The stratified legal market and its implications

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Posted in: Big Firms, Clients, Innovation

An extraordinary conversation has emerged among multiple authors in the blawgosphere over the past few days. It revolves around a pressing question: in light of the huge changes in the marketplace, what will become of law firms? More specifically, given the increasing segmentation and stratification of the universe of legal work, how can law firms — traditional, inflexible, one-size-fits-all businesses that they are — respond to these changes and continue to thrive? Can law firms serve multiple segments of a newly diverse market simultaneously, and if so, how?

No fewer than seven articles by six writers have explored this subject so far, and I recommend you take 10-15 minutes and go read these pieces (if you haven’t already) before continuing:

Collectively, these posts represent a deep dive into a subject that should command the attention of law firm leaders in firms of every size, because they identify a fundamental challenge. The nature of legal work is changing, and when demand changes, markets require suppliers to change as well. Law firms must adapt to at least some degree; but how, and in what ways? Inspired by all these posts, here’s my assessment of where we find ourselves right now and whether and to what degree law firms can move forward from here.

When viewed from the perspective of clients (which, when you think about it, is the perspective that counts), there are three types of outsourced legal work (that is, work not performed in-house). This is roughly how clients would describe them:

1. Mission-critical.

This requires a lawyer.
It really matters who we use.
It doesn’t matter how much it costs.

“This is mission-critical stuff; if this doesn’t work out, the company takes a major hit and my job could be on the line. Conversely, though, if it works out, the company avoids a hit and/or makes a huge gain, and my star rises considerably. There’s no way we can pull this off ourselves — it’s too big. So we need to hire the best — that is, either the very best lawyers to get it done right, or the firm with the best reputation so that if it goes wrong, I can point to the firm’s rep and say, look, I chose the cream of the crop, so don’t blame me. I’ll pay whatever lawyers or firms like that cost.”

2. Ordinary course of business

This requires a lawyer.
It doesn’t matter who we use.
It matters how much it costs.

“This needs to get done, and it’s definitely lawyer work, and we don’t have the manpower in-house to do it. But it’s also the kind of thing that comes up pretty frequently in our business. And of course we want it done well, but a loss or a failure wouldn’t be fatal. ‘Good enough” is good enough here. Many lawyers and a lot of firms do this kind of work, so we’ll be well served no matter who we choose. But with the budget pressures I’m under, I’m going to make sure that whoever we hire has a good system in place for doing this work and bills below the median rate. I can afford to set some conditions.”

3. Commodity

This doesn’t require a lawyer.
It doesn’t matter who we use.
It really, really matters how much it costs.

“This needs to get done, but this is basic stuff and it’s the sort of thing that comes up over and over again. I’ll find a cost-effective outside solution that can process these matters rapidly, repeatedly and reliably: a professional staffing firm like Axiom, a freelance contract lawyer, or maybe an LPO. Unless we’re really lucky and can find a law firm to do it as well and as cheaply as these other suppliers (which I seriously doubt), I can’t justify asking a typical firm to do this — even their discounted rates are more than this is worth.”

(This division is inspired in no small part by John’s rate pyramid. It also helps to think of these three types of work as occupying, in declining order, the five stages of legal matters proposed by Richard Susskind: bespoke, standardized, systemized, packaged, and commoditized.)

Law firms have long supplied all three types of work to clients, invariably by way of the cost-plus billable-hour system. Clients, lacking both other options and the incentive to go look for any, went along. One market, one model. But now there are three markets: mission-critical, ordinary-course-of-business, and commodity. The universe of legal work has segmented and stratified. (One can argue that it was always segmented and stratified, but that the market mechanisms to recognize and process this segmentation didn’t exist till now, which I think is fair.)

The question before us is whether one law firm can still supply all three types of work, or even two of the three. More specifically: is it possible for a firm to do so, and then, is it feasible?

1. Is it possible? Yes, as my friends make clear in their blog posts. Ron and Toby point out that the hotel and banking industries feature companies that successfully serve different market needs through different brands. In a similar vein, Steve points to Toyota, a company that profitably produces both the Lexus and the Yaris. To those three examples, I’d add a fourth: shoe stores. Many people don’t realize that the five or six different shoe stores in your average shopping mall, each geared towards a different market segment, are often owned by the same company. Theoretically, there’s nothing preventing law firms from taking the same approach, adapting their offerings to the demands of each market segment.

2. Is it feasible? Here’s where it gets tricky. In practical terms, how would a law firm go about offering both mission-critical and ordinary-course-of-business services simultaneously, within the same enterprise? This raises problems that, on the whole, I see as insurmountable.

  • The structures for each tier (let alone for the commodity work) are very different and would require, at a minimum, separate facilities in different locations: Hilton doesn’t house Astorias and Hampton Inns in the same complex.
  • They would have to operate under different brand names: Cravath can’t start up an employment-law subsidiary under its high-end corporate name, for the same reason that Florsheim doesn’t sell basketball sneakers: the brand dilution is too strong.
  • And as Mary points out, support systems and infrastructure will differ too. Will one part of a law firm will suffer systematization and efficiency measures when other parts of the firm continue to happily bill by the hour? And could that even be managed financially?

But I think there’s a more fundamental challenge, which Mary also raises: “How do you handle the potential for income disparity and differing levels of respect for the lawyers in each practice?” To an extent, this is a problem in current full-service law firms, where some partners earn ten times or more what others make. But in an explicitly two- or three-tiered law firm, it would become intolerable, because there would be clear divisions in quality of work, level of pay, and inevitably, quality of lawyer, and that simply will not be borne.

Every lawyer considers himself or herself to be an exceptional talent, and if there are some within the firm who make more money, well, that can be an accident of economics, and if there are some who are clearly incredibly gifted, well, we all like to have a few superstars on board; but let’s be perfectly clear, we’re all excellent around here — we’re only talking about degrees of excellence. This is the fiction that all lawyers in a firm tell themselves, even when the hard truth is that, as Mark puts it, most lawyers are mediocre (I’d use the more charitable term “ordinary”). The politeness of collegiality (which some partners lack the manners to maintain) asserts this fiction of excellence because it makes everyone feel better about themselves and improves morale and unity of purpose. But a firm that publicly announces, “We have one set of lawyers for extraordinary work and another set for the basic day-to-day stuff,” abandons this fiction and  suffers the consequences. Firms hide this division today under the “full-service” label, but it exists and everyone knows it; keeping it hidden and unspoken is one of the things holding many law firms together.

At a certain point, the multiple divisions within a tiered firm would diverge so widely that they would  effectively become separate firms, bringing into question the point of the whole exercise. Could a law firm create a holding company to manage a fleet of separate legal enterprises? Within the right legislative environment, sure — but why would it want to? How could it be worth the hassle? It’s hard enough to manage a single law firm, and as Ron suggests, lawyers don’t possess a ton of management acumen or entrepreneurial spirit. Berwin Leighton Paisner’s Lawyers On Demand service, which Ron references, may be the only really successful example I’ve seen of a law firm operating two legal business models simultaneously — and even that service, which explicitly offers different types of lawyers serving different types of client needs, looks like it might be spun off into a separate entity.

For these reasons, I think it’s next to impossible, in practical terms, for a law firm to explicitly serve both the mission-critical market and the ordinary-course-of-business market: the requirements are too different and the cultural pressures too intense. A firm can position itself to offer ordinary-course-of-business services — Mark cites the example of a “big-firm quality at small-firm prices” brand that presents a sensible-yet-still-professional image to the market and allows everyone to save face. But that image can’t co-exist, within the same enterprise, with a “We’re the very best in the world and you’ll never get fired for hiring us” brand. Very few lawyers beyond their third year of call will voluntarily wear the “second-class status” discount tag with a smile.

So how will this dilemma be resolved? Legal work is segmenting and stratifying, and law firms can no longer profitably perform this work in a one-size-fits-all business model: mid-level work requires a degree of management and systematization, while the truly commoditized work requires full-scale business process re-engineering. But it seems to me that trying to operate two or three different business models under the same roof, name or brand will generate centrifugal forces too powerful to contain. How does this story end?

I think, inevitably, it ends with the breakdown of many of today’s large, full-service firms into smaller enterprises that serve these component markets:

Mission-critical work will go to a small cadre of firms with outstanding lawyers and outstanding reputations: they might be global, but they won’t be as massive as they are today, because they will require fewer lawyers on-site to carry out their work and will instead make use of the “commodity”-type enterprises described in #3 above to carry out the more routine work that associates and junior partners used to do. These mission-critical firms will retain the powerful names and brands that their best lawyers helped forge over the years. They will charge stunningly high rates and will likely operate much the same as today’s law firms do.

Ordinary-course-of-business work will be the province of large firms that have evolved the types of systems, procedures and philosophies that reflect the “Law Factories” Ron writes about. They will routinely make use of legal project management, automated document assembly, dynamic knowledge management, online service delivery and other innovations that reduce the cost and increase the efficiency of legal service delivery. Will they do good work? Of course! Competence is not an issue within any of these tiers. But the work will be less valuable to clients and will be priced more competitively, necessitating a frugal-innovation approach. These firms might very well employ lockstep partner compensation, since the corner-office gorillas will have decamped to the mission-critical providers. Some of these firms will be direct descendants of today’s big firms, with the same names and addresses; but many more will be entirely new creations, formed from the splintered remains of today’s big firms that found themselves caught in the no-man’s land between the high-end critical and low-end commodity markets.

Commodity work will, for the most part, have left the legal profession behind. It will belong to enterprises that resemble informatics providers more than law offices. Indeed, leading the pack will be companies like Thomson and its Pangea3 division, along with other financial, data and information companies like Bloomberg and LexisNexis (and maybe Google?). Legal process outsourcing companies will be players, some of them riding a wave of venture investment made possible by the Legal Services Act and its North American progeny. At the consumer end, look for outfits like Wal-Mart or CitiBank to offer as many basic legal services as regulations will allow. This is the work that has, in Steve’s words, risen up “through the floorboards” and is now, as Toby suggests with banks and check-cashing services, no longer lucrative enough to warrant lawyers’ efforts.

That, to my mind, is the near-term future of the legal marketplace: a wide-scale disaggregation of full-service law firms into smaller enterprises adapted to meet stratified market segments. If you think that sounds like a chaotic, messy and deeply upsetting experience for the legal profession, then I think you’re right. Law firms are complex business models of the kind Clay Shirky warns about, and when these models pass the point of maximum complexity, they don’t gradually disassemble themselves in an orderly manner: they simplify, quickly and radically. I don’t hope for that outcome. But it’s difficult to see another likely way for this to end.

Jordan Furlong speaks to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

The 21st-century solo

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Posted in: Innovation, Solo & Small Firm

(Author’s note: Read to the end to learn about a scholarship contest for sole practitioners.) During my recent webinar on legal marketplace trends with Susan Cartier Liebel of Solo Practice University, I raised a point about solo law practice that’s been bothering me for a while.

Almost every lawyers’ association in North America, I noted, has a section devoted to “Solo, Small-Firm and General Practice” lawyers. My problem with that category is that it still lumps together two groups — solo and small firm lawyers, and general practice lawyers — that should now be considered separately. Today’s (and especially tomorrow’s) sole practitioner has to pursue a niched, specialized practice — one that offers a focused set of skills and expertise with which to compete in an extremely fractured and specialized marketplace. If anything, I argued, today’s “general practitioners” are in fact the national and global giants — the full-service firms who assure the marketplace that “we do everything.” The traditional roles have been reversed.

This reversal is part of what I think we can justifiably call a “paradigm shift” for the solo bar — a change in its underlying assumptions and realities. Sole practitioners (for the purposes of this post, I’ll risk a charge of hypocrisy and bundle “very small firms” under the same term) have been accustomed to viewing themselves in a certain light, a view that the rest of the bar has shared and encouraged: the jack-of-all-trades, the storefront attorney, the low-cost but personal-touch underdog. This view of solos directly contrasts them with bigger law firms: we are more flexible, more affordable, and more personal. The flip side of that contrast, of course, is that solos are viewed as less specialized, less sophisticated and less able to take on big tasks.

Many solos have long been content with this trade-off.  Not only that, many have welcomed the current upheaval in the market that has caused bigger firms so much heartburn. We’re now poised, they say, to take in those price-conscious, relationship-hungry clients who’ve left the giants — this is our time.

To which I reply: not so fast. Solos are not exempt from the revolution. Everyone else in this market — big firms, mid-size firms, corporate clients, consumer clients, law schools, legal publishers and many others — is being transformed by the crucible of these times. Solos will prove to be no different. Taking advantage of this new market will require solos to change as well, which will mean abandoning some long-held habits and identities.

Here’s what I see as four characteristics of the successful 21st-century sole practitioner.

1. Specialized. I mentioned this at the outset, but it bears repeating. “General practice,” in real terms, has traditionally encompassed a range of product and service offerings that today have become economically unfeasible for lawyers. Real estate transactions, straightforward wills, contract drafting, incorporation and other basic business law services, and so forth — these are the stock in trade of the online, automated, or para-professional providers now accelerating into the market. This type of work has never paid handsomely, but in future, it will rarely pay enough to justify a lawyer’s efforts. Running a general practice has usually meant being good at a broad yet shallow range of services; but the shallow waters are precisely those into which the new competitors have advanced.

The solution for solos is to go deeper and develop specialties. Yes, as you give up a wide swath of your current broad practice, you will lose clients — but as you drill down and build up valuable expertise in a specific area of law for which there’s market demand, you’ll add clients, many of which will pay better for your scarcer skills and knowledge. And thanks to the internet, your geographic market has widened enough to allow you to maintain your reach while narrowing your offerings. Solo specialties are not unprecedented: criminal defence and family law practices are longstanding examples (although “vocation” is also a good way to describe these challenging but socially crucial practices). Most solos outside these areas of practice, though, have been general business and consumer lawyers. Now they need to focus.

2. Sophisticated. This is partly a function of specialization, as described above, but it’s also a function of business infrastructure. Solos cannot afford to give anything away to their rivals in bigger firms — yet they’ve usually been quick to concede organizational sophistication: we don’t have the marketing budget, we don’t have the IT capability, we don’t have the administrative capacity to do what bigger firms do. This simply isn’t a viable concession to make anymore — solos need to be running businesses as powerful and efficient as any big firm in their neighbourhood. Mid-size and larger firms that have taken infrastructure seriously and invested in it (especially on the client-facing side) have changed marketplace expectations of what a law practice should be able to do. You’ll have to keep up.

Fortunately, now you can. The available suites of law practice management software have never been better, more varied, or more affordable than they are today. In addition, cloud-based law practice management providers have emerged and have become completely reliable in a remarkably short period of time, removing the need to host any of this software or data on your own office systems. Virtual assistants can carry out administrative tasks as or more cost-effectively than an on-site person, often at customizable hours. Good websites and blogs allow solos to build up market profiles many multiples greater than their physical footprint could manage alone. Advanced client intake/contact and workflow systems can be implemented once and left humming for years to come. Your business can now be as sophisticated as you need it to be without overwhelming you with time and financial costs.

3. Collaborative. The “lone wolf” image of the sole practitioner was hard-won and is something many solos continue to treasure. But as I’m sure you’ve heard, this is no time for lone wolves, not in this economy or in this society. Solos simply must be networked, connected and collaborative in order to survive. Partly this is a matter of taking advantage of both old and new networks, from specialty bar groups to LinkedIn, and of contributing to communities like the blawgosphere. But it’s really about learning to collaborate with other solos, and even with larger firms, on projects that more and more frequently will involve multiple types of lawyers to achieve the client’s objectives.

The biggest knock against small law practices is that clients are reluctant to entrust them with anything more than small jobs — that for work of any real size or scale, clients consistently seek out the bigger firms with their greater manpower and their brand assurance that size guarantees reliability. This may prove to be many large firms’ strongest and most resilient selling point: don’t worry, because we have the critical mass to get anything done. That may be a battle that solos can’t win — but it’s not territory that you want to give up altogether, because the financial and intellectual rewards of big projects can be immense. So find ways to collaborate with other practitioners — perhaps as part of the free-agent lawyer wave, perhaps by launching your own specialist solo network that works together on projects — finding ways to punch above your traditional weight class.

4. Innovative. In many ways, I think this is the most important feature of the successful 21st-century solo. Sole practitioners have long prided themselves on flexibility, nimbleness and efficiency as market advantages, but bigger firms are now picking up some of these features by necessity. Solos can continue to have an entrenched advantage in innovation, however, because the bigger you are, the harder it is to enter new markets and try new things. Here’s how Clayton Christensen puts it in The Innovator’s Dilemma:

[C]reating new markets is significantly less risky and more rewarding than entering established markets against entrenched competition. But as companies become larger and more successful, it becomes even more difficult to enter emerging markets early enough. Because growing companies need to add increasingly large chunks of new revenue each year just to maintain their desired level of growth, it becomes less and less possible that small markets can be viable as vehicles through which to find these chunks of revenue.

Newly emerging markets offer tremendous potential, but big companies simply can’t afford to expend the resources necessary to exploit them early enough. That’s not a problem for smaller companies, which is one of the reasons why so many of today’s disruptive technologies and new markets were harnessed by start-ups. (Christensen himself recommends that big companies set up separate small divisions to pursue such opportunities.) Small law firms are in the same position: they can afford to innovate, to take chances and to try new markets and approaches in ways that big firms can’t. I submit that this will prove to be solos’ most formidable marketplace advantage, and they should press it.

What that means is that you can’t continue to practise solo law the way you always have before. You need to break out of the habits, limitations and rules that you always assumed constituted the underlying framework of sole practice. Maybe they did, once; they don’t have to anymore. Seek out clients from sectors you always thought were beyond your reach: what would it take to bring them in and keep them? Run your business in ways few other solos or small-firm lawyers would try:

and many others beyond what I’ve just tossed off in a few lines. Create markets where they didn’t exist before, deliver services in ways that haven’t been done before, define and run your business in ways that haven’t occurred to other lawyers before. The ability to conceive of, and then act to exploit, new opportunities will be the hallmark of the successful 21st-century solo.

To that end, I’m going to punctuate this post with something pretty different in itself. In conjunction with Solo Practice University’s second anniversary on March 20, 2011, I’m giving away five scholarships to Solo Practice University (valued at US$695 each; CLE is not included), courtesy of Susan and her team. These scholarships will be given to five current or soon-to-be solos or small-firm lawyers who are now engaging, or are ready to engage, in 21st-century sole practice. Drop me a line at jordan@law21.ca and tell me about the practice you now operate or that you plan to develop — describe the ways in which it is or will be specialized, sophisticated, collaborative and/or innovative.

I’ll be accepting entries from March 15 to April 30, 2011. Throughout the course of May, I’ll select the top 10 entries and my colleagues at Edge International and Stem Legal will help me determine the five winners. I’ll then post the winners, and descriptions of their practices, in a post here at Law21 on Wednesday, June 1. Get ready to innovate!

Jordan Furlong speaks to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

The new price wars

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Posted in: Billing, Clients, Innovation

Their World Series victory last fall wasn’t the only surprise the San Francisco Giants sprang on the baseball establishment. Throughout the 2010 season, the team engaged in “dynamic pricing,” changing the price of single-game tickets according to demand. The same seat for a Monday night yawnfest in May against the Washington Nationals, for example, would be priced well below a Friday night game down the stretch in September with the L.A. Dodgers. The new system, which reflects the ancient marketplace rule that demand drives price, produced a 6% revenue increase throughout the season and is expected to spread throughout not just MLB, but also the NBA and NHL in short order.

The Giants’ approach will sound familiar to anyone who grew up, as I did, in the era of “cheap night” at the movies, wherein ticket prices for Tuesday night showings were less than half those of other nights. The theaters, normally all but deserted on Tuesdays, were instead always full. Given that cinema owners make most of their money off concession sales, I imagine that “cheap Tuesdays” were immensely profitable. But as Malcolm Gladwell observed in The Tipping Point, theaters could actually go farther and change the price of individual movies according to their popularity, much as the Giants are doing with their game tickets: charge more for The King’s Speech and less (much less) for Yogi Bear.

There’s a reason why price tags are printed on cheap stickers, easily applied and frequently changed. Price is not carved in stone; it’s elastic, a function of supply and demand. This is true even in the law: it’s the rare lawyer who has never offered a discount on his or her hourly rate to win a client engagement. But rate discounts are about as radical as law firms have ever gotten with price. For most lawyers, fixing a price in advance of providing the service is anathema, and adjusting that fixed price according to a set of evolving criteria is farther beyond the pale again. But I think that’s about to change.

What got me thinking in this direction were reports this week that henceforth, DLA Piper (the newest holder of the “world’s biggest firm” title) was instituting minimum purchase levels for its clients. DLA’s US offices are said to be mandating an entry-level threshold of $200,000 a year for all new clients, while DLA International will set the amounts at €25,000 for new clients that don’t pose a potential conflict and €100,000 for those that do. The reasons, as explained in an excellent post by Financial Times GC Tim Bratton, are interesting: the firm wants lawyers to consider the firm’s strategic priorities more than their own; it wants to reduce the size of “conflict shadows” cast by smaller clients; and it wants to reduce the administrative cost of dealing with so many matters. Essentially, the firm wants many fewer, and much bigger, clients.

Some of my friends in the blawgosphere have called this a “cover charge,” but I don’t think that’s exactly the right analogy. A cover charge is an amount everyone pays at the entrance to ensure that no matter how little you spend upon entering, the proprietor will still turn a profit. DLA Piper, by contrast, is hiring a large, heavily muscled man to stand at the front door and admit only those customers who are guaranteed to spend enough to produce a profit. They’re pre-screening their clients for wealth, much as a legal aid clinic pre-screens its clients for poverty.

It might not win any points for populism, and there are serious implications for current and future partners. But as a strategic execution, as a profitability measure, and as a clear marketplace signal about which clients it desires, it’s brilliant: as Ron Friedmann notes, “it’s about making a conscious decision about your business, your costs, and your market position,” something few firms do. And in its own way, it’s an example of pricing innovation that other firms should follow.

I’ve written before about how the maxim “Don’t compete on price” has limited value in a highly competitive, price-sensitive market. Law didn’t use to be one of those markets; it is now, and some degree of price competition is becoming inevitable. But “competing on price” doesn’t have to mean getting involved in a downward-spiraling price war. As DLA Piper has demonstrated, you can compete on price upwards, setting floors rather than ceilings on how much you charge. For that matter, you can compete on price sideways, diagonally, and inside out through the fourth dimension if you like. You can make price a market differentiator simply by being creative and gutsy.

Examples are already abounding. Carolyn Elefant suggests that DLA Piper might effectively “offer $300,000 worth of service to clients who are willing to lock in and pre-pay the $200,000 minimum. Between the cash-flow benefit of receiving $200,000 up front and use of offshoring or second-tier contract lawyers in house, DLA Piper could still earn a decent profit, even while providing a ‘volume discount.” John Wallbillich at The Wired GC goes further: “What about a firm that does $1 million plus for a client not charging for telephone consultations with a defined number of client in-house counsel? Or provide access to part of a firm’s form files or knowledge management repository? How about a 3+ year associate on-site, gratis, for clients spending more than $5 million?”

Here are some more possibilities that law firms should mull over.

1. Charge like an airline. Some client matters are utterly routine, some are high priority, and some are absolutely urgent; but most lawyers tend to price solutions to each type of matter the same. Airlines thrive, even in a cutthroat marketplace, by charging you more for a ticket tomorrow than for one in three weeks’ time. What’s to stop a law firm from saying to client with an urgent problem: “To get this done tomorrow, we’ll need to drop everything else we’re doing and work on it for the next 24 hours; that’s a lost opportunity cost for us that will be reflected in a higher price.” Or conversely: “This is a low priority for you and can be done at a fairly leisurely pace by us; we’ll chop 30% off our regular price to reflect those facts.” Clients might not like the former treatment, but they’d understand it and probably accept it; they would love, and remember, the latter treatment.

2. Charge like a cellphone company. A dangerous comparison, to be sure, since many cellphone contracts epitomize the concept of gouging. But I mean this in the sense that many companies will discount the price of a cellphone itself, all the way up to 100%, if you subscribe to the connection service and payment plan. What would a law firm give a client for free in return for the guarantee of a fixed (and pre-paid) monthly fee over a two-year period? Maybe ten hours a month of a designated senior associate or junior partner’s time, no bills, no disbursements; maybe access to multi-jurisdictional regulatory compliance status updates; maybe an emergency “hot line” number that would put the client directly in touch with a responsible firm representative 24 hours a day. It would essentially be the freemium model applied to law.

3. Charge like a partner in a relationship. Seth Godin points out the cognitive dissonance by which many companies give their best rates to their worst customers: the difficult, the demanding, the frequent switchers. Similarly, their most loyal and enthusiastic customers are taken for granted and are charged accordingly. My Edge colleague Ed Wesemann has noted the same problem in law firms: discounts are offered to entice new business, but if the one-time client comes aboard and stays aboard, its rates soon go up and it’s relegated to the same “standard” treatment as the firm’s other “best” clients. Reward your best clients, give them discounts and freebies without being asked, simply to say thank you for being your relationship partner. As Seth puts it: make your best customers into your best marketers.

Lawyers resist change in many aspects of their work, but most of all in pricing: they try to pass all the risk of price miscalculation onto the client, a goal that the billable-hour system fulfills perfectly. Mature markets, however, allow (if not demand) more sophisticated pricing in which both the buyer and the seller accept some risk as a justifiable sacrifice to the greater goal of a stable, mutually beneficial relationship. DLA Piper is taking a risk with this new client minimum scheme, because it has both upside and downside: good for them, no matter how it works out.

Price is a conversation, not a command; it’s a journey rather than a destination. Lawyers with the wisdom to recognize that, and the courage to be flexible and creative in response, will emerge the winners from the new price wars that look poised to begin.

The future of lawyer associations

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Posted in: Governance, Innovation

Thomas Wolfe says you can’t go home again; nevertheless, I’m returning to my alma mater Queen’s Law School tomorrow to give a presentation on the future of the legal marketplace. While preparing slides for my section on networking, I noticed that examples of old-line bar associations (the volunteer kind, not mandatory or regulatory bodies like law societies or state bars) were becoming outnumbered by examples of new networks, everything from Facebook, Twitter and Quora to LinkedIn, Legal OnRamp and Solo Practice University. And that got me thinking about the future of lawyer associations.

This is a topic, I must tell you, into which I tread with caution. After all, I spent ten years drawing a paycheque from a bar association, and I continue to speak to and advise legal associations among my current consulting engagements. But I think it’s time to take a hard look at what lawyer associations, some of which trace their origins back to the 19th century, are and aren’t capable of selling to a 21st-century marketplace.

Lawyer associations of all kinds coalesced around a basic truth: there’s strength in numbers. Joining a group of professionals with similar practices, interests and affinities provides a practitioner with the comforts of collegiality, the advantages of an amplified voice, and the possibility of personal gain (referrals, learnings, and so forth).

But maybe more importantly, lawyer associations provide the benefit that every kind of club bestows: self-affirmation. Almost every member of a lawyer organization is proud to be a lawyer and enjoys the elite and rarefied atmosphere of other lawyers who feel the same. Lawyer associations, in this sense, are aspirational: membership is often an endorsement less of the specific association’s virtues or policies or activities, than of the idea that lawyers are special and have special roles in (and responsibilities to) society. Lawyers like that notion, and they like the company of others who share it. That fact has to underlie a lawyer association’s purpose and functions.

Unfortunately, I think a lot of lawyer associations have lost sight of that. Most lawyer groups these days are preoccupied (reasonably enough) with value: are we providing sufficient return on lawyers’ investment of membership fees and volunteer time? It’s the right idea, but I think many associations take it in the wrong direction, by focusing too much on tangible rather than intangible benefits.

Lawyer associations spend a lot of money providing business-improvement resources (checklists, practice pointers, forms and templates), publishing practice management materials (newsletters, magazines, handbooks, etc.), carrying out CLEs (both the in-person and online variety) and obtaining member discounts. These activities are sensible, legitimate and valuable — I’m a former association magazine editor, after all. But the thing is, many other people are offering them too. There’s not much unique about a CLE or a handbook or a discount provided by a lawyer association — it’s rarely a positive differentiator from the rest of the market. Lawyer associations that over-emphasize these services have to answer the question: what do you provide that I can’t also get from the market at large, on an à la carte basis, for less than my annual membership fee?

Many lawyer associations recognize this risk and undertake less tangible activities too, chief among them advocacy on lawyers’ behalf (or, put less delicately, lobbying governments as a special interest). Certainly, no one else will advance lawyers’ claims, given the perception that such interests are not always, shall we say, fully aligned with the greatest public good. But lawyers have as legitimate a claim to advocacy as any other constituency, and lawyer associations can and should uniquely fulfill this role. The problem, though, is that lobbying is not exactly what you call aspirational: necessary as it may be, it’s not a parlour game and it can be an unpleasant experience for all concerned. A lot of lawyers hope for something more from their association than simply aggressive self-interest.

Maybe the answer is public-interest advocacy? Many lawyers are motivated by the belief that laws should be fair and justice should be accessible, so a lawyer organization that publicly urges progress on these fronts will attract aspirational lawyers without repelling the average citizen. That makes a lot of sense and again, is a worthy undertaking for a lawyer association. But there are problems here as well. Public-interest advocacy is a difficult and thankless task that produces relatively few wins against a series of draws or losses; “social justice” issues adopted by an association can be internally divisive and even incendiary; and most pointedly, lawyers do tend to ask, after a while, what benefit they personally get from their association fighting the good fight.

Again — all of these activities have merit, to one degree or another, and lawyer associations legitimately can pursue any of them. The challenge is that, especially in a recessionary period and in the face of unprecedented private-sector competition, they can’t pursue all of them. Associations have to choose strategically — and more importantly, they have to decide what their foundation is. What’s that one thing, that single unique and effective purpose, that associations primarily serve and upon which they are built? It’s not annual meetings, which have dwindled in attendance and importance as physical distances have become less of an obstacle to networking. It’s not improving the image of lawyers, investing thousands of dollars in fruitless efforts to make lawyers more appreciated and valued by a public that is quite happy to stereotype and scapegoat us. So what’s left?

My own suggestion is this: lawyer associations should transform themselves into lawyers’ marketplace evangelists. They should adopt as their mission a sustained campaign to trumpet the unique advantages of choosing lawyers over the many other options spreading throughout the legal services market. Our de facto monopoly on legal services is already disappearing, and our regulatory advantages likely will follow shortly. Lawyers need to differentiate themselves from the people, processes and programs that are coming into the marketplace and drawing clients away; but no lawyer or firm is going to launch an expensive and complex campaign that will benefit competitors as well as colleagues. Lawyer associations can. And they can do so by emphasizing lawyers’ training, professionalism, ethical standards and other outstanding characteristics with which lawyers are proud to be associated.

That’s what associations can do externally. Internally, I think they need to focus on collegiality and collaboration. As society becomes more virtual, face time becomes far more valuable. But lawyer gatherings of all kinds still over-emphasize the role of educational sessions and business meetings — events that lawyers can attend from their desks or on their smartphones — while relegating socializing and networking opportunities to short coffee breaks or abridged cocktail parties at the end of the day. Associations should reverse this: host gatherings to network and socialize first, and to learn or conduct business formally as a sidebar. Look for ways to encourage face time and personal interaction among lawyers — hold un-conferences, sponsor speed-roundtables, form micro-panel discussions for small, specialized groups, and so forth.

Law firms are difficult organizations in which to effect change, and law schools even more so. But the challenge of transforming lawyer associations might be the greatest of all, because institutional memory and habits are powerful and deeply ingrained and decision-making ability is often widely diffused. But the need is real, the challenges are building, and the clock is ticking. One way or another, voluntarily or otherwise, change is coming to the lawyer association sector, too.

Jordan Furlong speaks to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

Lawyers and the red balloon

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Posted in: Access, Competition, Innovation

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

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

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

Sir Topham Hatt laughed.

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

James was delighted.

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

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

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

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

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

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

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

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

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

Jordan Furlong speaks to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

So what happens next?

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Posted in: Innovation

As the year winds down and alternative fee arrangements become more widespread among lawyers, I’m finding myself doing something curious: I’m being nice to the billable hour. Not defending it, exactly — others are happy to do that — but being more nuanced in my criticism and even citing examples of billing relationships where it makes sense to price by time. This from someone who, in his days as a magazine editor, once published a cover story titled “Time’s up: counting down the billable hour.” There’s a lot more evidence of hourly billing’s demise today than there was five years ago when I ran that story, yet apparently I’m now the soul of caution.

And I’m not the only one: at a time when those of us who champion innovation in law practice management should be leaping and shouting that the long-expected day of liberation is at hand, I’m getting a palpable sense out there that, you know, maybe this isn’t the actual revolution quite yet. Part of this might be the fear we experience (felt as hope by many inside the profession) that the tsunami of change we’ve been announcing for the last 12 to 18 months is, in fact, simply a rogue wave or two. Part of it might be that quiet terror experienced by anyone at the threshold of a long-awaited goal that something is going to jump out of nowhere and take away all the gains you’ve made. And who knows, part of it might be that realization, just as you’re about to vanquish a longstanding but suddenly diminished enemy, that your foe really wasn’t as terrible as you thought it was.

But there’s a further possibility, one that occurred to me after reading an article by Jonah Lehrer in a recent New Yorker titled “The truth wears off” (subscription required; summary here). The article documents a baffling and disturbing recent trend in science: scientific results decline over time, both in magnitude and frequency, in everything from drug trials to particle physics. Many explanations were advanced in the article, but one of the most persuasive is the pernicious effect of publishing. Everyone wants to see their hypothesis proved and thereby receive a career-making publication in a respected scientific journal, so researchers (even honest ones) allow their judgment to be clouded and “see” results that aren’t there or aren’t as strong as they’d like to believe. It’s not that “the truth wears off” — it’s that the “truth” was never as true as it was first believed to be.

I wonder whether we’re not a little guilty of this ourselves in the legal innovation community. 2010 was the year that the mainstream legal media and even the wider business press caught up to what the blawgosphere had been saying (especially since the financial crisis): the watershed event that we’d long anticipated has finally happened, and nothing will ever be the same in this marketplace again. But the truth behind the shift was always more complicated than just “the recession” — the emergence of LPOs, the advance of technology, the rise of sophisticated pricing options, the continuing decline of lawyers’ aura of expertise, and the effect of generational evolution among both lawyers and clients figured into the mix too. And the last time I checked, the AmLaw 200 had not been reduced to piles of rubble in downtown cores — and anyway, the AmLaw 200 and its equivalents elsewhere in the common-law world represent a tiny fraction of a legal marketplace that is still far more consumer- than corporate-focused.

The buying and selling of legal services has always been a vastly complicated marketplace that only appeared simple from inside the protective shell of the legal profession. If there’s one thing we can say with certainty about what happened in 201o, it’s that that shell has cracked. Lawyers in law firms are no longer the sole option for legal service purchasers and they never will be again. But that is almost the only thing we can say with certainty. The legal marketplace is in immense flux, and it would be foolish to make table-pounding predictions about what will happen next: there are too many variables, too many players, too many elements in motion. Law firm lawyers could storm a comeback and assert themselves as the dominant providers in a new, fragmented, online-delivery market; they could also disappear beneath the waves.

What I want to remind everyone in this market — what I want to remind myself — is that we’re at the start of this voyage, not the end of it, and nobody owns a reliable map. I know where I think we’re headed: multiple service providers, including law firms, virtual lawyer networks, LPOs, and automated systems; a few gigantic global firms and legions of smaller, streamlined, regional niche firms; the long-term resurgence of the sole practitioner; the end of lawyer regulation of the legal services market; variable quality of and lower prices for those services; and lower incomes for all but a handful of lawyers. I have good reason to think all these things, which I’ll happily expound upon for you over a drink or at a lectern. But things changed fast this year, and I’m betting they’ll change even faster through this second decade of the 21st century.

This time last year, I wrote: “Years from now, we’ll look back on 2009 as the year the legal market began to change; but we’ll look back on 2010 as the year lawyers began to respond.” By and large, I’d say lawyers did a pretty decent job responding, from AFAs to outsourcing to rethinking legal talent; but the marketplace’s rate of change accelerated, leaving us relatively farther behind. I think we’ll look back on 2011 as the year the profession’s walls really came tumbling down and new competitors began to assert themselves, aggressively, in multiple sectors at once. But I emphasize again: these are still very early days, and there are developments coming that no one can foresee. Amazon buying Lexis-Nexis? Google buying LegalZoom? Goldman Sachs buying equity in a global law firm? You can’t dismiss any black swan scenario anymore.

No matter how you feel about change in the profession — whether you hope for it or fear it — watch what’s going on, listen to other points of view, accept information that might not fit your hypothesis, and be ready to adapt your beliefs and your approach. And above all, be ready to move on very short notice. If you think the last few years have been crazy, I really think you ain’t see nothing yet.

The new battlefield: convenience

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Posted in: Clients, Competition, Innovation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The law firm of the future: Thomson Reuters

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Posted in: Competition, Innovation, Publishing

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

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

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

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

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

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

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

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

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

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

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

Destroying your own business

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Posted in: Big Firms, Competition, Innovation

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

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

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

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

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

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

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

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

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

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

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

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

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

What’s your sports department?

by with 1 Comment

Posted in: Innovation

As both a former journalist and a recovering professional sports fan, I was intrigued by this entry at Mark Coddington’s blog about innovation in newspapers. He reports on a study that found the department within most news organizations most amenable to innovation is actually Sports. The two journalism professors who prepared the report, along with other commentators, offered a series of possible explanations for this finding:

  • Sports journalists’ frenetic pace and round-the-clock deadlines are more conducive to the web than to print.
  • Sports journalists have tended to value their readers more highly — a key attitude in adapting to the two-way nature of online news.
  • The web was practically tailor-made for the way fans want to consume information about sports.

But the number-one reason cited, one that I think has resonance for law firms as well, was this:

  • Sports departments operate outside the rest of the traditional newsroom structure.

Coddington writes: “Innovation and risk-taking usually take place in autonomous divisions within an organization, ‘and at most news organizations, the sports departments are separate beasts, often working different schedules and feeling relatively less shackled by [tradition].’ Sports have long been thought of as the newspaper’s ‘toy department,’ the place where journalists can try out new styles and strategies, and since it’s not ‘real news,’ no one will get too worked up about it. Most sportswriters still bristle at the term ‘toy department,’ but as Jeff Jarvis and John Zhu suggested, it’s easier to experiment when you’ve been cordoned off from the sections of the paper that take their mission too seriously to try anything out of the ordinary.”

I’ve tried to become a kind of innovation botanist over the past several years, figuring out why it flourishes in some environments but wilts and perishes in others. This explanation makes a lot of sense to me, especially in the legal profession. Lawyers, risk-averse and change-resistant to a fault, hardly ever sign off on wholesale change from the start; but they’re often willing enough to offer up a small section of the garden for a new kind of approach and see what grows there, so long as the potential downside is clearly defined and delimited.

When I worked for the Canadian Bar Association, for example, and we needed to introduce an innovation of some kind (moving association newsletters from print to email, for instance), I made more headway through the liberal use of “pilot projects” than with any other method. Two or three small sections would agree to run parallel print and email publications and see which the members preferred. Virtually without exception, the pilot projects succeeded, and the majority of the control group switched to the new approach ahead of schedule. It was a demonstration of how innovation and experimentation in legal organizations is tolerated at the edges, a safe distance from the business core, where “no one will get too worked up about it” — but when it succeeds, converts can follow rapidly.

I also see this in my role as chair of the College of Law Practice Management’s InnovAction Awards, which were handed out at the College’s 2010 Futures Conference last month. This year’s winner, for example, was Pro Bono Net’s LawHelp Interactive program, which helps low-income people to quickly and easily complete essential legal forms online at no charge. Moreover, we gave an InnovAction Honourable Mention to Axiom LLP, a virtual or distributed law firm, for its function outsourcing initiative. Both of these winning organizations operate on what most lawyers would call the periphery of the traditional legal marketplace — yet it’s precisely on the periphery that real progress towards better systems and better results is being made, not least because these initiatives don’t appear to threaten anyone’s established position (so far).

There’s always a caveat, of course, and in this case, it’s the problem of migrating successful innovation from the periphery to the center. One of the comments on Mark Coddington’s post makes this point: “While the ‘toy department’ rep helps make it easier for sports departments to experiment, I fear it also makes it harder to reproduce that level of experimentation in other areas of the news organization. It’s much harder to convince management to remain as hands-off for “serious” news, and when you say, ‘Well, this worked for sports,’ it’s always shot down with, ‘Yeah, but that’s just sports.’” This will sound depressingly familiar to advocates of change within law firms, who consistently run into opposition from lawyers deeply versed in the art of distinguishing precedents to suit their own purposes.

But that’s not a good enough reason to quit before you even start. Right now, within your law firm or legal organization, is a sports department just waiting for the chance to rip off the restraints and show what it can do. Maybe, if you’re lucky, they’re not even waiting, and they’re already conducting furtive experiments like publishing a practice-group blog, offering and profiting from risk-sharing fee arrangements, making use of contract lawyers and LPO services, or designing the software that will revolutionize this practice area in a year or two.

Your mission is to find these subversives and give them everything they need to succeed. Cordon off a section of the garden, provide them with a wheelbarrow full of supplies, and let them know they’re free to fail without consequence. At the same time, protect them from pressure and second-guessing by the organizational establishment. Don’t let anyone violate the Roman Rule: “The person who says it can’t be done should never interfere with the person who’s doing it.” Find your sports department, and do whatever you can to help it infiltrate your entire operation.