How to kill a law firm

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Posted in: Competition, Innovation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The evolution of outsourcing

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Posted in: Clients, Innovation, Outsourcing

Still in its relative infancy, legal process outsourcing has already had a huge impact on the legal services marketplace: scoring major deals with the likes of Microsoft and Rio Tinto, garnering the attention of private-equity investors, and helping to expose the degree to which law firms have overcharged for the simplest legal work, among other accomplishments. But this impact has set off two important chains of events. The first affects LPOs themselves: they now need to move their value proposition beyond cost savings in a market they helped to make more sophisticated. The second affects everyone: the legal profession’s response to LPO is having an unexpected effect on how legal work is distributed and how legal resources are allocated.

The first development is summed up in a question framed by an LPO Savvy blog post: what does LPO do for an encore? It’s not fair to say that the value of legal process outsourcing lies entirely in its vast price differential with traditional law firms; but it is fair to say that that’s where many LPO conversations start. Saving money, especially on the scale that LPO offers and in this economic environment, is not to be dismissed lightly; but as LPO Savvy notes, “cost competitiveness alone is not going to propel the industry’s longevity.” Asian upstarts in other industries like cars and electronics often began by offering basic services at low prices; but they didn’t stop there:

Japanese automakers have been able to achieve [success] largely due to their ability to innovate. They did more than just maintain their competitiveness when they set up their manufacturing processes onshore. They brought with them their processes and managerial tools … fresh ways of managing Lean Manufacturing operations such as Kanban. Kanban was an innovative means of managing inventories in the manufacturing process unseen in the industry. It took cost and unnecessary steps out of the supply chain processes that went into producing automobiles.

Putting this back to the LPO perspective, I struggled with what the Indian LPO’s Kanban could be? What is the innovative game changer that we possess and can bring to the table? … The creative minds behind Kanban developed the practice through many trials of error and rework. But the need and desire to change how their processes were carried out was apparent to them, thus driving their need to explore ways to change.

There is an acute need to bring innovation to how legal services are carried out — a need that LPOs helped to highlight, and an area where they’ve already made much progress, but one that they themselves must now tackle head-on. LPOs have contributed to a slowdown (if not a dead stop) in the previously unstoppable rise in law firm fees; but are they also leading the way in re-engineering the means by which legal work is done, finding and implementing the new “killer apps” for law? And if so, are they successfully advertising and selling that fact to clients? LPO companies are still ahead of many law firms in applying process improvements and reducing costs, but their lead is not insurmountable.

Consider this example: legal process outsourcers have had greater difficulty cracking the Australian market than the UK or the US, in large part because in-house counsel there are apparently more reluctant to try new approaches and more fearful of LPO quality and security failures. So LPO provider Pangea3 is trying a different tack: a partnership with Australian law firm Advent Legal that will see the two collaborate on a wide spectrum of “junior work.” Advent and fellow Australian firm Balance Legal have to some extent already filled the LPO role in their country by their widespread use of secondments to reduce client costs and increase client integration, and have reaped the reputational benefits. LPOs have had to adapt, and this partnership — reminiscent in some ways of the alliance system between Indian and western law firms — is an example.

If I were an LPO, I’d be nervous every time I read about a law firm that provided secondments, gave legal project management training, managed its workflow, unbundled its services, used decision trees, or even employed Lean Six Sigma, because it means they’re starting to adopt some of my stock in trade. The critical battleground in the legal services marketplace is not price, but innovation: inventing and implementing more efficient and effective ways to carry out legal work. That’s a tougher and far more important assignment than simply lowering the cost of associate work, and whoever figures it out first and best could, like Toyota and Sony, dominate this market. LPOs are in a strong position to compete in this race, but they’re not the only contestants.

The second development emerging from LPO’s appearance is that a surprising number of law firms are adopting — and adapting — the outsourcing model themselves. They’re figuring out that the important question isn’t which type of provider (law firm, LPO, whoever) gets to do what kinds of legal work; the question that matters is who will serve as the primary liaison to the client and direct the allocation and assignment of legal work.

The days when legal work flowed from a client exclusively to a law firm and back again are over; the reality now is that numerous providers are in play and numerous models are on offer. While a number of UK firms have embraced LPO providers as a means to get legal work done more cost-effectively, some firms remember the words of Rio Tinto’s one-time GC Leah Cooper, who said law firms should think of Rio’s LPO partner CPA Global as an extension of the company’s in-house department. Law firms don’t like anyone — offshore LPO, procurement department, accounting firm — coming between them and their client. So in future, what really matters is this: who sits next to the client, receives its instructions, and decides how its legal resources are to be allocated among myriad providers? Smart law firms are taking steps now to ensure that that answer is never in dispute.

Here are two examples of what I mean.

Mexican Waves. Despite its name, law firms involved in a Mexican wave system don’t send work back and forth across national or continental borders; instead, the work circulates between firms in bigger cities and those in smaller, less expensive locations. The system was pioneered by UK firm Lovells — now transatlantic giant Hogan Lovell, and interestingly, the term no longer appears on the new firm’s website.  Clients like the Royal Bank of Scotland prefer a Mexican Wave arrangement to a pure LPO because they can cut costs while still retaining a long-term relationship with their primary law firm. Eversheds has adopted a sort of internal Mexican Wave by outsourcing work to its own firms’ lower-cost locations worldwide. And Magic Circle firm Freshfields rejects suggestions that its recent discussions about “referral arrangements” with smaller law firms is a Mexican Wave arrangement, but it’s hard to tell the difference. Meanwhile, some UK firms are outsourcing directly to law firms in foreign jurisdictions: Lewis Silkin, for example, is sending litigation work to Minter Ellison’s New Zealand office.

Outsourced law departments. One of the most interesting developments of the past several months has been a pair of joint ventures between UK law firms and public-sector law departments. In February, Geldards LLP and the Kent County Council created a new entity called Law:Public that will handle not just all of KCC’s legal work, but will also seek out work from local governments and public sector agencies across England. Law:Public’s 100 lawyers (80 from KCC) will charge below-market rates to these increasingly cash-strapped clients and will boast unparalleled experience and expertise in this sector. Then in March, large UK utility Thames Water essentially transferred its legal function to London firm Berwin Leighton Paisner, leaving behind a core group of in-house lawyers to provide strategic legal advice to the company. Here’s the key quote from a BLP partner: “With this model, we’re able to say that BLP’s embedded in the business. Other models such as LPO take you a certain way, but [they] don’t necessarily do what clients want, which is complete alignment.” In both cases, a law firm has completely integrated its operations and interests with those of a key client, ensuring continuing control of the assignment of legal services.

What these developments share in common is the law firms’ recognition that when clients say legal work has to be carried out differently and more efficiently, they mean it. Clients are putting all their options on the table and studying them closely, and many of those options don’t involve law firms much if at all. Some firms have therefore come to realize that they need to (a) find different ways of getting clients’ work done that (b) still leave the firm as the conduit through which that work flows and as the primary provider of the highest-value services.

What we’re starting to see now is an industry-wide jostling for position by legal services providers, each competing not just for the client’s attention but also for the coveted “quarterback” or “foreman” role that directs work to the other players, supervises its production, and takes ultimate responsibility for the result. Law firms used to hold that conduit position by default; they can’t count on that anymore, and the threat of losing that position is as close to an existential one as the legal profession should care to come. Clients are going to have more and more options for their legal work in the next several years, and managing all those options is a difficult and demanding job; but whoever holds that job will have an extraordinary amount of influence with the client and over the other providers. That’s the new Holy Grail for law firms, and I think that’s why a few smart firms are now taking outsourcing seriously: because they need to get very good, very quickly, at managing the production of legal work by a multitude of different providers.

Two specific sets of players should be concerned by all of this. The first is LPOs and other upstart providers of legal services, because if law firms (a) figure out how to manage legal work more effectively and (b) become entrenched as clients’ primary legal services overseer in a multi-provider environment, these entities risk a serious clipping of their wings. And the second is North American law firms: all the examples in this post and almost all the examples I’ve seen of this trend are in the UK, Australia and New Zealand: if any US firms are working on this, they’re keeping an extremely low profile. That’s risky, because this trend won’t take long to metabolize and it won’t take long for some clear winners to emerge. Law firms that don’t recognize this trend might find that an important and decisive war ended before they even knew it had begun.

One week left to enter the InnovAction Awards!

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Posted in: Innovation

If your law firm or legal organization has successfully introduced a powerful innovation in the last few years, then you have one week left to enter the College of Law Practice Management‘s InnovAction Awards, as detailed in this previous post here at Law21, and reap the rewards. At a time when innovation is valued by clients and demanded by the marketplace more than ever, the returns on this investment (one entry form and a US$325 fee) are tremendous. Nominations close on June 1, so if you’re looking to show off your innovation and gain the imprimatur of a world-class organization like the College, now’s your chance! As always, please feel free to drop me a line if you any questions, and good luck to all of this year’s entrants!

Frugal innovation and the law

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Posted in: Clients, Innovation, Purpose

Lawyers need to learn a very important lesson from a salad spinner.  Specifically, we need to understand the implications of the Sally Centrifuge, developed by students at Rice University in Texas:

The necessary parts: one salad spinner, some hair combs, a yogurt container, plastic lids, and a glue gun. The finished product: a manual, push-pump centrifuge that could be a lifesaver in developing world medical clinics. … A team of college students invented this low-cost centrifuge, which can be built for about $30, as a project for a global health class at Rice University. The teacher challenged them to build an inexpensive, portable tool that could diagnose anemia without access to electricity, and the tinkerers got to work.

The students, Lila Kerr and Lauren Theis, found that spinning tiny tubes of blood in the device for 10 minutes was enough to separate the blood into heavier red blood cells and lighter plasma. Then they used a gauge to measure the hematocrit, the ratio of red blood cells to the total volume. That information tells a doctor whether a patient is anemic, which can in turn help to diagnose conditions like malnutrition, tuberculosis, HIV/AIDS, and malaria. … “We’ve pumped it for 20 minutes with no problem,” Theis said. “Ten minutes is a breeze.” It has proven to be fairly robust. “It’s all plastic and pretty durable,” Kerr said.

If you think the multinational makers of expensive medical devices would fight a cheap innovation like this, then let me also introduce you to the Mac 400, a hand-held electrocardiogram developed by General Electric’s health-care laboratory in Bangalore, as reported in The Economist:

The device is a masterpiece of simplification. The multiple buttons on conventional ECGs have been reduced to just four. The bulky printer has been replaced by one of those tiny gadgets used in portable ticket machines. The whole thing is small enough to fit into a small backpack and can run on batteries as well as on the mains. This miracle of compression sells for $800, instead of $2,000 for a conventional ECG, and has reduced the cost of an ECG test to just $1 per patient.

The Economist goes on to explain, in a special report on innovation in emerging markets, what these developments represent: a reinvention of the product development cycle for markets with very limited resources. Like Japan before them, which developed lean production systems to compensate for a lack of physical space and material, India and China (and a few other smart entities) are developing production systems for buyers without much money, mobility or infrastructure:

[Companies] are taking the needs of poor consumers as a starting point and working backwards. Instead of adding ever more bells and whistles, they strip the products down to their bare essentials. Jeff Immelt, GE’s boss, and Vijay Govindarajan, of the Tuck Business School, have dubbed this “reverse innovation”. Others call it “frugal” or “constraint-based” innovation.

Chances are that you, like me, live in an affluent society and are familiar with unnecessary options. Most of us have more consumer choices than we need or could hope to sample, choices that don’t make our lives that much better or happier. Most of us have never used 80% of the buttons on a standard remote control or could even identify what they do. Most of us with elderly parents wish someone would invent a computer with only four functions: “Read email,” “Write email,” “Send email,” and “Check the weather forecast.” Most of us can, for a few cents, supersize the meal we just ordered, even though what we ordered was enough to satisfy us just a few moments earlier. Collectively, we’re hooked on the idea that more is better — and in our low-cost, resource-rich world, that’s an idea both easy to indulge and profitable to sell. Continue Reading

Why the 2010 InnovAction Awards matter

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Posted in: Innovation

When the College of Law Practice Management launched the InnovAction Awards in 2004, Western economies had just climbed out of a tough recession (and were busily laying the foundations for a much uglier one) and law firms were starting a run of several years of unprecedented growth and profit. It was a time when the profession’s desire not to rock its revenue boat was stronger than ever; but the College perceived (correctly) that innovation had also never been more important to the legal marketplace, and it wanted to recognize those firms that could demonstrate their commitment to doing things differently and better.

Today, in 2010, innovation in the provision of legal services is breaking out all over. I won’t even try to list all the innovations and inventions emerging from outside the profession — from LPOs to e-discovery software to online legal information to collaborative social networks — that have helped drive this change. But even within the profession, a quick review of reports just in the last month shows us that: Continue Reading

The platform is changing

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Posted in: Big Firms, Competition, Innovation

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

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

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

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

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

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

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

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

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

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

Targeting the variable fee

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Posted in: Billing, Innovation, Talent

For as long as most lawyers can remember, the billable hour has defined, powered, and shaped their law firms. It determines how lawyers work, how they sell their work, how much they earn, and how they assess and reward their employees. It breeds inefficient, overworked lawyers and frustrated, resentful clients; but it has also proved almost impossible to kill. I’ve come to believe that we haven’t been able to kill it because we’ve been hunting for the wrong beast. We’ve been calling our target the billable hour, whereas we ought to have been describing it, more accurately, as the variable fee.

The fundamental client objection to lawyers’ fees is uncertainty: the client rarely knows the final price before the work is done. Neither, in most cases, does the lawyer — either because the price is truly unpredictable or, far more likely, because the lawyer has neither the means nor the incentives nor the inclination to figure it out beforehand. The fundamental variability of legal fees powers a business model that has proven enormously profitable for lawyers: because the fee varies according to the amount of time and effort devoted to the task, the lawyer has every incentive to maximize that time and effort. Uncertainty creates risk — 100% to the client — and reward — 100% to the lawyer.

The radical change facing law firms today is the end of variable fees as law firms’ financial engine and their replacement with non-variable fees — or, in the parlance of the day, fixed fees. Evidence continues to emerge not only that fixed fees are the immediate future of how lawyers’ services are sold, but also that they’re long-term future of how lawyers’ entire businesses operate.

Fees that vary according to the lawyer production process, rising in tandem with time and effort expended, naturally give rise to inefficient workflow, reinvented wheels, maximized activity and over-accomplished tasks. Conversely, fees that are fixed in advance by the purchaser naturally give rise to proportional efforts, recycled know-how, streamlined processes and hyper-efficient workflow. The first type of law firm business model is starting a steep decline; the second is in sharp ascendancy. In the result, we’re going to witness a sea change in the culture and operations of many law firms. It’s not destiny or professional genetics that makes law firms houses of horror for both the lawyers who sweat to docket the hours and the clients who grimly pay for them — it’s the fever grip of the variable fee. The rise of the fixed-fee-driven law firm is going to demonstrate just how different and better a law firm can be.

Two examples: first, an excellent article at LegalBizDev by Steve Barrett, former CMO of Drinker Biddle, with a title that says it all: “Alternative fees demand improved project management.” It argues that any firm thinking about adopting a fixed-fee approach to sales must be prepared to overhaul its internal systems and business culture. Fixed-fee firms can’t survive massive writeoffs by lawyers who made clients promises about price that they couldn’t keep, or succeed without tracking the progress of past fixed-fee approaches and instituting technological tools to analyze them. And no firm can even contemplate fixed fees without a very clear understanding of the most important aspect of their business: what it has cost them in the past to deliver their services:

Many firms mentioned that a good understanding of cost patterns has never been developed in their firms.  One said (paraphrasing) “We should know how much an ‘XYZ financing transaction’ typically costs, since we do hundreds of them every year.”  Another (again, paraphrasing) said “I can’t believe we don’t know the cost of a typical deposition, since we must do thousands a year.”

As clients ratchet up the pressure on their lawyers to deliver results on a fixed-fee basis, firms will be obliged — forced is probably a better word — to implement these systems and gather and use this data. Just as the variable-fee model discouraged the adoption of these processes and approaches, fixed-fee models will require it.

Second example: firms’ use of associates. Pamela Woldow and James Cotterman of Altman Weil warned law firms in a recent seminar on associate compensation that they need to cut associate salaries much more deeply and accept the fact that clients will never again pay for new associates billed out by the hour. Clients would much rather rely on their own contract lawyers or on offshore professionals than on inexperienced associates; but the opportunity to train associates with this work —  and, much more, the ability to generate revenue off these associates’ billed hours — is key to law firms’ success. The solution to this impasse: fixed fees.

Woldow pointed out that corporate clients are more amenable to using first- and second-years on their matters in fixed-fee arrangements. “So if you really want to use and train your first- and second-years, then up the alternative fee arrangements,” she said.

Endless battalions of associates only make sense in a variable-fee system. When the amount of money you make is tied directly to the number of people working on a file and the amount of time they take to do it, you have every incentive to increase both. In a fixed-fee system, profitability flows in precisely the opposite direction: fewer people hired, fewer hours spent. Law firms that abandon variable-fee structures will shortly find themselves completely rethinking how many associates they hire, how much they pay them, and what tasks those associates are assigned. Under a fixed-fee system, a firm that genuinely wants to train its associates can afford to do so, not least because there’ll be fewer of them — the demand for associates will plummet, along with their cost.

As variable fees give way to fixed fees, we’re seeing a corresponding shift of burdens from the client to the lawyer: the risk of financial shortfall, the maintenance and analysis of relevant data, the obligation to control costs, the necessity of working smarter, the requirement to properly define productivity, and the responsibility to prioritize value. These changes are poised to transform lawyers’ incentives, processes, systems, and attitudes — for the better. Forget the billable hour: the future of law practice is tied to whether lawyers’ fees remain variable — or, put differently, to whether the client or the lawyer decides how much the client will pay. If I were you, I’d bet on the side that’s holding the money.

Hands across the water

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Posted in: Big Firms, Innovation

I don’t normally focus on very large law firms and mergers thereof, but I’ll make an exception for this one. As you might have heard, US-based Hogan & Hartson and UK-based Lovells have apparently reached an agreement to merge their respective firms by May 2010. The combined entity (Hogan Lovells, provisionally) would crack the top ten worldwide in terms of both number of lawyers (circa 2,500) and annual billings (north of $1.9 billion), would have a massive global reach (as many as 40 offices, including substantial presence in China, Hong Kong and Germany), and would represent a rare joining of roughly equal-sized firms that appear compatible in both practice and culture.

I won’t try to improve upon the analyses already provided by Bruce MacEwen, Alex Novarese and Aric Press, among others. But I will provide one quote from each to indicate that this is not your garden-variety merger announcement:

– Bruce: “This is potentially a transaction that will change a conspicuous portion of the BigLaw landscape globally.”

– Alex: This is “the first concrete evidence to back up the claims made for months by managing partners on both sides of the pond that the general mood is warming to transatlantic mergers.”

– Aric: This is “a sign that while the Magic Circle and most financially elite New York firms continue to insist on their independent futures, firms just one step behind can see a future where a combination is greater than the sum of their parts.”

And in its daily e-newsletter, The Lawyer put it this way: “[T]he consensus so far in the market is that this deal could genuinely see the creation of something not seen before. ‘At a stroke you’ll have a firm the size of [Allen & Overy], better quality than DLA Piper, broader in scope than Herbert Smith and far more international than anything in the current UK mid-market,’ is how one London consultant sums up the deal.” The arrival of anything truly new in the legal services marketplace is always noteworthy, but a Hogan/Lovells merger could have significance beyond whether the firm manages to become more than the sum of its parts (which at this point seems fairly likely).

For one thing, this firm could be really transatlantic, in ways previous cross-ocean expansions (cf. Clifford Chance and Rogers & Wells) were not: a mega-firm, created by a merger of equals, with a center of gravity somewhere between the two capitals rather than vying between them (Hogan & Hartson, with a strong government practice, is headquartered in Washington, D.C., such that traditional London-New York rivalries might not kick in.) Back in February, I forecast a true US-UK powerhouse emerging from the recession, although I thought the American entry would hail from the Big Apple, and I didn’t think it would happen quite so soon. If the experts are right, other cross-ocean mergers might follow and a real wave of consolidation could be at hand.

Secondly, it’s instructive to note the innovations that each side is bringing to the table. The Lawyer reported earlier this month that Lovells is preparing to abandon its lockstep partner compensation system in favour of Hogan’s pure merit-based approach. Merit-based compensation has tremendous momentum in large firms right now, and although no one’s denying the challenges of partner compensation facing a potential Hogan Lovells, this suggests that more complex systems for assessing lawyers’ productivity are at hand. At the same time, Lovells was one of the first law firms to publicly acknowledge it was outsourcing legal document review to India, back in December 2007. UK firms are substantially ahead of their US counterparts in offshoring, so the Hogan side of the deal is going to acquire direct experience with this phenomenon. So in at least two ways, this is going to be very much a 21st-century law firm.

But here’s the main reason why I think this deal could be a game-changer: about a year after the expected May 2010 date for the Hogan Lovells merger to be completed, key provisions of the Legal Services Act come into force, and UK law firms will be allowed to accept non-lawyer investment and ownership under Alternative Business Structures (ABS). What if a future Hogan Lovells decided to take advantage of those provisions? It doesn’t figure to be the kind of Magic Circle or white-shoe firm that most agree would disdain the entrepreneurial offerings of the LSA — in fact, it looks exactly like the sort of firm (fresh, ambitious, global, innovative and unencumbered) for which the non-lawyer equity investment provisions were designed. If this new firm — or any other powerhouse resulting from a US-UK merger in the near future — went down that road, extremely interesting things would start to happen.

Hogan Lovells would be both English and American — and not one of the 50 states allows non-lawyer ownership of even a fraction of a law firm. So if this new firm did in fact accept venture capital or investment-fund equity, or float shares on a stock exchange, it likely would be in immediate contravention of the ethics rules in all the states where it carries on business. Hogan & Hartson, by way of example, currently has offices in Maryland, Colorado, Texas, California, Florida, New York, Virginia and Pennsylvania, as well as the District of Columbia. The ensuing tangle, it seems to me, would rapidly bring to a head the burgeoning conflict between how UK firms and US firms are structured and governed. In a globalized legal profession, this conflict is inevitable — but this new firm, if it comes into existence and if it acquires an ABS under the Legal Services Act, could actualize that conflict much sooner than we  expect.

So keep a closer eye on this merger than you normally might. It could be just another instance of two large firms becoming an even larger firm, still struggling to make its way in a challenging marketplace. Or it might turn out to be the catalyst for unprecedented change in the profession worldwide.