The Blind Side

I have to admit, when I started a recent series of trips to make presentations in the U.S. and Canada, I’d been questioning whether my recent assessments of and predictions for the legal profession had maybe become too radical. Having now returned from speaking with and listening to some of the sharpest and most engaged minds in the business, I’m coming to think I haven’t been radical enough.

Certainly, there was encouraging news. Delivering serious and perhaps discomfiting messages to state bar leaders in Chicago and law society executives in Toronto, I was heartened by the openness to these ideas and the readiness to address our current challenges that our profession’s leaders displayed. Some lawyers and some firms might be ignoring what’s happening in this marketplace, but in no way is that universal, and I think it bodes very well that the people in charge of many of our legal institutions are facing these challenges head-on. Listening to the managing partners of some of the world’s largest law firms at a Georgetown Law symposium in Washington, D.C., it was also refreshing to hear at least some of them acknowledge that the old model is passing away and the adaptation to a new model will be difficult but necessary. Certainly, everyone else in the room, which included almost every thought leader who wasn’t otherwise engaged at the ABA TECHSHOW, was fully cognizant of what we’re facing (and two new surveys confirm it).

For all that, though, I came away from these experiences more convinced than before that major, rewrite-the-rules change is imminent in this marketplace, and that some current institutions simply won’t survive in recognizable form. You should read the media accounts of the Georgetown Law Firm Evolution event, from observers like Aric Press, Rachel Zahorsky, Ron Friedmann, , and various Twitter correspondents (as well as a response from Robert Sawhney), to get a sense of the scope of change that was discussed.

But for me, the penny dropped during the dinnertime address by Richard Susskind, whose remarks included a heartfelt plea for conference delegates to lead a change for the better that the profession and justice system desperately need. One of Richard’s topics was the Legal Services Act in England & Wales, and its soon-to-be-active provisions allowing alternative business structures (ABSs), including non-lawyer equity investment in law firms and legal enterprises (here’s a sampling of articles, from last September to last week, describing scenarios under which law firms might invite such investment).

Richard, however, has been speaking with investors who are actively engaged in preparing entry to this marketplace, and he reported that law firms are not their primary target; in fact, their interest is coalescing around legal service providers that we now consider to be on the fringes of the profession, like legal processing outsourcing companies. These are the providers that outside investors think are much likelier than law firms to emerge successful from the ABS upheaval, and it’s where most of the new capital is going to go.

Match that up against what the private equity people have been saying on the subject. Jeremy Hand of Lyceum Capital is quoted in two of the previously linked articles as saying his company has a “focus on new business delivery models, not traditional law firms,” and is looking to work with firms with “a modern, streamlined, low-cost delivery model — quite different from that of the traditional partnership.” Tony Williams of Jomati Consulting, who advises Lyceum, added that the new private-equity model emphasizes equity over debt, and equity-driven investors require high rates of return: “So firms need to have a very clear understanding about what they can do with that money that gives a higher rate of return to them and to the private equity people.” None of these remarks resonate with how the vast majority of law firms go about their business — but they do sound a lot like how non-lawyer providers conduct themselves and view the marketplace.

Put all that together, and this scenario emerges: private equity enters the legal marketplace in England & Wales, but it pays just glancing attention to traditional law firms, deciding that it doesn’t need the headaches that come with trying to manage lawyers and reinvent law firms built around the billable hour. Instead, most of the money heads for efficient, accessible, predictable, process-driven operations that are aligned more closely with how modern businesses operate, including LPOs, online and virtual service providers, and streamlined, fixed-fee lawyer boutiques. Already, Intermediate Capital Group has made a £440 million investment in CPA Global, the LPO firm that famously took a huge chunk of legal work from Rio Tinto last year. That purchase effectively placed a marketplace value on CPA Global approaching $1.4 billion. How many law firms, if they were to go public today, could aspire to a $1.4 billion market cap? 

LPOs, it has to be emphasized, are not just doing first-year associates’ grunt work, not anymore. They are moving up the value chain steadily and with surprising speed, taking on the work of second-, third- and fourth-year lawyers — not just by using lower-cost labour, but by doing the work more systematically and efficiently. As I said a while back, these companies will not be content with basic work forever; they see no reason why they can’t eventually do the toughest legal jobs. Billion-dollar legal services providers, unfettered by traditional lawyer restrictions, can go global instantly and almost effortlessly. They’ll have more than enough money to acquire the top talent from the best firms worldwide, to invest in new systems and innovations that will reduce costs even more, and most importantly, to change clients’ expectations about what a law firm can deliver. They will be law firms, in effect, and even if lawyers in a given jurisdiction somehow succeed in keeping them out, the landscape will have changed: clients will demand their lawyers compete on the same playing field.

Some firms, especially in the UK, seem to sense this already, and they’re taking outsourcing seriously (though perhaps none as seriously as Eversheds, which has gone into the LPO business itself, albeit with risks). More interesting are attempts by some firms and clients to rethink workflow, such as the move by Royal Bank of Scotland towards a “Mexican Wave” system (pioneered by Lovells) that you’ll be hearing much more about in the months to come (a City firm does the “higher-end” client work while sending more routine work to lower-cost firms in smaller centers). Also intriguing are joint lawyer-client ventures in the UK (such as those by Geldards and Kent County Council and by Berwin Leighton Paisner and Thames Water) whereby in-house and outside counsel are integrated to an unprecedented degree. I’m pleasantly surprised by the innovative approach these firms are taking, and I hope it’ll be enough to secure their positions when the floodwaters really start pouring into this marketplace.

For many other firms, though, the challenges are extremely serious. The prospect that emerges from all this is a legal services marketplace in which many law firms are simply irrelevant — they’re not structured in ways that deliver maximum value to clients and they can’t compete with rivals that are. There was a lot of talk at the Georgetown event about whether “BigLaw is dead,” and I have to agree with those managing partners who dismissed the notion: these firms are obviously up and about and making a great deal of money, and it’s absurd to pretend they’re dead men walking.

The worry, for me, is that many firms, of all sizes, aren’t ready for the radical ways in which the playing field is about to change. Their focus is either straight ahead, on their clients, or internal, on their own condition and competitiveness. They’re like a quarterback whose gaze is either locked downfield on his receivers or focused dead ahead on the defenders in his path. As a result, he never sees the hit coming, from his blind side, that flattens him and turns the ball over to the other team. It’s not just lawyers and clients who matter anymore. New players, with an unprecedented combination of size and speed, are charging onto the playing field like a storm and rewriting the rules of the game as they come.