Amazon’s shares have doubled during the past year in a flat market. Good news for Amazon shareholders, but what-you might be wondering-does this have to do with the legal vertical?
Lots. Law firms-and legal service providers -can learn from Amazon’s remarkable success.
A recent article by Farhad Manjoo, “How Amazon’s Long Game Yielded a Retail Juggernaut” (The New York Times, “State of the Art” Nov. 18, 2015) provides two reasons why Amazon’s shares have soared and the company’s market cap now far surpasses Walmart. Mr. Manjoo’s “simple explanation” is the explosive growth of Amazon Web Services, the company’s cloud-computing business that rents server space. He also provides a more nuanced explanation for Amazon’s remarkable success: the long view it (and investors) has taken in its core online business.
Several stock analysts maintain that Amazon’s retail operations have reached an “inflection point,” where the company’s long-term investments in infrastructure and logistics are paying off. Investment in the company’s huge warehouses and logistics speeds up shipping. And this, in turn, encourages more shoppers while also making infrastructure investment an ever-smaller proportion of the company’s operations. Translation: Amazon has invested megabucks to streamline its operations and, thereby, to enhance customer experience.
Call this-as Mr. Manjoo does-“patience” or “the long view.”
That brings us back to legal delivery and, more specifically, law firms.
How many of them take the long view? How many invest in infrastructure that streamlines delivery to improve customer experience? And why do law firms take a short-term view in a vertical where customers (clients) clamor for change?
The Law Firm Partnership Structure and PPP
The traditional law firm partnership model rewards an ever-shrinking cadre of equity partners. Firm “success” is generally measured by PPP, the holy grail of legal metrics. A high PPP enables firms to retain rainmakers and entice new ones to join its ranks. It is the also a key element in firm acquisitions.
PPP is what once kept the next generation of firm talent working hard and staying in the fold, because they too wanted to grasp the golden ring. Those who lost the partnership sweepstakes were usually assured a tenured home at the firm or partnership at a smaller one with lower PPP. Translation: a book of business has always mattered, but not to the extent that it does today.
Optimization of PPP now comes at a steep cost. That includes foregoing a long-term approach. Disaggregation, heightened competition, and a buyer’s market, are among a spate of factors creating stress cracks on the traditional law firm structure. To preserve PPP, firms must adopt a “future is now” strategy. And to do that often requires “pruning the herd” of upcoming talent and service partners.
There is a generational divide within most law firms. Older partners generally favor stasis to preserve PPP. Younger partners and those in line for promotion lack a say in the firm’s direction, investment, and hiring/firing decisions. Equity partnership is now a statistical long shot. Thoughtful young lawyers might ask: “What is it that I would be taking over, anyway?”
The partnership model rewards partners, not shareholders. And so, those who have climbed the mountain to partnership are not apt to change a structure that rewards them well-even if preserving the status quo compromises the firm’s long-term sustainability. As Richard Susskind quipped: “It’s hard to convince a room full of millionaires that they’ve got their business model wrong. “
The traditional structure is fine for equity partners intent on “running the table ‘til retirement.” But it’s no longer so good for the rest of the firm. Add to that the generally unfunded firm retirement plans, and soon-to-retire partners have little financial incentive to tinker with firm structure.
PPP once created economic tension between firm and client. That persists, but now there is also an internal friction pitting the “old guard” against up-and-comers. So where is the future in firms? And how does a “run-the-table” approach affect the sustainability of firms as well as their clients? Answer: the traditional partnership model may well be in its last generation.
Service Providers and Infrastructure Investment
Service providers do not have the same prohibitions that (U.S.) law firms do regarding “non-lawyer” capital, partnership, revenue share, inter-disciplinary practice and even IPO’s. This has many ramifications, not the least of which is the substantial research and development budgets that several legal service providers have. They-not law firms-are investing in technology, analytics, and processes that are transforming the delivery of legal services.
If legal service is now a three-legged stool (legal expertise, IT, and business process), then service providers are beginning to distance themselves from their law firm competitors who remain “legal-centric.” Providers reserve seats at the management table-and equal standing-to technologists, process, and other domain experts who contribute to improved delivery of legal services Plus, service providers generally seem to be more client-centric than law firms.
Is it any wonder, then, that service providers-not law firms-are driving innovation in legal delivery? And is it a surprise that service providers are steadily migrating up the complexity chain of “legal” tasks, performing them more efficiently and cost-effectively than law firms?
Clearly, top service providers are addressing client needs that law firms cannot. The traditional law firm structure makes it nearly impossible for firms to compete with providers in the cost-effective delivery of all but the most bespoke legal tasks (e.g. high-value expertise and judgment). And clients are beginning to see this.
Law firms are no longer the sole source suppliers of legal services. The future of firms is to focus on bespoke work and leave the rest to providers. An exception: law firms that adopt alternatives to the traditional partnership model and integrate provider services. And whether legal services are delivered by firms or providers, client needs, not profit, must be the focus.
Whether law firms or others will manage integration of the legal supply chain is another question. But if law firms are to assume this vital role, they had better hire- and reward- those who know how. This is not a skill that most partners have.
Service Providers Have Different Structures-and DNA-Than Law Firms
Service providers do not have the legacy mindset of law firms- billable hours and their inverted reward system, segregation of lawyers from IT and process management, and a partnership structure. They were created to deliver tasks once performed by law firms on a more client-centric, efficient, transparent, and cost-effective basis. Translation: service providers came about because there was a market demand for alternatives to law firms delivery of all “legal”services.
Now that the urban myth that “only law firms can deliver ‘legal’ work” has been debunked, where will the migration up the legal supply chain end for service providers? It’s difficult to predict, but service providers perform more complex work every year-as well as a greater slice of the outsourced pie.
A Future of Hybrids?
If law firms as we know them are unsustainable- except for a handful of “bespoke”, brand-differentiated ones- what will come of them? Some possibilities include: spin-off boutiques that practice in specialized practice areas, a proliferation of legal networks (both for firms as well as individual lawyers), legal departments within accounting firms and consultancies (an expansion of what already exists), and strategic partnerships between law firms and service providers (e.g. the recent collaboration of DLA and Lawyers on Demand).
The days of law firm hegemony are over. Some of the more prescient ones are taking steps to reposition themselves in the marketplace, either as boutiques, as integrators of the supply chain, as stripped down firms with various subsidiaries (performing tasks once done by the “mother ship”), or as spin-offs with new business models. Then too, many continue to get bigger through mergers and acquisitions. But that is simply kicking the structural can down the road.
Conclusion
The precise contours of the legal delivery’s future remain fuzzy. It is clear that law firms as we know them will assume new and different forms. And the shape of those firms will be molded by client needs, not PPP.
Wayne Gretzky said, “I skate to where the puck is going to be, not where it has been.” Most law firms are skating to where the puck has been. There’s an open net for those who move to where it will be.
This article originally appeared on Bloomberg’s Business of Law website.
