Law firm profits in the process era

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Posted in: Big Firms, Process, Talent

Large and midsize law firms appear to have an “expenses problem.”

  • Few managing partners expect that they’ll be able to corral rising expenses in the foreseeable future, according to the Citi Private Bank Law Firm Group’s most recent report. The bank’s newest survey of law firm leaders showed that only about 10% believed expenses would decrease by as little as 5%; about 21% thought expenses would stay steady, and a whopping 69% believed expenses would rise, with more than 22% forecasting an increase greater than 5%.

We know a few things about this market by now, or at least we should. First and most importantly: demand is soft, and it promises to stay that way for a few years. Macro-economically, we’re all stuck in a low-growth environment, with several landmines still active in Europe and China that could go off anytime. Law firm business is equally slack: every recent survey of in-house counsel confirms that law departments are insourcing more work and are pushing back on fees for the work they do send out. (Bruce MacEwen goes further and insists that “Growth is dead” in a must-read five-part series of Adam Smith Esq. posts, with a sixth to come.)

Aggressive marketing and business development can go some way to offset this decline in demand, but you can only squeeze so much blood from a stone. Severely discounting rates will get you some work, but clients have been playing this game for awhile and they know how it works: the firms keep raising their rates, the clients keep asking for steeper discounts, and the circle of life goes on. Demand is soft, and there’s not really much firms can do about it.

But expenses are up too, and firms can do something about that, even if they haven’t had much success so far. Physical premises might be off-limits if the firm is in the middle of a long-term lease (hopefully not one signed at the height of the boom), but property owners under recessionary pressure might be persuaded to renegotiate terms. Moving into a less ornate yet still respectable location is sometimes an option, though most lawyers are extremely reluctant to risk the perception of shifting downmarket, and it ain’t exactly cheap to move a law firm.

The killer expense for most law firms, however, is people, which is why reducing headcount is still a popular route to an improved bottom line. We all recall that firms threw thousands of employees over the side in the wake of the financial crisis. But most haven’t fully repopulated, instead forcing more work onto the partners, associates and staff who remain. That trend has never really gone away: just yesterday, white-shoe UK firm Slaughter & May fired 28 secretaries, while partner de-equitization remains the new black for every large firm. But you can only fire so many people, and you can’t fire them over and over again. At a certain point, you stop cutting fat and start carving into bone.

The other popular option is to find cheaper alternatives to your current staffing arrangements. But as Bruce points out in part 4 of his “Growth Is Dead” series, labour market arbitage — “a) cheaper people; (b) cheaper locales; (c) cheaper career paths; (d) cheaper offices, or some combination of all of these” — also has built-in limits: “You can only move certain people out of midtown Manhattan once, and you can only introduce the non-partner associate track once; [moreover,] there are virtually no barriers to entry in the labour market arbitrage business. If AmLaw firm A can do it, so can AmLaw firm B, C, D … — not to mention the Pangea3s and Integreons of the world.”

Bruce then goes on to make a critically important point: “We have not fundamentally changed how we do things. We have changed who does them and where.” [My emphasis.] I think that’s the heart of the matter right there.

Law firms have run up against a wall when it comes to reducing expenses, and that wall is their business model. The traditional law firm business model is fundamentally people-intensive. The only way most firms know how to get work done is by using lawyers and support staff. Few technologies more advanced than email management or time and billing software govern their operations. Few systems more sophisticated than hourly docketing support their workflow. People provide the vast majority of law firms’ products and services — but the market price of those products and services is falling below the baseline cost of their in-house providers and will eventually surpass the cost of the outsourced ones. Something has to give.

There’s only one door that leads through that wall — but firms are immensely reluctant to walk through it, because it leads to a radically new business model. The fundamental nature of law firms has to change from “people-intensive” to “process-intensive.” Systems and technology must play a greater role in the creation of products and services — not least because systems and technology are less expensive, more easily scalable, and completely immune to lateral hiring offers. Lawyers must be reassigned from performing systems-level work to either overseeing that work or taking on higher-value tasks. We are well into the process era I identified more than three years ago. It’s past time for firms to acknowledge that and adapt.

But many don’t. Many firms keep trying to force more low-value productivity from a resource — lawyers — that is fundamentally designed to deliver high-value production and that has maxed out in its current usage. The law firm business model has to shift its primary fuel source away from lawyers and towards systems, reserving the challenging tasks for the former and relegating the routine work to the latter. This is no longer a matter of being innovative and cutting-edge; that was three years ago. Now it’s about remaining competitive and profitable.

Don’t underestimate the impact this business model change will have throughout the legal ecosystem. Because the volume of routine legal work is much greater than the volume of challenging work, law firms will require fewer lawyers to create and deliver their inventory — a lot fewer. I’ve already written about the fact that many law firms have too many partners. The next step will be the legal market’s eventual realization that it has many more lawyers than it needs.

We can already see the outlines of this new market emerge. Prof. William Henderson has noted that new lawyer hiring by large US law firms has fallen off a cliff: “In 2011, firms of 500+ attorneys hired 2,856 entry-level lawyers. In 2007, that figure was 4,745. So, after five years, Big Law is paying the same wage but hiring 40% fewer lawyers.” Even if, as Mitt Regan suggests in a comment, that 2011 figure represents the nadir rather than a midpoint, we’re not going to see those hiring levels go back to where they were, because the work simply isn’t there.

The best-case estimate of US new-lawyer full-time legal employment right now is about 55%. According to the US Bureau of Labour Statistics, 44,000 law school grads are expected to compete for 28,000 jobs over the next decade. We should expect to see compensation for entry-level lawyers nosedive over the next few years, as the glut in that particular supply becomes clear.

It’s not simply a matter of law schools producing too many graduates for the market to absorb. It’s a matter of law schools producing graduates for a legal market that will shortly pass from this world. Law firms today are lawyer-intensive, process-light operations; throughout this next decade, they’ll become process-intensive, lawyer-light operations.

Law schools are not the only stakeholder in this industry to be fundamentally misaligned with that future: legal publishers, CLE providers, and bar associations are likely to be the hardest-hit, because they all rely on “volume of lawyers” as the basis for their businesses. Conversely, legal technology suppliers and legal systems analysts should have a field day as they retrofit firms for leaner infrastructure and more mechanized operations. (Read my article on disruptive legal technologies if you’d like to refresh yourself as to what’s coming.)

Law firms wonder where the growth in the legal market has gone. But Toby Brown has answered that: growth is bypassing law firms and going instead to innovative new providers, few of which are law firms and hardly any of which employ lawyers in the usual way. Law firms are going to realize that in order to compete for this market growth, they will need to emulate the approach of these competitors, which invest heavily in systems and reserve lawyers for those tasks that truly require their intellectual heft and skilled judgment. The hard fact for lawyers to absorb is that those tasks are much fewer than our traditional law firm model supposed them to be.

Many law firms believe their “expenses problem” is all about cutting costs to preserve profit in the face of declining revenue. It’s not. It’s a concrete sign of the growing misalignment between law firms’ lawyer-intensive workflow models and the market’s emerging requirement for a better use of resources in the delivery of legal services. The “expenses problem” can’t be solved by making deeper workforce cuts or by playing around with outsourcing and automation. It can only be solved by recognizing that firms must be configured differently in order to deliver legal services profitably.

Business is down for law firms, and it will stay down for a while. But when it comes back (and remember, it always does), it will look different and behave differently than it did before. Your firm must be ready for that. If you have an expenses problem today, prepare to change the way you do business tomorrow.

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

Learning to run

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Posted in: CLE, Law School, Talent

There’s an old expression among professional sports coaches: “You can’t teach speed.” It’s usually meant to indicate that there are things you can train athletes to do well (skills) and things that are simply God-given (raw talent), and it encourages the traditional view that talent is more valuable.

I’ve come to believe differently. In most markets, athletic and otherwise, there’s no shortage of talent: the physical and mental attributes of today’s new recruits surpass what most members of previous generations could boast. What’s missing, in many cases, are the skills, the knowledge of how to deploy those talents to maximum effect as a performer. Almost every good athlete coming out of high school and college can run fast; relatively few, however, learn to run well.

These thoughts came to me while reading (and commenting upon) an excellent post by UK law professor John Flood, in which he laments the complete disconnect between the legal education system and the rapidly evolving profession into which that system’s graduates will be deposited. If you asked your average law school professor to identify names like Axiom, Acculaw, Lawyers On Demand or any leading LPO, as John suggests, they wouldn’t know what you were talking about.

Law schools are so far behind the legal market’s evolutionary curve (and apparently so uninterested in catching up) that they seem extremely unlikely to lead conversations towards a better legal education and training system. But if so, where do we start fresh? I’d like to suggest that we begin by re-examining some fundamental assumptions about “talent” versus “skills” in the legal profession.

Virtually everyone in law school and the legal profession today has talent: some combination of raw intelligence, analytical and logical adeptness, and/or communication ability. That’s primarily thanks to the undergraduate education systems that produced these lawyers, the Law School Admissions Test that judges them, and the law school admission personnel who value these criteria head and shoulders above any others.

So the talent is there. Virtually everyone who’s in or preparing to enter the legal profession has speed. But not everyone in the legal profession can run well. And the newer you are, the more this is true. It’s almost universally the case for law students and new lawyers, in fact, who have received almost no training to help turn their talents into skills with which they can serve clients and make a living. (And I don’t just mean “practice” training; the tools with which you become a great lawyer include a really solid grounding in jurisprudence, legal history, and ethical philosophy, and not many law degrees can say they deliver that.)

Law schools haven’t been much help in this regard; but in fairness, it really wouldn’t have made much difference even had they spent the last 20 years teaching students “how to be lawyers.” That’s because the market for which those fantasy schools would have been preparing students is quickly disappearing. Nobody (not least me) can say with certainty what law practice in 2026 will look like, but it seems a pretty safe bet that it’s not going to look remotely like it did in 1996. Just as well, then, that we have mostly raw talent that doesn’t need to unlearn old habits before acquiring new ones.

But we still need someone to lead the way in the new skills-acquisition process for the legal profession — and that leads me to think there’s a huge market opportunity, right now, for a legal skills training company geared towards early 21st-century law practice. Never mind preparing students for Skadden or Linklaters; prepare them for Axiom, Lawyers On Demand, Clearspire, Quality Solicitors, Eversheds Legal, and similar operations that look like they’ll be offering an increasing percentage of legal jobs over the next couple of decades.

But — and this is important — we need to skill lawyers up, not down. We don’t want to be developing data entry clerks or automated-contract proofreaders here, and tomorrow’s best legal employers won’t be hiring those people. We need to train new lawyers in leadership, problem solving, project management, cultural fluency, emotional intelligence, technology, entrepreneurship, and other traits that have a decent shot at being the skills future lawyers will need. Give them the tools with which they can harness their talent and take it into any high-value or socially meaningful career, whether it involves the sale of legal services or not.

Law schools, as mentioned, might as well not be in this discussion. I don’t have a great deal of confidence in the practicing bar, either, especially given CLE administrators’ continued fondness for offering legal updates and calling it “professional development.” These are yesterday’s approaches; we need to find tomorrow’s. Solo Practice University remains a powerful model for this sort of innovation; we need more organizations interested in training lawyers to be gainfully and usefully engaged as lawyers in the decades to come. We need far greater use of true, supervised, mentor-based apprenticeship, because “doing” has a multiplier effect on “training.”

What we need, essentially, is a new breed of coaches who can deliver future-oriented professional development. There is no lack of opportunity awaiting them. There are thousands upon thousands of lawyers out there who can run fast but aren’t getting anywhere. They need someone to teach them how to run well.

The new capitals of law

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Posted in: Big Firms, Outsourcing, Talent

A minor parlour game for BigLaw cognoscenti is the question of which city will be the next world capital of law. New York has held the unofficial title for many years, although London made a powerful case throughout the 2000s. Down the road, who knows? Maybe Hong Kong or Shanghai, possibly New Delhi or Mumbai; real outliers might include Singapore or Rio De Janeiro. And of course, don’t count out London or NYC retaining the crown.

Allow me to suggest, however, that some of the future capitals of law have already been nominated. Here are seven worth considering, in alphabetical order:

  • Belfast, Northern Ireland
  • Carrollton, Texas
  • Dayton, Ohio
  • Fargo, North Dakota
  • Hamilton, Ontario
  • Overland Park, Kansas
  • Wheeling, West Virginia

These seven cities, of course, are home to low-cost law offices or legal outsourcing facilities, many of which have just opened or are in rapid growth stages. More specifically:

These law firms and companies are choosing these locations not just because of lower costs, but also because of good-quality legal talent in the area and proximity to transportation hubs. Skeptics who complain they’ve never heard of Carrollton or Overland Park should remember that no one used to know where Bentonville is, either. If our clients are in smaller regional locations, why shouldn’t we be there as well?

This is by no means an exhaustive list, of course — many Indian cities host legal outsourcing operations, and similar entities can be found in South Africa, New Zealand and Australia. But two factors in particular are marking many of these operations as a whole new animal. The first is closer physical proximity to law firms’ national headquarters — “onshoring,” if you like, as opposed to “offshoring.” This approach to outsourcing has long had political and public relations benefits — opening plants in Tennessee rather than Tianjin pays numerous dividends — but as wages in previous outsourcing hotspots start to rise, the cost gap is narrowing and other non-financial factors are coming into play.

The second element, though, is more interesting. Increasingly, these outsourcing centers aren’t just low-cost “drudge” work outposts — they’re growth engines. Orrick’s Wheeling office has increased from 75 people to 350 in the last two years alone, while Allen & Overy aims to have 50 fee earners join 250 support staff in Belfast by 2014. Pangea3, as this New York Times article points out, is busily hiring lawyers in the United States, which is more than a lot of U.S. law firms can say. These cities look like new magnets for legal talent in the 2010s and maybe beyond.

These legal jobs are for so-called “second-tier associates,” but the reality behind that insulting label is this: these jobs do work that isn’t extremely challenging and needn’t be performed in global financial centers. These jobs and their lower salaries are perfectly calibrated to the value of the work they produce. They aren’t based in New York or London because, as firms have been painfully learning the past few years, clients won’t pay the rates required to sustain mid-range jobs in high-priced locations. (And as the grim statistics make clear, new lawyers are paying the price for this change.) These jobs are in Dayton and Wheeling because that’s how much they’re worth, and there’s nothing the least bit wrong with that.

What we’re looking at here is the unbundling of law firms: the disassembly of the once-mighty law firm talent block into discrete groups of lawyers and para-professionals based in various locations to carry out several types of legal work in ways better aligned with its value. Law firms and legal enterprises are heading towards a hub-and-spoke model: small but focused strategic headquarters in a major financial center, revenue-producing satellites in a variety of lower-cost locations worldwide. Soon enough, we’ll look back and wonder why on earth a law firm ever kept all of its partners and all of its associates inside the walls of its major downtown office buildings.

It bears repeating: this is not a temporary, stop-gap response to tougher economic times and partner profitability demands. This is the beginning of a fundamental change in how law firms carry out the work their clients send them. Ron Friedmann, in a wide-ranging post that takes in both these developments and the emergence of a “Top 23” in the AmLaw 100 (related developments, Ron thinks, and I agree), puts it plainly: “As more work moves to an AFA basis, firms will have to examine how the work itself is done: they will need to minimize time spent on matters to protect and grow profits. Wasting time on repeatable, wheel-reinventing matters simply makes no economic sense.”

This isn’t really about outsourcing, although LPOs have played an invaluable catalytic role in this process. This isn’t about new lawyers getting stuck in low-paying jobs, although my heart goes out to law school graduates caught in the breakdown between the old system and the new one.  And this isn’t about partners being greedy — or at least, no more than it ever was and no less than should be expected and encouraged from equity shareholders in a business enterprise. This is about how legal work is priced and delivered in a newly competitive marketplace. That’s the prism through which you should examine almost everything currently happening in the law, including the emergence of some unlikely new capitals.

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.

Are you selling the lawyer or the firm?

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Posted in: Big Firms, Marketing, Solo & Small Firm, Talent

From England and Wales, the newest hotbed of innovation in the current legal marketplace, comes word that the first nationwide solicitor franchise is on its way. Legal Futures reports that Face2Face Solicitors “is initially aimed at small private client law firms and will provide franchisee solicitors with centralized back-office systems – including accounts, IT and regulatory compliance – and central marketing and business development, to enable them to focus on the legal work.” Face2Face would seem to fit the Alternative Business Structures model very well, and in fact, the company plans to register as an ABS when the starting gun sounds October 6.

Face2Face is compared to and contrasted with another British operation, Quality Solicitors, which has been around for longer. Quality Solicitors is a network of about 200 independent law firms across the UK, ranging in size from solos to firms with more than 40 partners. Face2Face characterizes QS’s business model as one that rebrands existing firms, whereas its own model is “targeting start-ups, breakaways and firms looking to be ‘reconstructed,’ especially if there is a need to consider succession/exit.” In practice, the two models probably won’t come across much differently to clients; in both cases, they’ll see a small law firm with a franchised brand and the promises that come with it.

The UK, of course, is also home to the still-mythical “Tesco Law,” the widely mooted example of what the ABS provisions of the Legal Services Act would enable: legal services sold by supermarkets. This too would be a franchise operation, albeit with the franchised firms operating inside the mega-stores rather than in downtown or suburban storefronts. Canada has something similar with the “President’s Choice” line of banking and insurance services offered through Loblaw’s or the Great Canadian Superstore supermarket chains. (I enjoy telling US audiences that the Tesco Law equivalent in Canada would be “Loblaw’s Law”).

President’s Choice aside, however, the idea of franchise law firms hasn’t taken off in North America. I still remember the launch, back in the mid-1990s, of First American Law (not to be confused with First American Title Insurance or the First American Law Center), which planned to build a fleet of small branded firms across the US and Canada. Perhaps because it was ahead of its time, FAL didn’t take. The idea hasn’t gone away, though: Richard Granat recently floated the idea that LegalZoom might get into the same kind of business, supporting small firms with a brand and a back-office processing center.

The common thread in all these companies and concepts is this: a series of small firms, from solos up to about five lawyers but conceivably larger, operating independently but under a single brand name and supported by centralized web-based back-office support and marketing functions, serving consumers and some small businesses in heavy-traffic areas of law like family, real estate, wills, and business law. Because the work is what lawyers like to call “commoditized,” the brand becomes extremely important. Among the promises that QS firms make to their clients, for instance, are “no hidden costs,” “direct lawyer contact,” “same day response” and “the first consultation free.”

That’s one vision of the future. At the opposite end of the spectrum lie the global giants, and they’re taking a much different approach. Most of these firms dread the “commodity work” label and strive to serve a high-end market of major corporate clients with complex, challenging, high-stakes work that engages lawyers intellectually and rewards them stunningly. And while smaller firms are turning to a faceless brand to give them an edge, the larger firms are counting on faces, very specific ones, as their salvation.

The Wall Street Journal‘s recent report on lateral hiring trends was one of a growing number of accounts of law firms raiding rival firms for superstar partners with large books of business. These laterals don’t come cheap: many new arrivals expect compensation up to ten times heftier than what some of their new colleagues are earning. The compensation gap is to be expected, of course: just as LeBron James is paid a lot of money because he’s expected to fill a lot of seats, laterals are expected to earn their keep and more. But it’s still interesting to hear DLA Piper chairman Frank Burch explain the rationale behind lateral hires: “We are focused on making big, strategic hires, who can allow us to achieve greater stature and visibility in the business community.” That’s not a productivity argument; that’s a marketing argument, a profile-augmentation rationale.

None of this is new, of course: smaller firms that sell what everyone else is selling need to find a market differentiator (hence the interest in brands), while large firms want to sell services of a type or quality that no one else is selling and make that the differentiator. The question, at this stage, is which of these approaches makes more sense in the marketplace of the near future? It seems to me that going forward, the branded commodity approach actually has more upside.

I was speaking at a retreat for an AmLaw 100 firm last summer, and one of the lawyers asked me about what the future held for both “commodity” work and “bet-the-company” work. My response was that virtually every law firm mid-size and higher insists that it wants to pursue the latter kind of work, that that’s what it wants to be known for in the market. The problem, I said, is that there’s actually relatively little work of that kind available — companies don’t bet themselves every day — and thousands of law firms are all chasing it. Compare that to the “commodity” work: there’s tons of it out there and hardly anyone wants to provide it (indeed, judging from the number of self-represented consumer clients, there’s a massive shortage of supply). Which of these two areas looks more promising from a business development perspective?

The high end of the legal market is over-served and the low end is under-served, and there’s two reasons for that. One is that many lawyers don’t find the low-end work “challenging” enough (to which I say, find me a high-paid M&A superstar who can last a week in family court without breaking down). The other, of course, is that the low-end doesn’t pay enough. But I’ve written before about how it doesn’t matter how much the client pays, it matters how much profit you make after the costs you incur are subtracted from the price you charge.

National branded legal franchises look like an excellent way to accomplish the goal of providing more with less to this market. Let us do the things you hate, the franchisors tell lawyers, like marketing and branding and administration and whatnot. You do the things you love, like practise law and serve clients. Our efficiencies reduce your costs, so you can price competitively yet still keep more of what you charge (with a slice to us, of course). As more and more legal tasks pass through Richard Susskind’s five declining stages of work, from bespoke to commodity, the “low-end” “commoditized” share of the market is going to grow. Firms that took a more enlightened approach to this sector should reap the rewards.

And the big firms, the global giants? They have plenty of marketing and branding firepower, without question, and they’re awfully good at what they do. But they’re also susceptible to the weakness inherent in the traditional law firm model: your assets walk out the door every night, and you need to pray they come back the next morning or else you don’t have a business. The Lawyer reported this month on a survey of nearly 2,000 partner moves in London from 2005-2010 that found almost half of those hires left their new firm within five years, and up to a third left after three. Do you think those acquisitions were good investments of those firms’ time, money and effort?

As legal work drifts towards commoditization, lawyers drift towards fungibility. All five partners in your branded storefront franchise walked out today? You can probably find five other lawyers with very similar skill sets to replace them — and in this economy, you can probably do so fairly quickly. But brand names and logos — they don’t leave. Now suppose that all five partners in your large firm’s biotechnology practice group walk out the door; you have a much bigger problem. A wise manager once said that if he discovers he has an irreplaceable employee, his mission become making that employee replaceable. Large firms that boast about the irreplaceability of their top earners perhaps don’t realize the double-edged nature of that particular sword.

The oldest axiom in the legal business is that clients buy the lawyer, not the firm. This is true and always will be true, insofar as the lawyer brings something unique to the table: extraordinary skills, outstanding personality, or perhaps most importantly, the ability to craft and perfect a trusted relationship. But absent those conditions — and those conditions, I expect, will become increasingly rare — and with bespoke legal work diminishing, clients’ buying criteria are going to expand to emphasize factors like price, accessibility and reliability. When you’re sliding towards those criteria, you’re walking into territory where national brands have developed a very strong home-field advantage.

Are you selling clients your lawyers or your firm? Think carefully about the ramifications of your answer, now and down the road, because clients are starting to ask themselves the same question.

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 year of the free-agent lawyer

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Posted in: Talent

Thomson’s acquisition of Pangea3 last November capped off what I think we can fairly call the year of law firm outsourcing. Among 2010’s LPO highlights, in chronological order, were:

What’s clear by now is that law firms are sending increasing amounts of work outside the firm, in two streams: (1) back-office tasks (administration, financial support, etc.) and middle-office tasks (research, document review, etc.) to LPOs in lower-cost locations overseas; and (2) routine lawyer work to law firms in lower-cost nearshore locations (expect more of that, and soon). We don’t hear much about clients’ direct LPO activities, but like icebergs, those are 90% hidden from view. And Thomson’s Pangea3 acquisition promises intriguing new developments to come on this front.

So we’ve just come off the year of law firm outsourcing: traditional firms contracting with distant corporate entities in lower-cost jurisdictions to carry out basic or routine work. I think 2011 will see the further development of a related but more important trend: the shift of lawyer work away from full-time associates and towards independent, unaffiliated, networked and mobile practitioners. The corporate outsourcing stream is branching out into an individual outsourcing stream. 2011 should be the year of the free-agent lawyer.

Almost two years ago, John Flood and Peter Rouse pointed out that law firms’ historic tendency towards full employment — maintaining platoons of full-time lawyers on the immediate premises — might have run its course, in light of both the recession and new service models at “dispersed” law firms such as Axiom, Rimon and Lawyers Direct. “Although legal work has become more commoditised and an increasing proportion of it shipped offshore,” they wrote, “it is perhaps lawyers themselves, both associates and partners, who are the commodities, traded and marketed by recruiters and head-hunters.” The new law firm model will be based on “contract lawyers” — attorneys retained for a specific project or a limited time, then released back into the market.

Law firms themselves soon caught on to the fact that many of the associates they had cut during the financial crisis could be brought back into the fold at lower costs, with fewer benefits, at the firm’s sole discretion. Last summer, an Altman Weil survey reported that “a majority of responding firms expect that contract lawyers will become a permanent part of their firm’s structure.” Altman’s Tom Clay added: “As firms become more comfortable with contract lawyers, AFAs, fewer partners, and whatnot, they’ll see it as a way to deliver services more efficiently to their clients.”

This past December, contract lawyer hub The Posse List noted that temporary lawyers were becoming a permanent solution. “[D]uring the recession, in order to keep the troops busy, law firms gave their associates work that would have normally gone to contract attorneys,” TPL wrote. “But now, even as the economy continues to improve, the ranks of ‘other’ attorneys continue to swell due to their lower cost and often more targeted experience. We have seen that as many contract attorneys with specialized experience move out of the document review rooms and into more substantive work.”

CEOs in all industries, not just law, have concuded that their labour costs have been too “fixed” and insufficiently “variable” in the recent past — the shift towards contract employees addresses that perceived imbalance. This chart from a recent issue of The Economist starkly illustrates that although current unemployment rates remain very high, there’s one notable exception: temporary or contract workers:

It’s not just in North America — the Posse List reports a steep rise in European and foreign-language document review work for contract lawyers. It’s not just “temporary” or “contract” lawyers, either: the last few years have seen a steady growth in the percentage of part-time lawyers (including partners) in law firms. And even within the ranks of law firm associates, a two-tier reality is emerging, notes Jerome Kowalski: a small elite segment of associates paid top dollar and expected to slide smoothly into partnership, and a “vast underbelly” of staff lawyers who are paid much less and worked just as hard, but are not held to strict billing or business development expectations.

Law firms, for once, appear to be near the front of a business trend: the lawyer employment model is shifting away from full-time work in law firms towards temporary, contract, part-time, dispersed, and/or remote free-agent lawyers. And this should be no surprise, because legal work itself is making the same transition: from a model in which every task was performed (and billed) by full-time lawyers inside the law firm, to a model in which legal work is carried out by the most appropriate, efficient and cost-effective performer, regardless of status or location. Associate leverage ratios have declined from their historic mid-’00s highs and figure to stay lower for the foreseeable future; formerly bottom-heavy pyramid-shaped law firms have become and should remain noticeably slimmer.

It’s a rational development, and in the end, it will produce a legal labour model more aligned to marketplace reality than to lawyer traditions. But from now on, many lawyer jobs will be much less secure, and significantly lower-paying, than the last few decades have led us to expect. And it will give rise to a number of implications and repercussions:

  • Law schools have not seen this trend coming and they have not adjusted their business model, which still pretends that huge tuition fees can be paid off quickly with a high-paying law job. At least three years’ worth of students have graduated into an entirely different market than the one on which their schools’ economic assumptions were based, and every year that schools fail to adjust adds another year of graduates with misaligned expectations. The long-term impact: a winnowing of the number of law schools and a general (although not universal) slump in revenue among the schools that survive.
  • Professional responsibility rules and practices will prove equally unready for the new model. As a friend who operates professional development in a large firm asks: to which lawyers should PD be applied? The future stars, certainly. But what about the staff, temporary and contract lawyers who produce work for the firm’s clients but are not expected to stay long enough to be considered a good educational investment? If firms don’t provide associate PD, where will it come from?
  • And what about conflict of interest rules? The same friend points out that contract lawyers who work for multiple employers on numerous matters will accumulate many more conflicts at a much faster rate. If the current rules on conflicts of interest are maintained and enforced, these lawyers will rapidly find themselves ethically obliged to turn down work, eventually becoming effectively unemployable. If we consider that to be a perverse and impractical outcome — and I think we should — are we looking at a two-tier ethics system? Or the collapse of an already unwieldy conflicts regime in the face of market pressure?

Despite all of that, however, I do think that this trend will eventually prove to be advantageous for this new generation of lawyers. I prefer to think of them not as “contract” lawyers or “temps” — terms that, in both reputation and reality, often aren’t so great — but as “free-agent” lawyers: agile, versatile, flexible, low-cost and high-quality sources of legal expertise. I think this new model will end up a net positive for the current and coming generation of lawyers. The advantages of free-agent lawyering should include:

  • a wider range of work,
  • more flexible work schedules,
  • a greater ability to respond to changing market needs,
  • more time for family and personal priorities,
  • better and more efficient work habits,
  • less attention paid to timesheets,
  • more opportunities for niche careers,
  • greater freedom to chart your own developmental path, rather than one shaped by the firm’s immediate needs, and
  • the ability to carve out your own independent professional brand.

Interestingly enough, free-agent lawyers could ultimately make law firms less important in the legal services market. In sufficient numbers, they will effectively constitute a new set of competitors: armies of independent lawyers who operate without the overhead costs and institutional inertia of law firms.

Free-agent lawyers might work for Axiom-style dispersed firms for as long as it suits them. They might ply their trade as independents with the assistance of Posse List-like organizations. They might come together to form emerging legal business networks of their own and use them to build brands and careers. They won’t be “solos” in the traditional sense — they ultimately work for other businesses, not their own — but they will constitute a valuable option for clients who want legal work done quickly, cheaply and well. LPOs will have to keep an eye on free-agent lawyers, too: they could be each other’s primary competition. Equally, though, the two entities could form alliances and pose an even stronger challenge to law firms.

Make no mistake, free-agent lawyers have a steep hill ahead of them: it’s a legal career on the edge, providing little leverage or security and demanding an entrepreneurial spirit. They could use some organizational help. But it does seem like a career path custom-designed for millennial lawyers, who were raised to multi-task their way through numerous serial careers with maximum flexibility and personal fulfillment opportunities. They represent, if not the future of the legal profession, one of a growing number of available futures for a legal marketplace increasingly in flux.

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.

Can’t buy me motivation

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Posted in: Satisfaction, Talent

I still remember the story told by a friend of mine who quit his job at a large national law firm. The income, of course, was great. But he had become increasingly unhappy with the work he was doing, the people he was doing it for, and the culture of the firm for which he was doing it. After a lot of internal debate and many discussions with his wife about their financial future, he finally made up his mind, secured a position in-house, and went — with some trepidation and perhaps still a touch of doubt — to have That Conversation with the practice group partner. After hearing the news, the first thing out of the partner’s mouth was: “Can we offer you more money?” There went any last doubt whether he’d made the right call.

I’ve seen this scenario repeated many times, not only in law firms but certainly with unusual frequency there. The instinct to solve a problem by throwing more money at it — or more accurately, to interpret dissatisfaction primarily as something more money can cure — emerges with remarkable ease and frequency within law firms. Hardly surprising, since virtually every internal and external metric of success for law firms, and almost every major decision about strategy and tactics, involves revenue in the here and now. Money motivates. Money galvanizes. Money is why we’re all here, why we show up every day. So if you want something done in the firm, if you want to maximize your chances of success, just add money. Not happy? Here’s more money.

Yet while this belief holds firm inside partnership meetings, and seems to constitute the philosophical foundation of a remarkable number of law firms, a somewhat different picture emerges when you step outside that hothouse environment. The American Lawyer‘s most recent associate satisfaction survey (which, by the way, recorded its lowest levels since 2004) does highlight associates’ desire for salaries to return to pre-recession levels. But as Northwestern’s Steven Harper points out, the higher-ranked firms scored very well on factors such as “relations with partners and other associates, interest in and satisfaction level of the work, training and guidance, policy on billable hours, [and] management’s openness about firm strategies and partnership chances.” Associate salary does not drive associate satisfaction; there’s more to it than money.

Move outside the law firm world altogether and the evidence becomes more compelling. A widely circulated study of multiple Gallup polls found that on average, an annual salary of $75,000 correlates with the high point of people’s “day-to-day contentment.” Salary increases beyond that point improved people’s broader satisfaction with their place in the world, but it had no effect on their daily emotional well-being. The actual figure can be debated — it would certainly be higher or lower in various cities or industries — but the fundamental takeaway is that past a certain point, compensation fails to move the needle on happiness. Throwing more money at unhappiness is a waste of good money.

Then there’s the work of Daniel Pink, whose new book Drive explores what motivates people to do their best. His TED presentation on this subject is a masterwork. He describes extensive studies showing that people desire workplaces that give or encourage autonomy over their work, mastery of their subject and higher purpose behind their efforts. And he demonstrates not only that these intrinsic motivators are more important than extrinsic motivators (including money), but also that for certain types of work, increasing monetary rewards actually reduces people’s effectiveness. What types of work? Pink describes them as “right-brain, creative, conceptual kinds of [tasks, where] the solution, if it exists at all, is surprising and non-obvious.” That describes, among other tasks, most legal work of value. Monetary rewards narrow people’s focus, which is ideal for straightforward, mechanistic tasks. For creative problems, where the solution is on the periphery, monetary motivation does more harm than good.

This all matters if your firm wants to be successful for its clients and be competitive for legal talent in the 21st century. The factors that keep lawyers satisfied and that positively affect their ability to do their jobs are changing as we speak. Law firms that continue to act as if everyone and everything has their price, and that money is the fuel that drives performance, are going to struggle to keep the best talent and deliver the best results, and they’ll wonder why.

Now, of course money plays a role in satisfaction; but in most cases, what matters to people is less how much they make and more whether they’re being treated fairly. We all like to complain about new lawyers in large firms pulling down six-figure salaries that they “don’t deserve.” You hear the same criticism of professional athletes, whose income is wildly disproportionate to their actual societal contribution. But the measure to look at isn’t the stand-alone denominator of salary, but its percentage of the overall profitability of the company or industry: when pro athletes complain, it’s because they see the overall pie growing to mammoth dimensions and they want a proportionate share. Similarly, associates know exactly how profitable their law firms are. But when they see colleagues laid off and their own workload doubled while watching multi-million-dollar partner profits grow, they start to have understandable doubts about whether the firm is dealing with them in good faith.

So compensate your lawyers fairly, in the context of their contribution and your profitability. But once you’ve done that, turn your attention to ways in which you can improve their performance, illuminate their career path, and increase opportunities for communication. Focus on intrinsic motivational drivers of the best performance and attitude. And learn to de-emphasize the role of money in your efforts to motivate and satisfy your lawyers — especially if they’ve just walked into your office for That Conversation.

Law firms and the JetBlue guy

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Posted in: Competition, New Lawyers, Talent

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

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

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

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

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

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

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

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

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

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

Law firms on demand

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Posted in: Big Firms, Clients, Talent

What if you could take a law firm, carve away all the parts of it you don’t like, and keep all the parts you did? What if, from the client perspective, you could get rid of high and rising prices, time-based bills, gratuitous overhead costs and unfamiliarity with your business? What if, from the lawyer perspective, you could do away with brutal billing targets, inflexible work schedules and long commutes into the downtown core? But what if in both cases, you could keep the high quality of talent and the brand-name assurance that comes with a respected legal services provider — what would that be like?

It’s an intriguing question, but not because of whether it would be feasible — it already is. Firms following this model are blossoming across North America and Europe. They offer corporate clients the services of lawyers with pedigreed credentials (large-firm and law-department experience) who will work from the client’s office or from home, for limited periods of time, at much lower rates than traditional law firms charge. The selling point for clients is the services of an excellent lawyer on the client’s terms, at a competitive price that excludes traditional firm overhead costs and revenue expectations; for lawyers, the challenge of high-end work on a short-term, flexible or even itinerant basis.

Maybe the best-known of this new breed of firms is Axiom Legal, which is closing in on the 300-lawyer mark, but there’s a growing collection of similar operations like Virtual Law Partners, FSB Corporate Counsel, Paragon Legal, Cognition LLP, Virtual Law [UK], The Rimon Law Group, and Keystone Law. They’re often called “virtual firms,” but that’s a little confusing, in light of the growing number of small cloud-based law practices. I prefer VLP’s self-description, a “distributed” law firm, or Keystone’s, “dispersed.” Concerns about these firms usually focus on the scope of their expertise, their value for money, and their KM and quality-control systems, all reasonable worries.  There doesn’t seem to be much question, however, that these firms are sustainable and are already legitimate players in the marketplace.

No, what’s really intriguing about these firms is the fact that they developed at all — that the traditional law firm has become sufficiently unpalatable to the people who retain it (and to some of the people who work inside it) that something new and different can flourish. Dispersed law firms directly challenge the traditional law firm model, presenting themselves as at least a complementary service to what traditional firms offer, and at most, a full-fledged alternative provider. These new firms question the fundamental nature of traditional firms, arguing that the physical concentration of legal talent in a high-priced centralized location with a rigid hierarchy and pyramidic revenue structure is outdated and self-serving. Flexible, project-based, techno-savvy, client-focused law firms are the way of the future, they contend: they’re more efficient, more accessible, and more rational. Continue Reading

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.

Breaking the big firm

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Posted in: Big Firms, Billing, Diversity, Talent

My strongest, greatest fear by far, if it’s not too soon to look to the “other side” of this financial system meltdown and general economic interregnum, is not that things in law-land will look overly different when we emerge, but that they won’t look different enough.

That observation comes from Bruce MacEwen of Adam Smith Esq., and I share his concern that false confidence will lead too many large firms to believe that everything’s going to be basically okay. For large firms, everything is emphatically not okay.  The past couple of weeks have delivered a series of examples that demonstrate one thing: the ways in which large law firms have operated over the past few decades are coming to an abrupt end.

First, consider this this Legalweek report that two major international firms, Mayer Brown and Reed Smith, are jumping onto the fixed-fees bandwagon. Mayer Brown is readying itself to offer fixed fees for all its transactional work, as well as to make more frequent use of abort agreements and success fees. Reed Smith, meanwhile, plans to use fixed or capped fees in its financial industry group, in its corporate and real estate practices, and for transactional work.

What brought about this sudden departure from the easy-and-profitable billable-hour system? The firms’ leaders cite client relationships first and foremost, which is nice to hear. But perhaps equally instructive are two other articles linked from that Legalweek story: 55 job cuts at Mayer Brown in March, Reed Smith hiring a restructuring consultant in July. Few firms undertake changes of this potential magnitude unless the outside pressures exerted on them have made things very uncomfortable. (It’s worth noting, as Jim Hassett’s webcast does, that these are not the first AmLaw 100 firms to  climb onboard this train.)

Even more revealing are the contents of a leaked strategy memo from O’Melveny & Myers that appeared on Above The Law. The firm plans to “adopt a single rate card by FY2012, with volume and ‘investment’ discounts and appropriate alternative fee arrangements … becoming the leader in providing high-end legal services on a fixed fee basis, reducing costs to clients and achieving superior economic performance through practice management oriented toward cost effective client service.” Especially noteworthy are plans to reduce associate leverage to as low as 2-1, a ratio that’s positively Canadian.

Fixed fees, if done right (a big if), are demonstrably better both for the client and the lawyer. The question is whether large firms constructed on billable-hour pyramids can really adapt their culture and systems to make such a monumental change. Many big firms still think the key to flat fees is to take the last ten bills issued for this kind of work, average them out, add 10% for contingency, and present the final figure with a flourish. Fixed-fee veterans in smaller firms are skeptical, to say the least. Here’s Valorem’s Patrick J. Lamb on these big firms’ moves:

The essential element of alternative fees that actually work is that they shift risk to law firms, meaning the value changes from leverage and body count to experience and fewer bodies.  More brain power, less body count.  So a goal of reducing leverage “in some practices” to “as low as” 2 to 1 will make anyone experienced with alternative fees laugh out loud.  O’Melveny might as well take out a full page advertisement saying it really won’t be changing a damn thing.

I’m prepared to give O’Melveny’s initiative the benefit of the doubt, actually — every journey has to start somewhere, and I want to encourage every green shoot of innovation I see. But man, is this a long journey — changing a law firm’s fee and billing structure is like re-engineering your DNA, and the best will in the world won’t make it any less difficult. And for every large firm that is finally acknowledging that the horse they’ve ridden for years has died, ten more are still clinging on to the saddle.

The O’Melveny memo states at one point: “In the very recent past, our business model, as a whole, has yielded disappointing financial and practice growth results. … [O]ur litigation clients are looking for rate and fee reductions, and we expect that mindset will continue into the next good economy and beyond.”  That understates the size of the challenge. It’s not just litigation clients — a lawyer at a large firm confirms to me that the pressure for lower and/or more predictable costs is intense and is coming from across the client spectrum. This is the new reality, and large firms will struggle to make the sort of fundamental changes needed to adapt.

Let’s look at another key element of law firm success: personnel. The results of a survey published in The American Lawyer are interesting, if not surprising: associates in large firms are measurably more unhappy than their counterparts in smaller firms. Not only that, but graduates of the “elite law schools,” from which so many big firms insist on drawing most of their recruits, are the unhappiest of all when compared to their colleagues from “less elite” schools. (It doesn’t help that, as Ron Fox points out, law schools of every rank tend to funnel their graduates towards large firms and away from opportunities to serve ordinary consumers in smaller practices.)

You can probably guess the advice that the study’s authors offer big firms as an antidote: recruit outside your usual law school boxes, and make life for your new lawyers a little less punitive. It’s advice unlikely to be accepted, says Aric Press, editor-in-chief of American Lawyer: “I fear that we will look back at the exuberant spree of the last few years as the high-water mark of nonelite law school hiring. … This leaves an opportunity for the firms wise enough to seek first-class talent no matter what brand is on a diploma.” But how many firms will risk the CYA comfort of consistently recruiting from “the best and the brightest,” let alone make substantive changes to the overall associate model?

The study’s authors note that big-firm attrition is particularly frequent among women and minorities. Underlining that concern is this account of an event celebrating Working Mother magazine’s 50 Best Firms for Women Lawyers. Many of last year’s winners didn’t make the cut this time — in part, perhaps, because despite wishful thinking to the contrary, leaner times at big firms have made it harder, not easier, for women to advance and succeed:

It’s optimistic to believe that most large law firms are rethinking the work/life balance equation during these hard times. Frankly, most firms today are focused on survival and on a need to bring in more business — they are not, it seems, focusing on the larger questions of the meaning of work and job satisfaction. From where we sit, covering women in the profession for almost a decade, we don’t see a revolution on the horizon.

So: profits are dropping fast, more firms are getting ready to change the basic business model, the young talent is alienated, and diversity has been back-burnered. But that’s not the worst of it for big law firms. Because all this time, solos, small firms and midsize operations keep picking up all the opportunities that the large firms keep dropping.

While big firms allow women to walk away, one small firm encourages its employees to bring their children to work — not to an on-site day-care, but into the office, all day long. While big firms burn through their young talent, innovative companies like DirectLaw offer new lawyers reduced pricing to start up a solo virtual law platform — with 90 days’ free tuition to Solo Practice University to boot. While big firms set up committees to consider fixed fees, small firms have long since figured it out and will even tell you, as Jay Shepherd does, how they set their prices. All the momentum in the legal services marketplace today favours small, adaptable, innovative, client-focused, value-oriented, business-savvy providers. Most large law firms answer to immobile, traditional, self-centered, profit-oriented, and business-challenged. It’s not hard to pick the winner here.

Every marketplace, even one as artificially stunted as legal services, operates according to the law of supply and demand. The demand is changing, irrevocably. The suppliers that change with it will survive; the ones who don’t, won’t. Some more large firms are waking up to this fact and doing their best to change — but I’m concerned that 2009 is simply too late to be starting the change process.