The Law Firm Inflection Point

The troika of artificial intelligence, pricing, and talent transience has been with us for some time now. As a result, traditional pyramid-structured law firms grappling with these bet-the-business juggernauts are at an inflection point. I propose a flatter way forward.

I have been writing and talking about this issue for many years, most recently as part of my ‘The Law Firm’ series: Pyramid Rollover, Private Equity Puzzle, Disappearing Act, Foundational Rebuild, and now this one, Inflection Point.

My argument throughout this series is that traditional law firm pyramid structures will not hold against AI, pricing, and talent transience. Therefore, those who want to fix their firm structure must do so in stages strategic to their client base, not the firm’s internal constituents.

And there’s the rub. This is why we will see more mergers and consolidations because they are “easier” than restructuring with less blood on the floor. In addition, we are likely to see more failures of firms of all sizes in various jurisdictions worldwide.

A Flatter Structure

The traditional law firm pyramid structure is crumbling. It is rotting from the bottom up. New lawyers are asking “what’s in it for me?” and leaving after getting experience. Mid-career lawyers are questioning whether to invest capital into becoming an equity partner with the possibility of no one buying them out in 20 to 30 years. Senior partners are shifting to counsel with many feeling that now is no time to be a senior partner in a law firm.

Against this turbulent backdrop, I propose a flatter law firm structure that reflects how firms can shift from being traditional hives of busy work that can now be done almost to completion by AI, to become environments where true advisory services are founded on four cornerstones: 1. Industry Alignment, 2. Business Experience, 3. Legal Perspective, and 4. Sales Culture. Let me explain.

1. Industry Alignment

Clients don’t care about your business; they care about their business. This translates to “Clients don’t care about your practice; they care about their industry,” which I have been writing and talking about forever. Yet most law firms structure by and lead with practice because it is traditional and puts the focus on themselves. This is backward, shortsighted, and client insensitive. Better to flip the script because even though transitioning to an industry-aligned structure is not for the faint of heart, it meets the market where it is and from a position of strength.

Every law firm regardless of practice – including litigation – can align by industry using NAICS (North American Industry Classification Systems) Codes. NAICS is the gold standard because every business engaged in active commerce must select a code that identifies them by industry. For example, the code for Legal services is 5411 that being parsed further reveals that 54111 is the code for Offices of lawyers, 54112 for Offices of notaries, and 54119 for Other legal services. The same is true for all industry categories.

The best part about identifying clients by their NAICS code is that these codes cannot be argued – an enterprise self-selects the code that best identifies its business. Therefore, NAICS codes ensure exact alignment with recognized and real industries rather than catering to whims of those who insist on aligning fantastical, non-existent industries to their individual practices. For example, there’s no number high enough to tally how many times I have argued that there is no such thing as a technology industry, which is why NAICS doesn’t include it. Industries are verticals. Technology, somewhat like tax or litigation, is horizontal and touches all industry verticals.

Industry alignment presents a firm’s strengths and weaknesses with stark clarity. Other pluses of structuring by industry include but are not limited to market positioning, client attraction, talent and technology considerations, budgeting, and teams.

Market Positioning and Client Attraction

Industry alignment cements your market position. How? Because industry strengths crystalize a firm’s standing in terms of its client base. And when industry strengths are cast against financials, findings are further clarified about which ancillary industries to keep or add to those revealed as core as well as those that can be downplayed or spun off.

An industry-first market position enables a distinctly defined go to market objective with clear strategies to support it as well as no-nonsense tactics that act as bulwarks. It also enables bright-lined brand boundaries that reinforce a revamped or new business.

While market positioning is client-facing, there is no clearer message to both the firm’s internal constituents as well as a firm’s current and prospective clients that industry alignment, experience and know-how are to be found at an industry-first firm. Both talent and clients who recognize this signal are either attracted to it or understand they may be better suited elsewhere.

This is exactly the part most traditionally structured law firms fear most: That a non-aligned client may shift out or a non-aligned lawyer may leave. But this is also the precise turning point that results in the short-term pain/long-term return-on-investment gain of industry-aligned market positioning. This is because those who leave open capacity for a firm to take in more of the exact type of talent it wants along with clients whose work sits squarely in the centre of its industry-based wheelhouse.

Talent, Technology, and Budgeting

Industry alignment identifies where to invest or divest in talent and technology in order to either bulk up or trim down. While it enables smart hiring because it identifies a firm’s strengths, it also sends a signal to those who have expertise outside the firm’s industry distinctions that they may be best to consider other opportunities.

The ugly truth is that job losses due to AI and pricing have and will continue to impact talent at all levels throughout traditionally structured law firms and are part of the transience we’ve seen to date. It’s fair to expect this will not abate and transformation of roles will continue to happen resulting in turnover at all levels in law firms worldwide. While this is an uncomfortable topic, it is very real.

What is also real is that industry alignment enables a firm to become lean and, due to industry strengths, is better able to attract talent with industry depth and savviness who, in turn, attract and retain industry-relevant clients.

The same can be said for new, current or dated technology that can be added, kept, tailored or turfed depending on industry relevance.

Lastly, budgeting becomes sharply defined with decisions around expenditures being black or white – money either supports a key industry target, or it doesn’t. Budgeting debates become moot, and business moves ahead with less friction and better speed.

Industry Teams

The smartest law firms ensure that within multidisciplinary industry teams, there are individuals with proven, hands-on experience working within that team’s specific industry. Simply being interested won’t cut it with hardcore industry professionals who eat pretenders for lunch. This why the person with direct, hands-on industry experience – and not the most senior lawyer – is the best choice as that industry team’s leader.

For example, a firm I worked with in 2006 was identified by NAICS client codes as having distinctive automotive industry strengths. So, when I created an automotive team to service those clients, its leader was an associate-level lawyer and mechanical engineer with hardcore automotive expertise. Team members had proven experience working on automotive shop floors, testing facilities, and with parts manufacturers. True industry experts, they spoke the language of “automotive” that enabled the team to be founded on zero fantasy and no BS. Furthermore, because of their industry qualifications, that automotive team remains strong and vibrant to this day.

2. Business Experience

While it may not be taught in law schools, it’s still amazing how many lawyers range from ill-informed to clueless about business fundamentals. For example, while walking down the hall of a national firm many years ago, I overheard a 30-year-out senior business lawyer ask what “variance” meant. His question stopped me in my tracks. How could someone who advises businesses not know that term or what it means? (Variance is the difference between actual and budgeted income and expenditure.) It’s basic business. And “speaking to the variance” monthly helps those who control the purse strings understand when and how budgeted funds are currently being or will soon be spent.

Understanding how business works is a critical piece of the puzzle. If business fundamentals are not taught in law school, get educated by another means fast.

This harkens back to my argument that clients don’t care about your practice; they care about their business and while their legal needs are only one supportive facet of their business, speaking the languages of both their industry and commerce makes all the difference in the world.

3. Legal Perspective

Providing a legal perspective is the smallest piece of a flattened structure, but it is where legal knowledge enables judgement on a client’s problematic issues as well as their business planning. This is a piece AI isn’t capable of – yet. It is where our humanity and abilities to sympathize and emphasize, listen and watch, and question and gauge for nuance still eclipse machines.

As an illustration, one of the most successful managing partners with whom I’ve worked over the years also handled trademarks for one of Canada’s most iconic companies. In addition, he acted as a business planning sounding board by attending the company’s management meetings gratis for many years and, as a result, knew the business inside out and backward. While he wasn’t qualified to answer questions to all issues that had a legal component, the company entrusted him to find the very right person from the very right firm – that often wasn’t his own – to provide a response and solutions. In doing so, he was indispensable to the company’s leaders and general counsel who told me during a feedback session that they would never make a move without him.

4. Sales Culture

The combination of AI and pricing is leading smart law firms toward the development of a sales culture. You can call sales “business development” if you prefer, but the type of business development I am proposing is very different from the type of business development that currently predominates in the conventional law firm realm.

This is a sales culture as it was in the Big Four in the mid-1990s and law firms – even though they’re late into the starting gate – are well-advised to catch up.

A Sales Culture supports the three cornerstones of Industry Alignment, Business Expertise, and Legal Perspective as well as being a cornerstone unto itself.

Success with a sales culture starts by hiring business development people who have proven experience and deep knowledge of the industries with which the firm has notable strengths and aligns. These people are worth their weight in gold because they know their industry’s needs and wants as well as its players and politics and, best of all, they speak that industry’s language fluently.

As a result, they are best positioned to research and select high potential clients – both current and prospective – who have work that sits squarely in the centre of a firm’s industry purview. As for clients, having someone from their industry working within a firm helps cement both trust and loyalty.

Industry-based sales talent is also well-positioned to use relationship mapping to find opportunities for the firm to provide cross-servicing opportunities that lawyers often miss because they are focused solely on the work they are doing for a client and how they are being compensated for it. This is when industry-aligned sales talent that sees the big picture of how well a client is or isn’t being served can determine if said client is even a good match for what the firm offers.

This identification is vitally important. Not every dollar is a good dollar and carrying an unsuitable client is costly. This is when a strong sales culture bolstered by industry-experienced sales talent can cull burdensome clients to open capacity for clients with work that sits dead centre of the flatter structured law firm’s industry-based wheelhouse.

Account-Based Growth

In this model, sales acts as a client-work instigator as well as a bridge to the very right lawyer and/or industry team that has the know-how to apply business smarts and legal perspective. Brought it at the midway point or later in the process, the lawyer or industry team close the sale, do the legal work, and both they and the relationship sales talent retain ties to the client to aid in the development of that client’s business, which is at the heart of – guess what? – business development.

This revenue-generating model takes the heat off lawyers who – at least to me over the last almost-30 years – have complained that they didn’t go to law school to sell legal services.

In a nutshell, what I have described is an account-based growth strategy.

Over the years, I have revamped legal services teams to embrace account-based growth. Some firms have taken to it better than others. Those best suited tend to be peopled by lawyers who understand – and are often relieved – that they don’t have to be leaders of a pack. In a flatter structure, lawyers are equal members of a team.

Firms that struggle tend to be peopled by lawyers who cannot stand even the thought of not leading the charge to acquire a new client often with bull-in-a-china-shop tactics, such as a senior lawyer who, in front of me, failed to introduce himself to a decision-maker from a major bank who he had never met and whose work every firm wanted. Instead, he sprang in front of this individual and asked a direct but confrontational question: “How do we get your work?” It was hardly a surprise that the bank’s decision-maker decided that neither this partner nor his firm would be successful.

Fix the Firm

Lawyers are not unique in wanting control over their livelihoods. We all desire control in one way or another. However, controlling the juggernaut effects of AI, pricing, and talent transience is like trying to push a pill up a hill with your nose: It’s a lot of work that takes too long and the return on investment is nil. The real question is how to wrangle this three-headed hydra effectively.

I often talk about this problem as “fixing the plane while flying it,” a phrase that seems to capture imaginations because it’s visual. The problem is not who on the plane is doing the fixing; instead, it’s the plane itself. “The plane, she is broken,” said an Alitalia representative when I checked in at Italy’s Pisa airport years ago and learned a flight was cancelled.

Like that plane in Pisa, the traditionally structured law firm, she is broken. Short of ordering a new type of aircraft – or in this case, a new type of law firm, which private equity is already doing in a big way worldwide right now – a flattened industry-aligned structure that positions clients squarely in the centre of its account-based growth strategy might be one of the most effective models now and in years to come.