‘Innovation’ and ‘disruption’ are the legal industry’s favorite terms these days. Articles and conferences on ‘legal innovation’ and ‘disruption’–whether, when, how, and by whom—are legion. Pinpointing when disruption will occur is as unpredictable as an Amtrak train’s arrival. As Yogi said, ‘it’s tough to make predictions, especially about the future.’ Another way to chart the industry’s future is to consider whether the traditional partnership model law firms are becoming obsolete and, if so, what will replace them? That does not require a crystal ball or a Ouija board; a growing body of evidence points to advancing obsolescence of the incumbent partnership model. The structural and operational characteristics of its replacement are now identifiable–even if its dominant players have yet to be determined.
How Are Firms Becoming Obsolete When They Still Have Majority Market Share?
Profit-per-partner (PPP) and revenue remain high at law firms, so how can they be on the way out? Short answer: PPP has been preserved by internal belt synching that does not address the fundamental problem: client dissatisfaction. Partner ‘de-equitization’ and showing the door to experienced lawyers that have high client value but are a drag on PPP (read: high salary, no business) will not stanch the erosion of law firm market share–even if is props up PPP in the short-term. The Georgetown Report and numerous other industry studies conclude that internal cost-cutting has gone about as far as it can go to maintain robust PPP figures. Meanwhile, client dissatisfaction with law firms remains high as evidenced by the rapid growth of in-house departments and elite service providers. This migration from firms has created a growing delta between increased demand for legal services and a flat demand for law firms. Excepting 20 or so elite, brand-differentiated firms that handle high-value, price-insensitive matters, law firms are confronting two systemic issues: (1) delivery; and (2) structure. A closer look at each helps to explain the plight of most law firms and the reason why their sustainability is in question.
Firms confront a number of client challenges: (1) dissatisfaction and failure to address it; (2) insufficient knowledge of the client’s business; (3) high, unpredictable cost; (4) inefficiency and an economic model that ‘applies brute force’ (read: lots of high-priced lawyers billing loads of hours) accompanied by a failure to assess appropriate value to task/cases from the client perspective; (5) failure to deploy technology to streamline operations and provide enterprise solutions; (6) an absence of process and project management; (7) a transactional approach to client matters rather than one that provides enterprise solutions; and (8) poor customer service. The technology and process deficiencies are particularly problematic, because legal delivery is now the business of delivering legal services, not simply the practice of law.
The traditional partnership model was designed for the practice of law, not the delivery of legal services. Technology, globalization, and the financial crisis of 2008 have changed the buy/sell dynamic in numerous industries—law is among the laggards but that’s changing. Disaggregation—peeling tasks from law firms and sourcing it elsewhere—is in its second phase in the legal marketplace. It started as labor arbitrage and has morphed to a labor/technology/process triad. The urban myth that ‘all legal functions must be performed by lawyers working in a law firm’ has been debunked. The practice of law has morphed into the delivery of legal services that requires legal, technological, and process/project management expertise. All but a handful of firms have failed to navigate the transition to delivering legal services. Law remains their stock in trade, and technology and process are laggards. Worse still, IT and operations professionals are accorded second-class status within firms. In contrast, in-house legal departments and legal service providers are not only melding legal, IT, and process expertise, but they are also becoming enmeshed in their clients’ (customers’) business in ways that law firms do not. This goes to the heart of why law firms are becoming extinct: they have failed to become integrated components in solving clients’ business challenges.
Firms also face internal challenges related to their structure. The partnership model is decentralized; each partner is a ‘tent in the bazaar.’ Consensus is difficult to achieve, and institutional loyalty—to the extent it ever existed– has yielded to peripatetic partners that ‘lateral’ frequently to competitors offering guarantees, signing bonuses, and higher PPP. That might be a short-term positive for the lateral partner and—in some instances—the transferee firm, but it does little for the client. The enormous uptick of lateral movement and mergers (that are often takeovers, roll-ups, or cherry picking) is great for legal recruiters, but points to an instability of traditional firms. Increased size does not resolve firms’ structural and client challenges. Nor does it create cohesion or a common culture within the firm. Then there’s the generational divide between partners that often undermines firm sustainability. Older partners within sight of retirement are loathe to invest in the firm’s future. This is understandable since they have no vested economic interest once they turn in their final timesheet. For them, it’s a ‘future is now’ mentality that militates against re-investment, succession planning, and other characteristics of a successful corporate enterprise. Firms’ short-term perspective is caused—and aggravated—by an absence of (real) equity and reinvestment.
The self-regulated legal industry has constructed barriers to competition that remain in place today. The irony is that those barriers—prohibitions of outside investment in law firms; profit-sharing with ‘non-lawyers’, corporate structure; and inter-disciplinary practice—have been circumnavigated by in-house legal departments and service providers. Those providers operate from corporate structures that: (1) offer (residual) equity to key stakeholders; (2) reward output–advancing the business– rather than input–billable hours and origination; and (3) embrace legal delivery by combining the ‘practice of law’ with technology and process-the business of law. The DNA of leading in-house departments–that are both defenders of and partners of the enterprise– and elite legal service providers is corporate, client-centric, and better aligned with the client/customer than law firms. That’s why so much work has migrated from law firms to in-house departments and service providers. Migration from firms is not simply a matter of price or enhanced use of technology and process. It can also be attributed to in-house and service provider integration with clients and an ability to deliver enterprise solutions to business challenges. This is the new legal delivery paradigm.
Lawyers Versus Law Firms
Lawyers are not going out of business, but many will soon be changing employers—and not just hopscotching from one firm to another. The structure from which legal services are delivered is shifting from partnerships to corporate providers–in-house or outsourced. That is not merely an organizational change but a fundamental shift in methods, approach, alignment with clients, reward system, and division of labor. Output–results- is what matters now, not input– hours/origination. Change in legal delivery is being propelled by capital, the availability of technological tools, timing, and client demand for a new delivery model. Law firms had an opportunity to get out in front of this but, instead, relied on self-regulation to preserve the status quo. And as my wife from Texas would say, ‘How did that work out for them?’
Follow the Money
The smart money—and lots of it—is investing in legal technology companies including artificial intelligence (AI). During the past half-decade, more than three-quarters of a billion dollars has been pumped into U.S.-based ‘legal tech,’ and there’s no sign of a let-up. Technology, of course, is a means to an end in streamlining legal delivery; it is not an end unto itself. That said, technological applications—in contract management, e-discovery, and other high-volume areas– are standardizing, automating, and ‘productizing’ what were once labor-intensive tasks performed by lawyers at law firms. Institutional money is betting that legal services—like so many other industries—will be transformed by tech-enabled, process driven, client centric corporate providers. Those providers will leverage lawyer time and cost by standardizing, then rerouting many ‘legal tasks’ from lawyers to machines and cheaper labor sources. This means that lawyers will still play an integral role in legal delivery—handling core ‘legal’ tasks like trials, client interaction, negotiation, counseling–and supervising others. Technicians, paraprofessionals, and other service professionals will play a far more significant role in legal delivery. The incumbent law firm partnership model is neither equipped for nor has the DNA to make this transition.
Traditional law firms are at an existential crossroad. Some will do more than hand-wringing. They will take a long, hard look in the existential mirror and focus on what they can do more expertly and efficiently than anyone in the marketplace. And if they do not have the technology and process expertise to deliver their legal expertise efficiently and cost-effectively, the smart ones will collaborate with companies that can. And they will understand their clients’ business better than most do today and, when retained, take a more holistic approach to problem solving than ‘handling a matter.’ The obsolescence of law firms does not imply marginalization of lawyers. But it does mean that lawyers will be working in a global legal marketplace where traditional law firms are no longer the dominant providers and ‘just knowing the law’ and ‘bill baby bill’ won’t cut it any more.
This post was originally published in Forbes.com.