’s managing partners awake, it’s this one. “Accountants aren’t kidding with ABS this time,” wrote The Lawyer‘s Catrin Griffiths earlier this year, and she zeroes in on exactly why BigLaw should be watching very carefully: “The accountants are after bread-and-butter commercial, employment, mid-level corporate, immigration, outsourcing and IP; it may not be bet-the-company stuff, but they create deep relationships with clients that can be leveraged.” It can be argued that the likes of Parabis and Co-Op and Slater & Gordon are focused on the consumer market and therefore safely distant from BigLaw’s hunting grounds (although Parabis evidently aims to move into the corporate market); the same can’t be said for “Big4Law.” Lawyers struggle with value billing; accountants advise their clients on it. A tiny handful of the world’s largest law firms generate $2 billion in revenue a year; as Catrin points out, PWC alone clocks in at $32 billion. If a fight does break out in this sector, it won’t be a long one or a fair one.

The emergence of client self-determination. In some respects, this might be the most significant new challenge for BigLaw to unravel, because it goes to the heart of law firms’ work supply chain. Many lawyers have already experienced a reduction in work and revenue from corporate clients, and the biggest reason has been insourcing: clients keeping a growing chunk of work inside the law department. “Over the past decade, the number of in-house lawyers has doubled in the UK. Now, one in five lawyers practises in-house. Over time, private practice has lost up to 20% of its market share to its clients,” writes Reena SenGupta in Legal Business. “Few private practice partners can pre-empt problems in the way their in-house counterparts can. … Where will their value be in the future? Outside of specialist legal knowledge that does not reside in the internal legal team or the ability to marshal bodies for a major matter (and the necessity for the latter is in question), where is their value-add?”

I wrote recently about how clients will become lawyers’ biggest competitors, and nowhere does this apply more than with corporate, commercial, and institutional clients. They have the unique combination of a strong impetus to manage their legal affairs better and the financial assets with which to make that possible. They are re-positioning themselves in their relationships with outside counsel, viewing BigLaw as just another resource rather than the default sourcing option, and they’re placing themselves at the centre of a new risk management ecosystem. Large firms, for the most part, have no idea what to do about this. They find it difficult to look at the world through clients’ eyes; they lack the necessary empathy. They know how to receive and perform legal work, not how to develop and manage the complex client relationships that produce work. This is an institutional skill, one that can be learned — but it’s much tougher than installing new software or even initiating legal project management.

BigLaw has seen and has begun to respond to shifts in the legal market, and kudos to those firms that have done this the best. But I want to make it clear to them that this process is not over, but rather is just beginning. Fundamental assumptions about their business models, their competitive environments, and their client relationships are all poised to shift dramatically over the next ten years, and it will require extraordinary effort, resilience, and leadership for them to adjust accordingly. Many firms have found it exhausting just to get this far, and I’m not sure how well they’ll respond to what’s coming.

It would be foolish to write off BigLaw, even given the enormity of these challenges: recall what I said earlier about what size, smarts, and money can accomplish. But, man — this is not going to be easy. Welcome to Level 2.

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.

Why law firms need R&D investment

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Posted in: Innovation, Management, Research

Lawyers hardly ever talk about research and development. We might be the only major industry or professional sector that fails to do so.

Last year, total spending on R&D by the world’s 1,000 largest companies was about $638 billion, according to the Strategy& 2013 Global Innovation 1000 Study. The 10 companies that spent the most on R&D (from Volkswagen to Johnson & Johnson) shelled out a little less than $100 billion themselves. Five of the ten companies on that list were in the health-care industry. Typically, businesses invest about 3.5% of their annual revenues on R&D, a measure known as R&D intensity.

The commercial legal market generates something in the range of $300 billion in revenue annually (a figure that comes with some reservations). Applying a normal R&D intensity of 3.5%, we would conclude that law should be spending about $10.5 billion every year on research and development. The AmLaw 100 alone clocked in at around $77.4 billion in revenue, suggesting their R&D spend ought to be $2.7 billion. We all know, of course, that nothing like this is actually happening.

Money was spent on legal R&D in 2013 — but as Susan Hackett pointed out, it wasn’t spent by established by law firms, but by their suppliers and competitors in legal startups. A venture capital investment of $458 million is slightly more than 1% of total legal revenue; it’s not nothing, though it’s not a whole lot more than that. But preliminary estimates suggest 2014 will produce lower levels of outside investment in the legal industry. So if there’s going to be an imminent uptick in legal R&D, it will have to come from lawyers and law firms themselves.

Many lawyers have difficulty seeing how R&D would have any application to their businesses, probably because “R&D” conjures images of scientists and engineers in lab coats, conducting experiments in hopes of discovering some new chemical compound or medical miracle. But research and development is far broader than that: it refers to activities that a business undertakes in the hope they will lead to the development of new (or the improvement of existing) products, services, and procedures. It’s not limited to the scientific or manufacturing sectors at all.

How could a law firm conduct research and development? By considering possible new products and services for its market, or new ways in which its services could be created and delivered. Here are four types of R&D activities that law firms of any size could undertake.

1. New Products And Services: Think about emerging or overlooked possibilities for providing value to your firm’s current or desired markets. Look at it from the perspective of people and businesses within those markets, their needs and opportunities, and consider potential responses or solutions that you could offer. This isn’t a lawyer-centred “business development” exercise; it’s a client-centred “opportunities and solutions” exercise.

2. New Delivery Mechanisms: Brainstorm potential new client service protocols or enforceable firm-wide systems for client interaction. Envision new methods for delivering products and services online, directly over the Net. Could you package your firm’s expertise as an ongoing service? What delivery system changes would enhance the speed and convenience of service for your clients? What do clients wish law firms would change, but never do, about client service?

3. New Pricing Systems: Anything that truly moves your firm away from the billable hour is going to get clients’ attention. Effective pricing involves knowing your client, your competition, and your costs: what projects could acquire this information from the market or dig it up from within your operations? Identify the lawyers, practices, or client relationships most amenable to new pricing arrangements, and start coming up with experiments to try them out. (NB: Your compensation system will be affected, too.)

4. New Management Systems: There’s not a law firm in the world that couldn’t benefit from better processes and management practices. Rethink your assumptions around talent by exploring home-based or mobile workers and project lawyers, or by reconsidering your recruitment and training regimens. Study the potential use of project management on personnel, budgets and timelines. Could you harness your firm’s know-how to improve productivity or create value? Think of ways to reward people for good management.

Earlier this year, at a Legal Marketing Association conference, I delivered (along with Prof. Dan Katz of Michigan State Law’s Reinvent Law Lab) a day-long session on R&D to a group of law firm CMOs. The marketing directors were intrigued by the possibilities of law firm R&D, and in their breakout sessions, they came up with all sorts of great ideas and initiatives that could be planted and could blossom under such a program. [do_widget id=”text-7″ title=false]

But when we asked them to identify the internal obstacles to developing an R&D functionality, many CMOs wearily raised the same objection: the partners wouldn’t go for it. Research and development, by its very nature, is an investment in the future, a short-term expense made today in order to generate revenue and sharpen competitiveness in the medium and long term. Many law firm partners, fixated on their annual profits, have no interest in reducing their income today in the hope that their income tomorrow will be multiplied (and that goes double for any partner in his or her last few years of practice).

This is most likely true. And I can’t help but note this reluctance in the context of the growing debate around non-lawyer ownership of law firms. Virtually every company in the Global Innovation 1000 is publicly owned, with shareholders renowned for their insistence on steadily rising value — yet these same shareholders have no difficulty approving the expenditure of millions of dollars annually on R&D initiatives. They’re quite willing to forego some profitability today if it could help sustain and improve the company’s prospects down the road. Yet lawyers, supposedly the guardians of higher-minded professional objectives, prefer to empty the entire piggybank every year rather than divert a few coins to enhance the firm’s long-term competitiveness.

But happily, there are exceptions. Earlier this year, AmLaw 100 firm Akerman LLP announced the launch of an R&D Council, “dedicated to creating new offerings that advance the business of law and redefine service delivery models, jointly helping Akerman and its clients overcome future barriers to innovation and growth.” Akerman has a history of innovation-friendliness, but their efforts here should demonstrate that R&D is neither impossible for nor irrelevant to law firms.

Nor is R&D limited only to large firms. I remember reading (and if I can find the link, will provide better details) about one moderately sized firm that gathered its young associates together, gave them a chunk of non-billable time, and told them to come up with ideas about markets the firm could be serving tomorrow if it started investing the time and effort today. One of the many ideas brainstormed in that session grew to become one of the firm’s top practice areas. That wasn’t a systematic, budgeted and ongoing R&D functionality; but even as an ad hoc event, it demonstrates what can happen when a firm gives its lawyers the permission and the space to be creative about what they do and how they do it.

Law firms probably won’t break the R&D 1000 anytime soon, but they don’t need to, either. Asking every partner in the firm to take 99% or 98% rather than 100% of their annual draw, and putting that money towards a well-funded research and development director who reports progress quarterly to the firm’s management — that might be all it takes to get your firm’s R&D started. And that investment, in turn, might be all that keeps your firm relevant and competitive as the legal market continues to redefine itself in the years to come.

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.

Watershed: The CBA Futures Report

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Posted in: Governance, Innovation

This morning, the Canadian Bar Association released the widely anticipated Final Report of its CBA Legal Futures Initiative, “Futures: Transforming The Delivery Of Legal Services In Canada.” I had the benefit of receiving an advance copy a few days ago, so I’ve had time to review the report and prepare some thoughts.

My primary thought is this: The CBA’s report constitutes a watershed moment for the legal marketplace in Canada, and possibly in North America. No document like this has ever been produced by a legal organization on this continent; the only reasonable comparison I can draw (albeit obviously not as groundbreaking) is Britain’s Clementi Report, released nearly 10 years ago. That’s how significant I think the CBA Futures Report could turn out to be: it has the potential to help usher in a new era in legal services on this side of the Atlantic, and to utterly remake the Canadian legal market in any event.

Here’s a link to the full report, one to its executive summary and 22 recommendations, and one to an article in the CBA’s National magazine outlining its major points. This post identifies what I think to be the report’s most important recommendations, with accompanying commentary. I won’t touch on every recommendation, just the ones that I think have the greatest potential impact.

A few key points, however, at the outset:

1. This Report is not CBA policy, not yet anyway: in order for that to happen, the report must be approved by the CBA’s Governing Council. Normally, if I recall my CBA procedures correctly, that vote would occur at the association’s next mid-winter meeting in February 2015. Council might adopt the report in its entirety; it might also adopt only some of its recommendations, and it’s possible (although I think very unlikely) it could reject the whole thing. The next several months of debate and discussion should help indicate which way this will go.

2. The CBA, in case you’re not aware, is solely a lawyer advocacy group. It has no regulatory function, although it frequently advocates in the public interest and makes suggestions to the provincial law societies, which do exercise the statutory regulatory role. So even if CBA Council adopts this report in its entirety, that still doesn’t change the governance of the Canadian legal profession. I imagine, however, that Canada’s 14 law societies might well consider the report to be persuasive evidence (especially in Ontario, where a similar committee is poised to deliver a report on ABSs next spring).

3. I had no input, in case you were wondering, into the direction or content of the Report (I worked at the CBA for 10 years, ending in 2009). I facilitated a #CBAFutures Twitter chat earlier this year, and I provided some informal advice about communications and social media approaches for the project the year before that, but that was the extent of my involvement: this report arrived as new to me as it is to you.

With those points in mind, here we go:

1. Flexibility in Business Structures

Lawyers should be allowed to practise in business structures that permit fee-sharing, multidisciplinary practice, and ownership, management, and investment by persons other than lawyers or other regulated legal professionals.

Nothing like starting with a bang, is there? The Futures Committee recommends a nearly complete liberalization of the regulations that govern lawyers’ business structures. MDPs aren’t all that dramatic a change anymore — they’re already available in some Canadian jurisdictions, albeit with various restrictions on non-lawyer control — but fee-sharing with non-lawyers is a major development, one that hasn’t received as much attention recently but that could have a significant impact on solo and small-firm practices.

But the big-ticket item — the one that will dominate headlines and conversations — is the recommended approval of law firm ownership, management, and investment by non-lawyers. Note that there are no qualifiers, here or elsewhere in the report, about controlling percentages of ownership. Scotland, for example, allows up to 49% non-lawyer ownership in order to maintain lawyer control, and British Columbia’s 2011 report on Alternative Business Structures spoke approvingly of this middle way. The CBA, by contrast, has gone all in — and wisely, I think. Minority non-lawyer ownership is neither fish nor fowl: too much control for traditionalists, but not enough control to actually change the way firms run, leaving nobody happy. If you’re going to start a revolution, you don’t bring toy guns to the barricades.

The CBA, to its credit, has struck at the heart of the argument over how lawyers should be permitted to structure their businesses. Recommendation #1 will be seen, correctly, as the crux of this report and the vanguard of the recommendations that follow, and it will be the main battleground between traditionalists and liberalizers. If this recommendation is defeated or watered down before adoption, this report loses much of its impact, and many of the subsequent recommendations, even if passed, will feel toothless. If it’s approved, everything afterward will change.

4. Alternative Business Structures

Non-lawyer investment in legal practices should be permitted, but only on a carefully regulated basis as follows:

[My summary of what look like the key conditions:

  • An ABS (along with its lawyers) is to be regulated exactly as a law firm would be, with the same fiduciary, ethical, candour, and conflicts obligations to clients as a law firm has, and it must advise clients solely in their interests;
  • Non-lawyers can deliver legal services if they’re effectively supervised and controlled by lawyers;
  • The ABS, its owners and its shareholders may not access privileged client information without express client consent and then only for the client’s benefit;
  • The ABS must purchase legal malpractice insurance no less than required for lawyers but increasing with the size of the ABS.]

None of these restrictions seems unreasonable to me: most seem simply to confirm that the level of regulatory scrutiny currently applied to law firms should be applied in equal measure to an ABS. That’s no small thing: the report might have recommended higher governance standards for ABSs, but it did not.

The requirement of lawyer supervision of non-lawyer legal service providers is one that is already applied within most law firms anyway, and while it’s possible this requirement might eventually prove unnecessary, there’s certainly no harm in adding it now, especially if it helps calm traditionalists’ fears (ditto for the insurance requirement).

5. Fee-sharing with and Referral Fees to Non-Lawyers

The FLSC Model Code Rules should be amended to permit fee-sharing with non-lawyers and paying referral fees to non-lawyers, subject to the following:

[My summary of what look like the key conditions:

  • Existing conflict, confidentiality, privilege, and candour rules fully apply;
  • The client must receive full disclosure of, and discuss with the lawyer the relationship with, the fee-sharer and of the shared fee, which itself must be fair, reasonable, and fully accounted; the fee cannot be contingent and the referral cannot be “exploitive”;
  • The lawyer and client must discuss client expectations arising from the referral and mutually agree on the basis of the retainer.]

This recommendation should be most relevant and useful to solos and small-firm lawyers, because it should provide them with alternative sources of revenue (and giving firms access to novel financing sources is one of the main purposes of liberalization). What I like best about this recommendation, though, is that it brings out into the open all the fears and suspicions that lawyers have always carted around concerning fee-splitting with the dreaded “non-lawyers,” and it forces us to confront them head-on.

It’s a (generally unspoken) article of faith among traditionalists that fee-sharing with non-lawyers inevitably “corrupts” the legal profession, although to my knowledge, no one has established this belief through either sound argument or specific examples. I’d listen to those arguments if they were forthrightly made and stood up to scrutiny; but rarely is either the case. This recommendation reads like a refutation of lawyers’ unconscious assumption that non-lawyers are fundamentally less moral and ethical than we are; I look forward to hearing someone argue that assumption explicitly, in public.

6. Delivery of Non-Legal Services by MDPs and ABSs

MDPs and other forms of ABSs should be permitted to deliver non-legal services together with legal services on the basis that [the same client , confidentiality, and ethical protections that we’ve encountered already, but with this interesting addendum:] If the public interest demonstrably requires that some non-legal services should not be provided together with legal services, the rules should so provide. Otherwise there should be no restrictions. [do_widget id=”text-7″ title=false]

These new entities probably will want to deliver non-legal services as well, so it makes sense to start creating a regulatory framework for that (although it will be very interesting to see how lawyers choose to define “non-legal services,” and what impact that definition might have on subsequent attempts to enforce the “unauthorized practice of law”).

But that last sentence is intriguing: it sets up a presumption in favour of the authorization of non-legal services delivery, overcome only by a demonstrable public interest. The report could have created the opposite burden: no non-legal services, unless the ABS can demonstrably show there is no threat to the public interest. The report chose not to do so.

8. Compliance-Based Entity Regulation

Compliance-based regulation of legal practices should be adopted to promote ethical best practices as a supplement to existing rule-based regulation of individual lawyers. Under compliance-based regulation:

  • law firms would be required to register with the law societies;
  • law firms become regulated entities upon registration;
  • law firms would be required to designate a lawyer with whom the law society may deal on behalf of the law firm and who is responsible for overseeing law firm regulatory compliance; and
  • regulation of law firms would include the requirement of supplementary compliance-based regulation to promote ethical best practices.

Now, this is interesting. As mentioned above, the CBA itself has no regulatory powers, and the law societies have always politely made it  clear that such issues are entirely within their jurisdiction. But compliance-based entity regulation is an idea whose time is rapidly approaching, if it’s not already here: Australia and England have already adopted it to varying degrees, and some Canadian law societies are taking a very close look at it. The Nova Scotia Barristers’ Society, in particular, is making groundbreaking progress in this direction, and Ontario’s ABS Working Group has also explored the issue. Approval by CBA Council of this regulatory approach would be interpreted as a strong vote of confidence in this direction and could signal a tipping point towards its widespread adoption in Canada.

10. Effective Supervision of Non-Lawyers

The FLSC Model Code Direct Supervision rule should be revised to require effective supervision rather than direct supervision. …

This recommendation, previewed in #4, goes on to explain and qualify this approach in some detail, but the key distinction has already been made: substituting “effective” for “direct” supervision. The practical outcome is to relieve lawyers of the need to hover over their non-lawyer employees, monitoring or checking everything that they do, which “direct supervision” implies. “Effective” suggests that as long as there are systems and procedures in place that work to maintain acceptable standards of conduct and activity by non-lawyers, the lawyer need not concern himself or herself with more than the normal supervisory process applied to trusted colleagues of any description.

19. Structured, Rigorous and Consistent Pre-call Training

There should be a structured, rigorous, and consistent approach to pre-call training to ensure new lawyers have all the skills and knowledge required to practise safely and effectively.

This looks like a reference to the struggling articling system, which is in the throes of upheaval and can’t be asked to function much longer as a de facto competence qualification process. The key word here is “training,” which is quite a different concept than “experience,” the usual way in which articling is described. Articling is indeed a great way to “experience” what it’s like to be a lawyer; but that’s not the same thing as being given “training” in how to be a lawyer. I wonder if this isn’t a backhanded vote of confidence for Ontario’s Law Practice Program, which could offer an alternative qualifying route to articling, one that emphasizes “training” over “experience.”

21. Parallel Legal Programs

Educational providers should consider creating parallel programs in areas such as legal technology, in college or other environments, or incorporated into law school education, to educate and train new streams of legal service providers which may include lawyers.

Many of the recommendations in this report touch on legal education, but they’re not nearly as sweeping as those related to the regulation of lawyers and their business structures. Perhaps that’s an acknowledgement that the CBA, like other organizations, isn’t in a position to bring about any sort of change in law schools, no matter how much such change might be needed and desired. But still, the report has no difficulty stepping directly into the law societies’ regulatory back yard, so one has to ask why a similarly bold incursion wasn’t made onto law schools’ lawn.

In any event, this is an excellent suggestion, one that law schools should rush to explore and perhaps implement. It’s increasingly obvious that new legal professionals with innovative skill sets and job descriptions will grow in the years to come, at the expense of traditionally educated law students. Law schools looking for a growth area should already be drafting curricula for Legal Knowledge Engineers, Legal Process Managers, and the like — before someone else does. There are now more than 5,000 trained paralegals in Ontario, not one of whom received his or her paralegal training from a law school. It would be a shame for the law schools to miss the same boat twice.

22. Continuing Professional Development

Continuing professional development should be designed to meet lawyers’ needs through the stages of their careers and reflect identified and emerging client needs. Legal regulators should adopt consistent outcome-based national standards for CPD. Research should be undertaken to measure any link between quantity or input-based CPD and competence.

This is the report’s final recommendation, and it caught me by surprise. I’ve written before about the fundamental problems with how CLE is mandated and delivered, especially the problem of demonstrating its effectiveness. This recommendation tackles these issues and more, declaring that CPD’s purpose is to meet the evolving needs of lawyers and clients (which reads to me like a call for more practice- and client-related information and training), that there should be CPD standards grounded in practical outcomes, and that the assumption that traditional CPD correlates with competence should be tested (that last point, if studied and debunked, could change CPD worldwide). Everyone will have their own rooting interest for one of these recommendations; this is mine.

As mentioned, I’ve only highlighted some of the report’s recommendations; others might strike you as more significant, and you might have a different take on the ones I’ve explored. If so, let us know what you think in the comments. I truly have no idea if CBA Council will approve this Report, partially or in its entirety, and whether such approval would prompt one of more law societies to implement some of these recommendations through regulatory review. The Report has only just entered the public sphere, and the forthcoming commentary and conversations should be fascinating.

But I go back to my opening assessment: I’ve seen a lot of reports from a lot of organizations about “the future of law,” and I’ve never seen one as powerful, wide-ranging, and apparently serious as this one. Several U.S. sates, as well as the American Bar Association (through its new Commission on the Future of Legal Service Delivery) are considering many of the issues highlighted above; I can’t help but think that this report could be cited as persuasive authority by those who favour (as I do) the liberalization of legal market regulation and legal service delivery. No matter what changes actually result from this report, its release changes the conversation about legal regulation in North America.

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.