I gave a talk last week at University College London. The topic was The Changing Legal Services Marketplace: A View From Across the Pond. It began with my admission of ‘acute ABS envy.’ No, ABS is not a Midlands light lager. It refers to ‘alternative business structures,’ an element of The Legal Services Act of 2007 (LSA). LSA—and ABS–is the UK’s re-regulation of its legal industry intended to spur innovation and competition to better serve the public. ABS–among other things– removes long-standing regulations preventing non-lawyers from ownership, profit sharing, and other managerial functions in law firms. Those restrictions made sense when legal delivery was solely about selling legal expertise. But they are now impediments to structural changes necessary to jump start new models at a time when legal delivery involves legal, IT, and process expertise.
The ABA recently renewed—and shelved– the alternative business structures (ABS) debate, and the battle lines were familiar. The retail segment of the legal market is where the most strident exchange occurred. Reform advocates maintain that the access to justice crisis cannot be meaningfully addressed without ABS. The opposition cautions that ethical concerns mandate preserving the status quo. And some candidly admit that some form of ABS would knock them out of business. That’s hard to fathom since technology and process will help leverage lawyer time, reduce cost, and make legal services affordable to the millions of Americans—and small businesses presently unrepresented due to price. Translation: ABS will lower sky-high legal cost and introduce millions of new clients into the marketplace. And that’s good for society. And lawyers.
A century ago Harry Selfridge, the London retailer, declared: “The customer is always right.” The temptation to interpret this too literally belies the wisdom of the remark, because with an economy of words, Selfridge captured the cornerstones of success in any service business: (1) convince the customer that s/he will receive good service; and (2) convince employees to provide a positive customer experience. This was a departure from the “caveat emptor” standard of the time.
Naturally, customers are not always right, but whether one is selling shoes or legal services, it helps to instill customer/client confidence. A critical element of customer trust is the client’s expectation the provider will be reasonable, transparent, and stand behind the service or product. Lawyers were not long ago high up on the list of “most trusted” job categories. But as law firms morphed from small, personalized groups to enormous, geographically disbursed businesses, that trust has eroded. The popular and derisive tee shirt that reads “Trust Me, I’m A Lawyer” speaks volumes.
The UK provides a remarkable example of lost trust in lawyers and the steps taken to revive it. Can it come as a surprise that this odyssey was piloted not by lawyers but by the consumers of legal services?
A Quick Legislative History of the Legal Services Act of 2007
Complaints against lawyers in the UK were so widespread in the early years of the new Millennium that Sir David Clementi, former Deputy Chairman of the Bank of England, was authorized by the Britsh Government to undertake an extensive examination of the legal profession. Mr. Clementi is not an attorney, and that might be a cause, if not the proximate cause, of the candor of his assessment. His two-year investigation revealed several glaring problems in the self-regulated legal vertical. Sir David certainly understood business and the procurement of legal services; he was a Chairman of Prudential, plc, one of Britain’s largest insurance companies, as well as non-executive Director of the Rio Tinto Group, a huge minerals and mining company. His no-holds barred evaluation of the legal profession concluded that: (1) a massive overhaul of the self-regulated legal industry was necessary; (2) inter-disciplinary practice should be sanctioned—meaning that lawyers be permitted to work with non-lawyers; (3) signifcant changes were necessary to restore public confidence in the profession; and (4) the interests of the consumer must be paramount in fashioning new regulations.
The Government adopted Clementi’s recommendations and took them even farther, authorizing the creation of “Alternative Business Structures” (ABS) enabling non-lawyers to invest, share profits, and manage law firms. This is the best-known portion of the Clementi Report and its legislative aftermath but it is by no means its centerpiece.
The crux of the Legal Services Act of 2007 (the Act), the product of Clementi’s investigation and ensuing Parliamentary action, is an overhaul of the rules governing lawyers in England and Wales intended to serve the public interest and to restore confidence in lawyers. And if you think this characterization is a matter of subjective interpretation, consider the title of the Government Report that led to enactment of the Legal Services Act: “The Future of Legal Services: Putting Consumers First.” Then, read the Executive Summary’s introductory paragraphs:
“This White Paper sets out the Government’s proposals for reform of the regulatory framework for legal services in England and Wales. The purpose of the changes is to put the consumer first. The Government has set up a Consumer Panel to advise it as it takes forward reform.
The changes will mean an end to the current regulatory maze. The aim is a new regulatory framework, which better meets the needs of consumers and which is fully accountable.”
Meanwhile, On This Side of the Pond…
The Legal Services Act has been viewed with a mix of caution, dread, and visceral backlash by many lawyers on this side of the Atlantic. The Act is often characterized as an existential threat to lawyers’ independence and a capitulation to the avaricious over-reaching of business types whose goal is to annex the lucrative legal vertical. But lost in this fear-of-change mongering is the stark parallel between the current US legal industry and the pre-Clementi (2004) British version. Can one reasonably deny that here in the States—as was the case in the UK— there is a marked erosion of consumer confidence in lawyers, whether at the retail or corporate ends of the marketplace? What, then, has the response been in the US to restore consumer confidence in lawyers and to “put the consumer first”?
The ABA Commission on Ethics 20/20 was formed a few years ago to examine how globalization and technology are transforming the practice of law and how the regulation of lawyers should be updated in light of those developments. Unlike the Clementi Report authored by a senior business executive and sophisticated consumer of legal services, the ABA inquiry is conducted by lawyers who might tend to filter things through their narrow lens.
While the consumer is certainly in the background, the focus appears to be on the way lawyers practice rather than the impact of that practice on consumers. Who is the “protected class” here? The Brits concluded that consumers of legal services should be paramount, not lawyers. Why should it be any different here, especially given the global market legal services has become? Perhaps if the examination of the US legal profession were to be undertaken by a “non-lawyer” legal consumer—like David Clementi—a different result might obtain.
Efforts to effect change have been spawned in other US quarters. Soon after the great economic crisis of 2008, the Association of Corporate Counsel (ACC), the in-house watchdog of the corporate legal segment, launched its “Value Challenge,” exhorting large law firms—all with nearly identical economic models—to provide clients with greater value. Value, of course, is one of the cornerstones of most businesses, but its application is new—and largely unwelcome–to lawyers. So new, in fact, that considerable debate has ensued regarding what “value” means in the context of delivering legal services. It is telling that lawyers, a group so adept—and well compensated—for parsing words would struggle with an appropriate meaning—much less adoption of — “value”. So too with “efficiency,” a word which still makes many lawyers bristle. Why? Because for many attorneys it is inimical to the purportedly bespoke services they provide.
The urban myth that all—or most—legal services are bespoke has been generally put to rest, but “efficiency”, “value”, and “transparency” are still viewed by many lawyers as a failure to appreciate the “unique” work they do. Perhaps attorney resistance to these business cornerstones is not so much a problem of diction but one resulting from the traditional law firm structure where the (short term) economic interests of lawyers and clients often conflict.
Which brings us back to “the customer is always right.”
Conclusion: It’s About the Client, Not the Lawyer
When I was a young trial lawyer, the managing partner had a Daumier print in his office that depicted a rotund English barrister clad in his wig and robes. The barrister stood imperiously leaning on a lamppost while a young woman, bedraggled and with two young children in toe, sat weeping nearby on the curb. The caption read: “You lost the case, Madam, but you had the pleasure of hearing me plead it.” Comically tragic as this is, it is right on the mark.
My friend Jeff Carr, former General Counsel of a Fortune 500 company, recently told me: “For many law firms & lawyers, ‘customer focus’ means focus on the customer as a source of revenue as opposed to focus on meeting the customer’s needs, objectives, and expectations.”
Its time for lawyers to take the initiative and focus on those customer “needs, objectives, and expectations.” If lawyers fail to take the initiative and to adopt a more client-centric approach—with or without regulatory mandate—their customers will find those who will. Already, there are signs that this is happening as more and more work once described as “legal” is being handled by non-lawyers as well as by attorneys operating outside the traditional law firm environment. Henry Selfridge’s observation should serve as an admonition for lawyers: “The customer is always right.”
This post originally appeared in Bloomberg Big Law Business.
“So many options, so little time.” That could well be the lament of General Counsel, Chief Legal Officers, and others charged with engaging the services of lawyers. Not too long ago, it was a much simpler process: select a law firm; send them the file; and pay the invoice. No more. Technology—most notably e-Discovery–, globalization, the steady and cumulatively astronomical rise of legal fees, and regulatory issues—not to mention the global financial crisis of 2008 and its aftermath—have created a new landscape for lawyers and the clients they service. This was underscored by the ACC’s launch of its “ Value Challenge” amid the financial crisis, a clarion call by its membership for large law firms to bridge the “cost-value” divide and to provide enhanced value for their services.
It is against this backdrop that the aforementioned “many options” arose. A snapshot of the new landscape includes the following reference points:
- A proliferation of legal service providers. Unlike law firms that are strictly regulated, service providers are largely unregulated and employ attorneys (as well as paraprofessionals as well as professionals from other disciplines, notably technologists and consultants) in an ever-widening array of legal tasks once performed exclusively by law firms. In fact, if you were to put the service areas of some of these providers side-by-side with the practice area sub-specialties of law firms, the two would be virtually indistinguishable. The difference: law firms “engage in the practice of law” and service providers do not (or at least should not lest they be slapped with unauthorized practice of law claims “UPL”). Such claims are rare in the corporate end of the legal marketplace (as opposed to the retail side where lawyers are frequently whistleblowers, even when they are jus tertii complainants). And there is another difference between law firms and legal service providers: price. This stems not only from the providers’ abdication of risk retention (borne either by the client or the supervising outside law firm depending upon who is in privity) but also because the service providers are not encumbered by the cost-escalating structure endemic to the traditional law firm model.
- Increased competition among law firms. It’s a buyer’s market. Not only can GC’s routinely exact significant discounts from firm rack rates, but they can—and frequently do—put firms through RFP’s, demand alternative fee arrangements (“AFA’s”), and decree who can and cannot work on their outsourced files. Put another way: the days of law firm carte blanche and “for services rendered” invoices are over (excepting a handful of bet the company matters handled by a small number of brand differentiated, elite law firms).
- Foreign competition as well as the threat of new entrants. It is only a matter of time before UK-based firms, who operate in an alternative business structures (“ABS”) environment, set up shop in the States. How can they do this? There are several viable workarounds for the existing U.S. regulatory system which prohibits key elements of the ABS structure including multi-disciplinary practice, non-lawyer ownership and management of law firms, and other measures intended to encourage innovation, reduce legal cost, and otherwise benefit clients, not lawyers. Already, Dentons, the world’s largest law firm by headcount, has doubled-down on its U.S. presence by acquiring McKenna, Long. That’s not to mention U.S. firms looking across the pond as a base camp for global expansion; Cahill Gordon recently did just that when it became the first U.S. law firm (and an elite, brand-differentiated one), to secure an ABS license. All this ups the angst for U.S. firms and provides clients with even greater leverage to demand more value from their incumbent firms. That is not to mention the real threat posed by the BigFour as well as other consultancies with global brands and footprints, substantial war chests, deep and broad client relationships, and large legal teams not currently “engaging in the practice of law” but performing legal tasks.
- The “competition” from in-house legal departments. Many companies have decided that, for a myriad of reasons, it is preferable to beef up their in-house departments than to outsource the bulk of their legal work. Take the case of Shell, which has a 650 lawyer in-house “firm.” Why single out Shell? Here are two data points that underscore their amped-up internal law firm: (1) they have assembled an internal global litigation team of 80 lawyers spread across 15 countries (litigation has long been a practice area largely outsourced by OGC’s) resulting in greatly reduced outside spend; and (2) when the company divested $5.1B of assets in 2014, its outside legal spend was $100,000. That’s an ominous portent for outside law firms.
It’s far from gloom and doom for all AmLaw 100 partners. In fact, 2014 was a terrific year for many of them. But there are multiple signs that the traditional law firm model is unsustainable and that the legal vertical is ripe for disruption. The frenzy of law firm mergers (many firms seem to be taking the “too big to fail” route); peripatetic rainmakers who jump to firms with higher profit-per-partner (“PPP”); and the increase in Swiss Vereins are three examples of instability that presage true disruption in the way corporate legal services are engaged and delivered.
One thing is certain: law firms as we knew them are under intense pressure from multiple directions, both within and outside the legal vertical. “What is a law firm?” is a valid question, because the global behemoths that are springing up—most the products of voracious acquisition strategies rather than organic growth—bear little resemblance to law firms even a generation ago. And so too is it fair to ask “What is a lawyer?” at a time when so many tasks once performed by attorneys—in a law firm setting—are now performed either by lawyers working outside the law firm framework or by paraprofessionals or non-lawyers.
Where will it end? No one knows for certain, of course, but it’s clear that clients (buyers) are increasingly flexing their muscles and insisting that lawyers—like others in the business world—deliver greater bang for the buck. And that applies whether they work in-house, at a law firm, a service provider, or at an accounting or consultancy practice performing what used to pass as “legal” work.
This article was previously published in Today’s General Counsel.
The English language is undergoing an overhaul. That’s not news to anyone who has been around kids or is superficially exposed to popular culture. But when, as recently occurred, many of those neologisms and acronyms are included in the dictionary, it’s time to take notice—and not just for Scrabble or Words With Friends purposes. These words reflect modern life and have come to describe it in terms of sufficiently widespread usage—like it or not. Merriam-Webster’s Unabridged Dictionary announced 1,700 new additions, many of which are unlikely candidates for SAT verbal exams. Words like “photobomb” and “emoji” are now enshrined in our language compendium. “WTF?” Yes, that’s in there, too.
This brings to mind a plethora of neologisms and acronyms that have been recently introduced into legal parlance. What are some common ones and is their functional meaning captured or obscured by their use?
- Legal Process Outsourcing (“LPO”)—this is a generic term applied to moving offshore high-volume/low-value (document review, basic research, etc.) tasks once performed by domestic lawyers. More recently, such work has sometimes been moved “onshore” to low-cost locations. But LPO now has a much broader meaning than it once did and also describes the IT-driven, streamlined process and project management delivery process by which these tasks are performed as well as to their steady migration up the sophistication ladder. Translation: “LPO” is not what it was when Tom Friedman authored “The World is Flat” in 2005.
The cultural values the US has adopted from the UK are many and deep. That includes, of course, our legal system. What law student does not remember “The Rule in Shelley’s Case” and other precedent derived from English Common Law? (What was the holding in Shelley’s Case, anyway, and was Shelley male or female?) No matter. The point is: with all this commonality, how can the regulatory schemes governing the practice of law in the two countries be so radically different? It has not always been this way but, since the passage of the Legal Services Act of 2007 by the UK (Australia adopted similar legislation almost a decade earlier), lawyers in the UK and US operate under entirely different regulations. How significant is this difference? Answer: very and becoming more so by the day. Why?
A Very Cursory Overview of the Legal Services Act
Perhaps the most remarkable aspects of the UK’s Legal Services Act of 2007 are: (1) the Clementi Report which serves as its foundation and legislative history; and (2) that it was enacted in the first instance. Sir David Clementi, a former Deputy Governor of the Bank of England with a distinguished career in business, conducted a two- year, exhaustive study of the British legal delivery system, examining both the retail and corporate ends of the market. His conclusions were stark and pulled no punches: that in both segments of the market, clients were not being well-served by the self-regulated legal profession; that law was a monopoly; that the legal delivery system was broken and needed to be repaired; and that client interest should be accorded primacy over lawyers’ (self-) interest. After considerable back-and forth, legislation was passed that fundamentally changed existing regulations (still in place in the U.S. save for DC) that: (1) permitted inter-disciplinary practice; (2) allowed non-lawyer (“outside”) investment in law firms; (3) sanctioned non-lawyer management and equity ownership of law firms; and (4) established a process by which firms could become “Alternative Business Structures.” [Read more…]