Several news items, reports and articles in recent weeks have provided insights that should make traditional law firms nervous. Here’s what caught my eye:
- According to BTI Consulting, the financial services industry has essentially stopped hiring new law firms and will press for significant changes in the law firms these businesses are currently using.
- In its 17th annual Chief Legal Officer survey, Altman Weil found that “outsourcing to non-law-firm vendors again took top spot as most effective tactic for those that use it to control costs.”
- The same report found that “the second, third and fourth most effective cost control tactics all target outside law firms: shifting law firm work to lower-priced firms, reducing the total amount of work sent to outside counsel, and shifting work to in-house lawyers.”
- The number of law firm mergers in 2017 hit record levels. Thomas Clay of Altman Weil called the law firm merger market “white hot.” According to the American Lawyer, there is no sign of this trend slowing in 2018.
- The demand for law firm services is flat.
- Hourly rates continue to increase, while hours worked continue to decrease. 2018 Report on State of the Legal Market.
- Realization rates continue to decline.
- Informed commentators continue to forsee significant change that is not particularly good for law firms. See, for example, virtually any of Mark Cohen’s articles.
- The market for Legal Services Providers such as Elevate Services and Axiom continues to grow rapidly.
- The law firm market is significantly stratified and that trend is accelerating.
- There is exponential growth in artificial intelligence, including law-related AI, not to mention just generally. (See Mark Greene and Ken Grady for info in this area.)
- Not to mention that law firms respond to all of this with, to quote my friend Casey Flaherty, “law firm marketing bullshit.” This link will take you to a list of Casey’s posts on the “full bullshit arc.”
So what does all of this mean?
Actually, it may mean different things for different firms and differenty types of firms. But there is one overarching point to consider, best articulated by the sage Ken Grady:
The changes ongoing in the legal industry…are established and point to the steady economic decline of the industry unchecked by a few bright points here and there. This is an industry that peaked and will not return to any semblance of former financial glory.
The pie is not getting bigger.
What is unstated in all of the above is that the use of averages to look at the industry disguises the true problems many, perhaps most, firms face. The 2018 Report on the State of the Legal Market references the old cliché “that one can drown in a lake having an average depth of only six inches,” and then noting that “relying on average performance data to bolster our sense of well being in the legal market is perilous.” Consider this data from Bruce MacEwen:
First and foremost is that a bell curve’s “average” is a highly descriptive number; it defines the central tendency of the universe under inspection. For power curves, no such thing holds true; averages aren’t just misleading, they can approach falsehood. Consider a few characteristics of this year’s Am Law 100: (a) 10 percent of the group’s total revenue is accounted for by the top three firms; and another 10 percent by the smallest two dozen; (b) 25 percent comes from the top nine firms and 25 percent from the bottom 50; and (c) the top three’s combined revenue was over $8 billion and the bottom 20’s under USD$7.5 billion. In short, big firms really matter. Their performance can easily move gross measurements for the entire group.
Think about it from this perspective. As noted above, Amlaw 100 realization rates are now at 80%. I doubt that firms like Wachtell and Cravath have any realization issues, so where do some firms have to be to lower the average to 80%. I suspect the distribution of the realization rates would be shocking. The existence of many poor performing firms in the Amlaw 200 is a given and certainly contributes to the merger heat mentioned by Tom Clay, noted above.
One last point for context. Lawyers tend to see the world in a binary way, best exemplified by the “lawyer, non-lawyer” dichotomy. Businesses don’t see themselves and non-lawyer enterprises, and people outside the legal industry never describe themselves as “non-lawyers.” Lawyers see right vs. wrong, black vs. white, while most business people see the world as variations of gray.
Because the business world is more than ever driving change in law departments, and law departments are starting to drive change in the delivery of legal services (rememeber, not just by law firms), it is useful to understand that the distinctions that have historically governed our profession—inside counsel v. outside counsel, law firm v. law department, law department v. rest of the business, are quickly eroding. Rather, service providers are best seen as those who solve business problems and those who don’t. Put another way, when McKinsey or Accenture analyzes a problem for a company, do they limit themselves to a single department if solutions require them to go elsewhere?
All of this should have meaning for law firms. Law firms need to first accept the inherent applicability of this truth, first uttered by legendary economist Herbert Stein.
If something cannot go on forever, it will stop.
If you doubt the truth of this wisdom, ask the thousands of businesses displaced or materially changed by, say, Amazon or Walmart. Have you seen a paper map lately? And are you interested in investing in your hometown newspaper? Get over it—most law firms likely will not be able to continue in their present form.
The takeaways from the above, as I see them, are:
- Being “a law firm” is becoming more and more of hindrance, since it limits the areas where you can serve as a problem-solver.
- An effective business model will require the ability to do work that Legal Services Providers now provide, and to do so in a business-like manner rather than a law firm manner. Simple disaggregation is unlikely to be a workable option.
- An effective business model will require the ability to do “non-legal” work, that is, to solve problems that might end up in the corporation’s law department, but which originate elsewhere.
- An effective business model will require the ability to solve business problems, even if the problems only tangentially involve legal issues. Clients want problems solved—who does so is not their greatest interest.
- The combination of 2, 3 and 4 makes the “law firm” model, a business only owned by lawyers that operates on calendar year, cash-basis accounting. Firms must figure out work-arounds to the non-lawyer ownership issue. It’s easy—those interested in on workable way of accomplishing this should read Mark Cohen’s post, The Clearspire Story.
The hardest part of this evolutionary stage is not figuring out a workable structure. It is figuring out a workable culture. Even law firms that have centralized management do not operate the way normal businesses operate: too much power resides in rainmaker partners. The absence of equity interest makes everyone the equivalent of a free-agent athlete, free to sign with whatever team offers the best contract. Firms have little incentive to invest in R and D, so they don’t. Sales and marketing tends to focus on lawyer pedigree instead of solutions to problems or other outcomes.
While firms like McKinsey have a “McKinsey Way” that everyone down to the weekend janitor can recite, very few law firms have similar brand value. Law firm brand value among all but the most elite firms is instead driven by which adminstration some of your partners served in. Getting people used to being at the top of their personal silo to instead be a piece of an enterprise is a challenge no law firm I know has accomplished effectively.
These hurdles are ones that, in my opinion at least, few firms will be able to effectively overcome. The result is that firms that are not law firms will find lawyers to operate as their independent front door, satisfying the lawyer-owned firm for legal work, but bringing work in through that door and others that is done by skilled employees, some of whom may be lawyers and many of whom will not. Problems will be solved by a collaborative effort involving many skill sets.
That is the law firm of the future, as I see it.