Each Thursday we present a significant excerpt, usually from a recently published book or journal article. In every case the proper permissions have been obtained. If you are a publisher who would like to participate in this feature, please let us know via the site's contact form.
Oxford: Oxford University Press, 2013
Excerpt from Chapter Six, edited by the author.
To what extent can lawyers’ work be undertaken differently – more quickly, cheaply, more efficiently, but to higher quality – using alternative methods of working? That is a key question of the day. Lawyers have for many years performed routine work for which they have been overqualified and for which, in turn, they have been over-charging. In boom times, in what was a sellers’ market, there was little need for successful law firms to be detained by the challenge of delivering services in new and more efficient ways. Today, however, as cost pressures from clients intensify, as new service providers emerge, and as new technologies are deployed, it is unwise for any firm to avoid thinking about how it should work differently.
Nonetheless, I find that most traditional practices are not changing much. They are not yet adopting alternative methods of working. This is partly an issue of change management, in that law firms tend to be so busy serving clients and meeting their own financial targets that they allow little time for internal reform – it is not easy to change a wheel on a moving car. It is also, in part, a structural matter, because most law firms still aspire to the old textbook, broad-based pyramidic structure; whereas alternative methods of sourcing call for a revision if not rejection of that model. And, if we are honest, there is also reluctance in many firms to believe that they really need to change. There is an inclination, in other words, to cling on to the old ways of working in the hope that there will soon be a solid economic recovery and normal business can be resumed.
Prospects for law firms
However, if my analysis and predictions are sound, then law firms in the coming decade and beyond will be driven relentlessly by their clients to reduce their costs. This is the heart of the what I call the more-for-less challenge. For most firms, despite their current hesitancy, I predict that this will lead eventually to the deployment and execution of alternative sourcing strategies. And, in turn, we will witness the end of leverage – at best the pyramid (with partners at the top and less experienced lawyers at the base) will move from being broad-based to narrow-based. No longer will firms aspire to building large teams of junior lawyers as the basis of their profitability. ‘To survive’, in the memorable words of Theodore Levitt (in his seminal article, ‘Marketing Myopia’), lawyers ‘will have to plot the obsolescence of what now produces their livelihood’.
In due course, some firms may, for example, choose to strip away their junior and trainee lawyers, or stop recruiting them. They might then operate with a team of high-powered partners, each supported by, say, one associate; and the routine work will be resourced beyond the firm. Others may elect to build their own alternative sourcing capacities, such as internal teams of paralegals, or maybe through the establishment of their own off-shored legal facility. Still others will find opportunities for novel legal services, by creating markets that formerly did not exist or by inserting themselves in different places in legal supply chains (for example, by becoming involved far earlier in the life cycles of their clients’ business dealings).
Although these changes will have impact on all firms (large and small), some larger firms will want to argue that, for ‘high-end work’, notions such as commoditization, decomposing, and multi-sourcing, are of little relevance. But, on examination, it transpires that this concept of ‘high-end work’ is something of a myth – even in the world’s largest deals and disputes there are substantial components of work that can be routinized and sourced differently. And large firms that insist they only undertake bespoke work, which is a very different claim from asserting that they only do high-end work (bespoke being a sub-set, often small, of high-end), may find themselves at risk. They may be relegated, for instance, to the role of sub-contractors to other organizations who step forward to undertake the project management of sizable deals and disputes. At the same time, alternative providers may take up the work that these firms previously assigned to their junior lawyers.
A global elite
That said, there may well be a global elite of law firms, around 20 in number today (but likely to merge into a smaller cadre in the coming decade), who feel that they do not need to change. These will be firms who continue to enjoy great commercial success. With some force, they will argue that for bet-the-ranch deals and disputes, clients will still want the services delivered, more or less, as in the past. These firms will say that for really big ticket assignments, there is only a handful of brands that will be tolerated at board level (the ‘no-one ever got fired for buying IBM’ principle) and that, in any event, when the future of an organization is in the balance (whether under threat or in anticipation of a great new venture) legal work is not price sensitive (the ‘one million dollars here or there makes no difference in the broader scheme of things’ principle). If all of these elite law firms believe this and continue to work as they have in the past, then they may well be right. And it will be hard to convince a group of millionaires that their business model is broken.
However, they should not be over-confident in their belief that, in Levitt’s words, ‘there is no competitive substitute for the industry’s major product’. So, if one leading firm breaks rank, or if a major new force (such as a ‘Big 4’ accounting firm) emerges, and brings a new proposition to the market – a credible brand at half the price of its competitors, for example – then this could fundamentally and irreversibly change the market; and not just for the elite firms but across the entire profession. Leaders of the elite firms should suspend their likely incredulity at this scenario, if only because major clients, as never before, are commonly saying that they are now actively looking for alternatives to the traditional ways of some of the great firms whom many regard as too costly and sometimes too arrogant.
As for medium-sized firms, to survive and thrive, I suspect most will need to merge and seek external investment to enable the changes from their current approach to a new, sustainable, longer-term business model. There is a window of opportunity here – they should recognise that clients’ dissatisfaction with some of the leading firms throws up an unprecedented opportunity to be recognised as credible alternatives. To do this, they must find ways of building their reputations, brands, and capabilities.
I believe there will be a market for many years yet for small to medium-sized firms with demonstrable, niche expertise. General Counsel of even the largest of organizations often indicate that they welcome deep expertise and personal service even if offered from modest-sized firms. Usually, it is the talents of a particular lawyer rather than of a particular firm that is the attraction here.
As for much smaller firms with very few partners, aside from those who also offer a genuinely specialist or personal service that some market is prepared to pay for, I find it hard to imagine how these legal businesses will survive in the long run. On the High Street, in liberalized legal regimes, banks and retailers will compete with sole practitioners and small firms for everyday legal services (such as conveyancing, probate, and personal injury work). But it is likely that these alternative business structures, fuelled by external investment and driven by experienced business managers, will standardize, systematize and package legal services, and bring cost savings, efficiencies, and experience that the traditional, small law firms will find impossible to match. This will be the end of lawyers who practise in the manner of a cottage industry. One person who formally reviewed my publication proposal for this book said that he or she hoped that I would pay more attention than in the past to small firms. I am afraid I was not inclined do so, because I do not see much of a future (beyond 2020) for most small firms in liberalized regimes.
Questions asked by new partners
In the context of great change and disruption within law firms, I find recently appointed partners of law firms are currently disconcerted and nervous.
In the past, I have found young partners to be an interesting breed. Often in their mid-30s, these bright young lawyers have great energy and considerable experience, but have tended to operate on the expectation that the firms of which they are now part-owners are likely to function and profit in the future much as they have in the past. They have tended to be a confident bunch, pumped up by recent admittance into partnership by their seniors, and satisfied that the effort they have expended has been justified; although they have often been unnerved to discover that becoming a partner is of itself a new beginning and to find themselves on the bottom rung of yet another ladder.
In the past few years, however, I have found that junior partners are less confident in their position and worry very deeply about the future of the firms they have joined. When I addressed law firms’ induction courses for new partners between 1996 and 2006, I felt them dismissive of my seemingly outlandish ideas. Most preferred to look at their BlackBerry devices or draft documents during my presentations. This has changed radically. Today junior partners are all ears, consistently asking me the same set of questions, and are anxious to hear my views. Here are these questions, along with the replies I usually give.
Is our firm viable and sustainable?
The major changes I anticipate in the legal marketplace are not coming in the next 3-6 months but they will begin got take hold in the next 3-6 years. If firms do not embrace alternative sourcing strategies, I doubt the majority will be viable or sustainable in the long term.
Is the business model broken?
Insofar as this refers to the broad-based pyramid with the partner at the top and junior lawyers undertaking routine work at the bottom, then, again within the time scales just noted, I think this model will indeed be broken. Leverage will be replaced by alternative sourcing.
Have the glory years passed?
For many firms, I believe their peak was around 2006. This is not simply a matter of profitability and turnover, for many have improved these since, but a question of the ease with which work is won, the level of fees that clients can be charged without challenge, and the amount of human effort expended. Some elite firms and entrepreneurial firms will go on to enjoy yet greater times, but for many firms, unless they change radically, the glory years have indeed passed.
Are our fixed costs too high?
In the coming years, firms will need to revisit their property strategies, because high rentals in expensive cities will be a costly indulgence in an increasingly networked world with pervasive video links; and the labour costs of large numbers of junior lawyers will also be excessive, largely because of the availability of alternative sourcing in lower costs regions or countries.
What are we inheriting?
Most junior partners are inheriting outdated, outmoded, low-tech businesses that will soon not be fit for purpose. This means not that there is a lack of great intelligence or talent within the businesses but that the way in which this talent is taken to market is no longer competitively arranged and priced.
Do senior partners care about the long-term?
This is a vital question. Regrettably, most law firm leaders that I meet have only a few years left to serve and hope they can hold out until retirement before much that I predict engulfs them. Operating as managers rather than leaders, they are more focussed on short-term profitability than long-term strategic health. For junior partners this is tragic because any major re-invention and re-engineering of law firms has to be driven from the top. I find a great contrast here with the large accounting firms, where senior partners seem far more concerned about the prospects of their junior partners. Their philosophy – to regard themselves as temporary custodians of long-term and enduring businesses rather than short-term investors who want to bail out when the price is right – is one than could fruitfully be assumed by more equity partners in law firms.
In other words, it is time for senior partners to think more deeply about a more generous legacy to their successors.