8/21/16

Firing A Few Law Firms Isn't Enough; Why Clients Must Ask For Change

When buyers are dissatisfied, they shop elsewhere. Decline in demand signals the seller to change behavior. It's textbook. And yet it does not seem to be working in the legal market. Despite a decade of buyer dissatisfaction, behavior has remained mostly the same. Managing partners recognize the many signals of client discontent but still claim that clients aren't asking for change.

Last post, I explained why clients rely on exit rather than voice to express frustration. Here, I will try to illustrate why voice remains critical. In short, there is too much friction in the market. The current pace of exit is insufficient to drive major change. Nor does exit necessarily ensure structural reform, as opposed to reallocation of the same damn problems.

Clients are mad but not that mad

Clients' bark is much worse than their bite. The overall trend isn't so much a decline in demand for law firm services as a flattening. Rather than a net reduction in law-firm business, the insourcing and managed-services pushes are still experienced as a slowing of the explosive growth that marked the law firm market for decades.


This not-quite-decline is why managing partners point to insufficient economic pain as a barrier to change.


While the slowdown is enough to sustain a cottage industry in conferences and thinkpieces (see e.g., me) about the imminent implosion of the traditional law firm model, it is not enough to fundamentally threaten the model. What is true generally is especially true for the partners with the most power within law firms--i.e., those with the biggest books, best relationships, and shortest time horizons. They are doing just fine and that seems likely to continue.

Why clients don't use exit more

Exit is risky and expensive. Incumbents mostly do quality work, and switching costs are high. We tend to form long-term supplier relationships. We should act accordingly.

Even if prices are a problem and service delivery is frustrating, good lawyers remain extremely valuable. If a client already has good lawyers, they are loath to move their business elsewhere. We have few reliable proxies for, let alone measures of, lawyer quality--which currently resides somewhere between a credence good and "I know it when I see it." There is risk inherent in transitioning from known to unknown commodities. As Firoz Dattu of AdvanceLaw has observed, we have an information problem.

Moreover, the transition itself is resource intensive because of search and ramp-up costs. An incumbent that already knows the company, personalities, procedures, etc. offers genuine advantages. Indeed, the more rigor a client adds to protocols, processes, billing guidelines, etc., the more painful it is to find a new firm and bring them up to speed.

The transition to insourced or managed-service alternatives can be even more daunting, including the part where inside counsel attempt to repurpose budget that the organization is acclimated to directing towards law firms (law firms aren't the only ones biased toward the status quo).

That, on net, the most common preference is to remain with incumbent firms does not mean those firms couldn't stand to improve (hence the dissatisfaction). Repeating some of my standard schtick: with people and price in place, it is process that offers the most levers to drive continuous improvement. The only way to address process is to actually address process. That requires having a data-driven conversation. In short, voice.

If most incumbents are going to remain incumbents for a material length of time (i.e., no exit) then voice is the only real option to affect behavior.

Repeating the same thing, expecting different results

I'll never understand shopping primarily on the size of a discount (where the client chooses the firm with the higher effective rate because the firm came down by larger percentage from their rack rate). Then again, I also don't understand moving from one firm to another solely because the latter has lower rates.

All else being equal, lower rates mean lower spend. But all else is rarely equal. Even assuming the same quality, the basic math problem is that the variable you aren't controlling (hours) tends to have a much wider range than the variable you are controlling (rate). Where the difference in rates is usually linear (5% to 30%), the hours required can differ by orders of magnitude (20 hours of superfluous research to support the same 2 hour drafting exercise). The extra hours can swallow up the lower rate subtly and quickly.

This realization is usually accompanied by the resolution to do something about hours followed quickly by the awareness that proper scoping militates towards alternative fees. You'll get no objection here on the shift to alternative, especially value, fees. But recognize that it is the move to value fees that is doing the heavy lifting on changing behavior, not the switching of firms. That said, I can get behind selecting a new firm because they excel at value fees (e.g., they employ Toby). Still, we're now a long way from exit for the sole purpose of reducing hourly rates.

You are not going to change behavior by moving from one traditional firm to another simply because the latter has lower rates. You may not even save money.

Insourcing

Of course, you can move to the ultimate flat rate--a salary--and still not solve your problems. You are not just bringing a lawyer in-house. You are also insourcing the attendant challenges of scale. Resource allocation, document management, knowledge management, project management, data/analytics, technology, training, professional development....The demands and difficulties of scale will always grow faster than the in-house team.

Returning to the discount analysis, the problem remains much less about (i) the unit cost of lawyer hours than (ii) the number of units legal tasks demand. While insourcing in the present environment makes it easy to demonstrate a reduction in unit cost (rate), it is not automatic that the transition will do anything about unit volume (hours).

It is certainly possible for in-house teams to get a handle on scale (legal ops!). But they do so by addressing service-delivery issues--i.e., the same issues on which they were silent with their law firms when opting for exit over voice--and prevention (a separate but vital topic).

There is an argument to be made that coherence is easier to achieve when everyone answers to the same boss. They've handed out Nobels in economics (Coase, Williamson) for explaining why we have islands of dictatorship (organizations) dotting the sea of the market. That is, there is logic beyond unit-cost reduction that supports insourcing trend.

I agree with this logic to a point. I think it was absolutely essential for in-house departments to get bigger and more sophisticated relative to their external spend. Exit, let alone voice, requires extraordinary effort for a law department that is already completely underwater trying to triage too many matters. Any system predicated on extraordinary effort is doomed to underperformance.

But, as I said, only to a point. The unit-cost ROI is proving a little too compelling for many law departments. They are mostly just throwing less expensive bodies at the same problems. They are growing in ways that make perfect sense and save real money, for now. But they are trading short-term tractability for long-term flexibility.

Today's cost-saving hires are tomorrow's roadblocks. "We've been doing it this way for 10 years...we know what we're doing...we just need more headcount" is something all new hires will be able to say eventually. Entrenched employees, especially autonomy-obsessed lawyers, are challenging to retrain, repurpose, or retire. (Recommended: here and here from the peerless Ken Grady).

Sustainable cost savings may prove illusory. No matter the extent of the short-term savings, the in-house department will eventually have to address the systemic service-delivery issues (i.e., voice). Insourcing just changes the audience. I would not be the first one to observe that, often times, in-house departments have an easier time affecting external behavior.

Managed-Service Providers

The inevitability of addressing systemic issues remains true even if the bodies being thrown at the problem are really inexpensive on a relative basis. Managed-service providers, too, can suffer from the legal cost disease.

I've said many times, there is nothing wrong with labor arbitrage. If a law department can get the same product at a lower price, they should. In a world of tradeoffs, it is even worth considering slightly lower quality at radically reduced costs on non-critical work. But labor arbitrage only slows, rather than levels, the uptick in legal spend--i.e., it does not fundamentally bend the legal cost curve identified by the essential Bill Henderson:

It is justifiable for a law department to enter into a relationship with a managed-service provider expecting that the initial savings will come from labor arbitrage. But the long-term strategy has to involve systematization through process and technology. Systems do not arise spontaneously with managed-service providers, just as they are not naturally occurring at law firms or in-house. Law departments will still have to pay attention to and address (voice) the systems by which their managed-service providers are delivering legal services.

Just as there is logic to insourcing beyond labor costs, there is a compelling argument to be made that managed-service providers are in pole position to thrive in a more system-oriented legal market. First is the simple but genuine advantage of being relatively new and nimble. Building from scratch is often easier than retooling. Second is that the value proposition of managed-services providers is already expertly designed systems, rather than the individual expertise of particular partners. Not only is this more in line with the drive to systemization but it also suggests more stable long-term arrangements (no lateral mania with client work treated as chattel), especially since it complements law department insourcing of expertise. Underpinning both of these advantages are a capital structure and culture more amenable to infrastructure investment, process re-engineering, and technology deployment.

Back to Law Firms

I truly believe that in-house teams and managed-service providers will continue to grow as central pillars of legal service delivery while the frantic growth that law firms experienced for decades seems very much dead.

But let me conclude with some love for law firms. Inertia is unavoidable but not indomitable. Because they have been ascendant for so long, law firms have more intellectual capital than anyone. They have relationships, track records, experience, perspective, etc. They are filled with brilliant, experienced, talented, hard-working domain experts who are genuinely dedicated to quality and client satisfaction. Some of these domain experts are lawyers. Some of them are allied professionals who have spent more than a decade preparing for the transition to a more system-oriented legal market (see y'all at ILTACON next week). In theory, law firms even have more financial capital than anyone.

Law firms have the time, the talent, the funds, and the opportunity to make us doomsayers look silly. They just need a little push. But, clients, you do need to ask. A tad more on why in a subsequent post.

Exit isn't enough. Whether work is being done in-house, by a law firm, or by a managed-service provider, the systems for delivering legal services will need to be addressed. Clients will have to use voice at some point. There is no time quite like the present.

_______________________________________
D. Casey Flaherty is a consultant who worked as both outside and inside counsel and serves on the advisory board of Nextlaw Labs. He is the primary author of Unless You Ask: A Guide for Law Departments to Get More from External Relationships, written and published in partnership with the ACC Legal Operations Section. Find more of his writing here. Connect with Casey on Twitter and LinkedIn. Or email casey@procertas.com.

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8/15/16

Exit Not Voice: Law Firms Don't Change Because Clients Aren't Asking

Actions are supposed to speak louder than words. And the direction of client action seems fairly unambiguous:
Managing partners are well aware of these broad trends. Yet they still claim that clients aren't asking for change:



I tackled those pesky partners last post. Not only is the net impact less than dire--erosion, not extinction--but it is also not evenly distributed. The pain just isn't that acute for most rainmakers who can point to decades of empirical evidence that suggests they will be just fine. Given their stature, relationships, and time horizons, many of them are probably right.

In addition to robust data, they can probably offer a fair amount of anecdotal evidence, or the absence thereof, about clients' supposed interest in change. The top partners probably don't hear much about change from clients. And if they do, it is probably while trying to quickly get past the annual unpleasantness of rack-rate kabuki theater--where the two sides keeping using the word "discount" but are actually dickering over just how much to raise rates.

This does not mean that clients are content or passive. It just means they are bad at articulating their concerns or do not consider it worth the effort. Very few firms know they've been fired. The phone just stops ringing. Even fewer know why they've been fired. Or why they didn't win the RFP. Or why their work from the client was down 2% instead of up 2%. Or....It can be a very slow bleed. There are many ways to lose business that do not involve a formal "you're fired." And there are just as many possible explanations for the loss. Client dissatisfaction with service delivery is only one of them.

In short, clients are using exit, not voice. In the classic treatise Exit, Voice, and Loyalty, the economist Albert O. Hirschman outlined a client's options when quality declines (or fails to keep pace with what is available elsewhere).

Clients can be loyal--i.e., they just keep returning to the firm because of relationships, complacency, lack of alternatives, high switching costs, devil-you-know conservatism, etc. Loyalty is major part of the legal market, in part, because there are genuine advantages to incumbency. Loyalty continues to be the most important aspect of the client/firm relationship. We're witnessing a steady accumulation of minor paroxysms, not a mass exodus.

Clients, however, can and do exit. They take their business elsewhere. Alternative destinations include other firms, in-house, and managed service providers. As the headlines above demonstrate, exit is becoming a more prominent part of the legal landscape.   

Or clients can exercise voice. They can express their dissatisfaction but still afford the firm an opportunity to course correct. The managing partners' "clients aren't asking" response suggests that clients rarely do this. Clients choose exit instead.

Voice is critical. Loyalty signals acceptance of the status quo. Exit signals dissatisfaction and decline. Voice is the informative middle ground that demonstrates loyalty, raises the spectre of exit, and provides the path forward to bolster the former while avoiding the latter.

There is a vital difference between asking for a manager and just leaving the store to shop elsewhere. So why don't sophisticated corporate clients exercise voice? My friend Connie Brenton of NetApp/CLOC provided part of an explanation in a piece we co-authored on the topic:
Client preference for exit over voice has much to do with resource constraints. We need results now, innovation now, efficiencies now. We haven't the time to wait for our firms to catch up. There are also an increasing multitude of accessible alternative solutions and technologies that were not previously available, making the exit not only easy but the responsible decision for our businesses. Organizations such as the Corporate Legal Operations Consortium (CLOC) provide a forum to share best practices including how to better in-source legal work or move day-to-day work to lower cost alternatives.
Frankly, as Ron Friedmann has observed, it is often easier and quicker to start from scratch than to try to retool. Not only are established processes resource intensive to amend, but interpersonal dynamics also consistently fall back into familiar patterns. If the inside lawyer and outside lawyer are accustomed to resolving every hiccup with a discount, it may feel unnatural to have any other conversation, especially when there is 'real' work that needs to get done.

In the short term, it is simple to show ROI on moving to a firm with lower rates, bringing work in-house, or diverting work to a managed-service provider. Each option can be far less daunting than asking a long-time incumbent to cut their rates in half, let alone make an abrupt move to value fees (which Pat Lamb compares to reciting the alphabet backwards). You don't necessarily let the incumbent go immediately. You just start to taper their work, which subtly moves from increasing to flattening to declining as the new resources come online. Indeed, by keeping the incumbent around, you get to have a control to validate your ROI calculation.

The right question may not be why clients don't use voice but, instead, why they should even bother. Since I wrote a guidebook entitled Unless You Ask, I feel compelled to try to answer in my next post.

_______________________________________
D. Casey Flaherty is a consultant who worked as both outside and inside counsel and serves on the advisory board of Nextlaw Labs. Find more of his writing here. Connect with Casey on Twitter and LinkedIn. Or email casey@procertas.com.

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8/1/16

Say Hello to Casetext's CARA - Case Analysis Research Assistant

As many of you that follow 3 Geeks know, I'm a big fan of the products that are coming out of Stanford University's CODEX program. One of the latest insights comes from a CODEX fellow, Casetext, with their new CARA platform. Casetext's VP of Legal Research, Pablo Arredondo, has been talking with me about CARA for a number of months now, and I've seen a few versions as he prepped CARA for release. If you've ever seen Pablo demo this new product, then you know how excited he is about the value that he believes this brings to legal research.

What is CARA? CARA is a 'brief-as-query' legal research tool, in which instead of using a keyword query you drop an entire brief in as the input. Users can input a brief in either Word or PDF format. From my use of it, I would explain CARA as a tool to analyse your brief (or the other side's brief) to find potential missing points of law, or alternative arguments not cited within the brief.

CARA data mines the inputted brief and uses the gathered information to form a sort of 'mega-query' that runs against Casetext's database of case law. CARA takes a look at the brief and analyzes how much cited cases are discussed within the brief as well as the other text within the brief. Arredondo explained to me that "[t]he analysis CARA runs looks not only at direct citation relationships (Case A cites to Case B) but also 'soft citation' relationships – Case A doesn't cite Case B directly, but Case C cites to both A and B." He also says that, "CARA also discounts heavily cited procedural cases like Celotex" so that these citations do not skew the results. Attorneys and researchers upload their drafts to check for missing cases before filing and uploading their briefs, and they check their opponent's briefs to see if there are missing cases that they might be able to exploit.

Screenshot of CARA results.
CARA outputs a list of cases, all linked to the full text on Casetext. The results are displayed along side

  1. concise summary of case holding; 
  2. most cited passage from the case; 
  3. link to a law firm client alert discussing the case.  

Because attorneys are uploading drafts/work product, there is always a question of "who can see my draft?" Arredondo told me that "Casetext has applied stringent security to CARA.  Inputted briefs are not stored; once the data is extracted the brief is deleted. The reports CARA generates are accessible under a unique URL with a long hash; only those possessing the link can see the report."

A geek like me loves to learn about how the back-end of these systems work, so bear with me for a paragraph as I repeat Pablo's explanation of how CARA processes the brief that you drop in for analysis. CARA uses what is called topic modeling system (latent semantic analysis) to sort results based on how well they match the topics in the brief.In law-librarian terms, this means that CARA uses the full text of the brief and compares it to the full text of existing cases, looking for similarities in both legal terms and regular nouns. It's not magic, it's math. But, sometimes math can look like magic. Alright... end of uber-geek discussion.

The second serious question that most of us ask when we see products like this is "does it replace Westlaw or Lexis?" The answer is simply, no, and it is not meant to. CARA is designed to supplement traditional research systems. It can catch cases you missed using regular tools or help you find cases that you would have found anyway, only much faster. In these modern days of "efficiency" in legal practice, getting to the answer, faster, is a competitive advantage, and that is what CARA sets out to do.

Pablo mentioned that CARA will be made freely available to the judiciary, and that trials for firms or individuals are available for anyone who wishes to evaluate CARA. He said that there were no strings attached to the trial, and that you can contact him for details on the trial at pablo@casetext.com.



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7/26/16

Teaching Technology in the Academy – Dean’s Roundtable Part 2 – The ABA Annual Meeting (West Coast) edition

[NOTE: Please welcome guest blogger, Michael J. Robak, Associate Director/Director of Information Technologies, Leon E. Bloch Law Library, University of Missouri - Kansas City. -GL]

The movement to establish a true Technology instruction track and andragogy (meaning Susskind, Kowalski, et. al.) in the legal academy is gaining real momentum.  As readers may recall, on March 16, 2016 the ABA TECHSHOW provided an opportunity for an Academic specific event tied to TECHSHOW which 3 Geeks generously allowed me to advertise.  This first ever Dean’s Roundtable, held at IIT Chicago Kent College of Law (which was enthusiastically supported and hosted by Professor Ron Staudt,), was incredibly successful and helped set the stage for creating an Academic track at the 2017 ABA TECHSHOW.

The event was so successful that the 2016 ABA TECHSHOW Chair, Steve Best, thought a second edition of the Dean’s Roundtable would provide an even greater opportunity for dialogue if it could be held in conjunction with the ABA Annual Meeting in San Francisco in early August for a West coast version.  Those who attended the Roundtable, including the first Roundtable’s generous sponsor, Thomson Reuters, thought a second event would be well worth creating.

And so we are announcing the Dean’s Roundtable Part 2 to be held at UC Hastings College of Law on August 4, 2016 from 9:00 am to 1:00 pm. And I am pleased to announce Thomson Reuters is again generously sponsoring the event.

If you are at a law school in the San Francisco area or if you are attending the ABA Annual Meeting or if you are interested in helping build technology teaching or the ABA TECHSHOW Academic track please consider attending the Dean’s Roundtable Part 2 on August 4, 2016. 

And we particularly extend the invitation to practitioners, we need comment and recommendations from outside the ivory tower.

This is a free event and registration can be found here.

We hope to have in attendance a number of the members of the ABA Law Practice Division, including members of the Executive Committee, to create an even stronger dialogue about the “how and what” of teaching technology, particularly from those practitioners most engaged with serving as technology evangelists.  The second part of the dialogue will focus on helping design the academic track for the 2017 ABA TECHSHOW.  2017 TECHSHOW chair, Adriana Linares, is an avowed and immensely supportive proponent of the track and is working with her Board to develop the track.  Input from the Roundtable will be very important to getting this organized.

Besides the ABA TECHSHOW Academic track, there have been two other important developments in the month of July.  The first was a discussion that occurred in early July at the SubTech 2016 Unconference, hosted by the University of Richmond Law School (and thanks to Marc Lauritsen for organizing and Roger Skalbeck (and Dean Wendy Perdue) for hosting) the event for connecting law schools that have engaged in the substantive teaching of technology. During this unconference,   John Mayer, law tech dude extraordinaire, (where would we be without John!) sua sponte created a website to serve as a connector for those wanting to teach technology.  Among other services, the website will collect syllabi from anyone who wants to contribute.  If you are on the Teknoids listserv you’ve probably seen the conversation.

The second terrific development occurred during the AALL Annual meeting last week.  Elizabeth Farrell Clifford (who attended SubTech 2016) organized a flash meeting to discuss teaching technology.  This amazing event had about 30 people in attendance with another 15 or so expressing regret to Elizabeth they could not attend.  The meeting had each of the attendees discussing what they taught or planned to teach and clearly demonstrated law schools are recognizing the need to formally move in this direction.  The attendees unanimously supported the idea of creating an AALL Caucus focusing on teaching technology.  Elizabeth and I are moving forward on this proposal.

The half day conference Agenda is as follows:
8:30 a.m. – Registration
9:00 – 10:15 – Moderated Panel Discussion
Moderator – Dean Ellen Suni – University of Missouri – Kansas City School of Law
Panelists:
Professor Oliver Goodenough – Vermont Law School
Professor Alice Armitage – UC Hastings College of the Law
Professor Dan Linna – Michigan State University School of Law
Professor Jeff Ward – Duke Law
Assistant Dean Bobby Ahdieh – Emory University School of Law School
10:15 – 10:30 Break
10:30 – 12 noon – Discussion Forum
The panel will lead a discussion with members of the audience to move toward consensus regarding the next steps for advancing teaching technology in law school and examining how the ABA TECHSHOW can be part of these efforts going forward.

12 noon – boxed lunch and further discussion
(Generously provided by Thomson Reuters)
 
Please feel free to email me (the man behind the curtain) with comments, thoughts, ideas or any suggestions.  There will most likely be a discussion about the Academic Track and this topic generally at the Association of American Law Schools (AALS) at the January, 2017 meeting in San Francisco.

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7/24/16

Law Firm Partners: If It Ain't Broke...

It is rational for someone who has been wildly successful doing something a certain way to keep doing it that way, especially when the odds appear favorable that they will continue to be successful. Most people don’t exit their comfort zone without a compelling reason. This is doubly true of many high-status experts.

Any story about lack of change in the legal market premised solely on lawyers being stupid has limited explanatory power. I’m partial to a more nuanced narrative where the incentives to change are not evenly distributed. More specifically, those with the most power, by definition, encounter the least pressure to embrace innovation.

continuation, this post will focus on law firm partners resisting change.


A Primer On The Legal Economic Landscape

For context. Legal Business just released the Global 100 under the banner Hitting the Wall. The headline for this year’s Am Law 100 was Signs of a Slowdown. The Altman Weil 2016 Law Firms in Transition survey opens with the observation that “most firms are choosing to proceed with lawyerly caution in the midst of a market that is being reinvented around them.” The key findings from the survey are:
  • Unreliable demand
  • Surplus of lawyers
  • Inefficient delivery of legal services
  • Proactivity is a competitive advantage
  • Resistance to change
Likewise, the Peer Monitor/Georgetown 2016 Report on the State of the Legal Market states, “U.S. law firms continued to experience very sluggish growth in demand, coupled with negative growth in productivity, and continuing downward pressure on rates and realization.” The Report warns of BigLaw’s Kodak moment:
This story of the demise of Kodak is an important cautionary tale for law firms in the current market environment. Since 2008, the market for law firm services has changed in significant and permanent ways….
The reactions of the law firm market to the rapidly changing environment in which firms operate parallels in some respects the story of Kodak. The current challenge in the legal market is not that firms are unaware of the threat posed to their current business model by the dramatic shift in the demands and expectations of their clients. Instead, as in the case of Kodak, the challenge is that firms are choosing not to act in response to the threat, even though they are fully aware of its ramifications.
There are many reasons that may lead firms to make this choice, but one of the primary ones is surely that, like Kodak, many law firm partners believe they have an economic model that has served them very well over the years and that continues to produce good results today. They are consequently reluctant to adopt any changes that could put that traditional business model at risk. While that might appear to be a viable short-term strategy, the danger is – again like Kodak – that this effort to preserve their past and current success could result in law firms failing to respond to trends that over time could well challenge their traditional market positions.
“Over time.” That’s the thing. There was no single ‘moment’ that caused Kodak's demised. There was a long series of choices that resulted in Kodak becoming less competitive in the market it once dominated. The market for photography did not collapse. Especially accounting for smart phones and social media, photography is far healthier than it has ever been. But the economics of the market changed, and the largest incumbent did not (enough).

Certainly, advances in technology—from film to digital—underpinned the economic recalibration. But technology was not Kodak’s problem. The Report does a nice job laying out the history in which Kodak itself was responsible for much of the innovation that would undermine its market dominance. Rather, as explained in a new post up at the Harvard Business Review entitled “Kodak’s Downfall Wasn’t About Technology”:
The right lessons from Kodak are subtle. Companies often see the disruptive forces affecting their industry. They frequently divert sufficient resources to participate in emerging markets. Their failure is usually an inability to truly embrace the new business models the disruptive change opens up. Kodak created a digital camera, invested in the technology, and even understood that photos would be shared online. Where they failed was in realizing that online photo sharing was the new business, not just a way to expand the printing business.
The reason we still talk about the “Kodak moment” is that it made for really good copy. Headline writers jumped at the opportunity to use the company’s tagline when describing the rare cataclysm of a premier company filing for bankruptcy. But it was a moment of reckoning that was decades in the making. And the bell was tolling for a once prestigious participant, not the industry itself.

As an industry, legal is doing relatively well. Contrary to the headlines, demand is not flat. Rather, demand for law firm services is flat. According to HBR, the ACC, and LEI, the surplus is being captured by clients and, to a lesser extent (for now), their alternative service providers.

For law firms as a group, the story is one of stagnation, not collapse. There is, however, more volatility at the individual law firm level with bankruptcies and mergers. Unsurprisingly, the volatility is greatest at the individual lawyer and staff level. We’ve experienced significant de-equalizations and layoffs. This year, nearing a decade since the start of the Great Recession, the Am Law 100 again reduced the number of equity partners.

Pretty bleak picture, right? Not really. Not for everyone.

We're Good
Anyone who is interested in this topic should read Bruce MacEwan’s Growth is Dead and Bruce in general. Among the many reasons to read Bruce is the compelling way he explains that the top lawyers at the top firms have never really experienced a bad year. In the almost three decades (1987-2016) of the Am Law 100, revenues have increased from $7 billion to $83 billion, a compound annual growth rate of 8.9%. Over that time, profits per partner have quintupled (5x) from $324K to $1.6M (2.3x if we adjust for inflation).

And that’s the average firm and the average partner. Averages are misleading. Many firms substantially outperform the average. While at most firms, including the average and below average, the compensation spreads among equity partners keep growing. That is, the people with the most power within law firms have been doing quite well for a long time and there’s no sign of the good times ending anytime soon, for them. Soon matters, of course, because most of them are closer to the end of their career than the beginning. Time horizons affect perspective.

The top partners at the top firms probably figure that clients hire them for their deep expertise. They probably figure clients will continue to do so. Many of them are probably right. And those that are right will continue to have the most power in traditional firms because they will be the ones bringing in the business. The participants with the most interest in shifting the business model—and it is more about business model than tech, which is just one piece—will either not be enfranchised to begin with (e.g., associates and allied professionals with little to zero chance to make partner) or will find themselves disenfranchised (e.g., de-equitization) once the new normal intrudes on their professional tranquility.

Ken Grady recently had some tweets that did a wonderful job summing up partner resistance to change:




Why take risks when you can be rich without doing so? Why try to disrupt yourself when the market is not? If you’ve been extremely successful for 30 years and that is likely to continue for the next 10—when you’ll retire—why change course?

And the explanation need not be avarice. Attention is a finite resource. The most successful lawyers are stunningly busy. They are busy doing important work for key clients. If they are not feeling pressure from those clients (“client’s aren’t asking for it” is the subject for next post) and if market machinations are not affecting their wallets, how much attention are they really going to devote to what appear to be other people's problems. How much effort are they going to put into real change, which requires real resources (attention, time, money).

Managing partners are paying rapt attention. Isn’t it their role to force their partners to also come to terms with the shifting market? Call a partners’ meeting. Hand out Bruce’s book and George Beaton’s Remaking Law Firms (both highly recommended). Restructure compensation to tie it more to firm than individual performance. Invest in infrastructure. AFAs. Legal project management. Technology. Alternative staffing models. Experiment….

That’s all well and good until a few key rainmakers decamp for other firms where they are guaranteed to make more money. Those people who don't usually pay attention because they don’t have to will still notice if the firm pursues change initiatives that affect their time, workflow, or bank account. On the latter point, supported by strong historical evidence, these successful, high-status professionals consider substantial annual growth in their compensation to lie somewhere between a natural law and a birthright.

Even now, their belief in their ever-escalating economic value seems well founded. The lateral market is nuts93.7% of firms are pursuing growth via the zero-sum game of acquiring laterals. Unhappy rainmakers are coveted free agents subject to bidding wars. This makes the BigLaw business model—where your most valuable assets can walk out the door—inherently fragile. Even the largest law firms are susceptible to animal spirits and the cascade effect of rainmaker defections.

The prime directive of the managing partner is to keep the firm solvent and intact. That limits their leverage to force through changes that key partners resist. Successful partners need someone to handle the administrative side of the business. But, as autonomy-seeking missiles, they hate to be managed. Martin Bragg captured this well in exchange we had after my first post on the topic (reprinted with permission):
I am of the view that the real power lies (in most firms) with the king makers rather than the kings which in turn means that (most firms) are herded rather than led. The irony of this is that most lawyers in my experience hate anything to do with firm management but are unwilling to let others do it for them!
As a Martin alludes to, the foregoing is a bit of a caricature. My posts are about "most firms" and are already too long without nuance. There are some managing partners who are empowered to take a “let’em leave” attitude to partner defections. There are large firms with interesting, innovative approaches to business models, R&D, and productizing services. It’s not that change isn’t happening. It just doesn’t seem to be happening enough.

I’ll leave the final word to Bruce, who had a great post reacting to the Global 100:
In Law Land the cynical smart money is almost always on stasis; nothing will really change because any talk otherwise will spook the partners. If nothing else, this view has years and years of solid predictive success behind it.
But I wonder.
Rates of growth and decline—I emphasize decline because it is largely a story of decline in the only currency that matters, purchasing power—in overall gross revenue, RPL, PPL, and even PEP are to almost all of the 120,000+ lawyers toiling in these firms pretty abstract and denatured concepts.
One number, however, is as hard core and riveting as can be: One’s own personal compensation. This is where the abstracted figures have an impact people recognize and understand.
We can all have a debate in the parlor about whether too many lawyers with room temperature C+/B- talent were too highly paid by too many firms for too long, but as the reality of these numbers, “the New Normal” as far as the eye can see, and heaven only knows what other exogenous shocks intrude on our world, begin to sink in, real take-home pay is going to fall, and barring “something radical,” continue to fall for the great majority of these 120,000+ souls. (You guys gathered under the Wachtell banner, and few others of similar caliber, are excused—but then I stipulated I’m talking about C+/B- talent, so you knew that already.)
Upton Sinclair (1878—1968) was among many other things , author of the 1906 classic The Jungle, exposing malfeasance in the US meat packing industry and contributing to momentum behind passage of the Pure Food and Drug Act. He also gets credit for this barbed quip:
It is difficult to get a man to understand something, when his salary depends upon his not understanding it.
For quite some time now—coming up upon a decade—for partners in highly successful firms to “understand” that the good old days aren’t about to return would have entailed their understanding that the ever-upward trajectory of their compensation could be imperiled. No wonder the notion of change, much less “something radical,” spooked them. Self-interest required no less.

What if that is something that might be about to change?

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D. Casey Flaherty is a consultant who worked as both outside and inside counsel and serves on the advisory board of Nextlaw Labs. He is the primary author of Unless You Ask: A Guide for Law Departments to Get More from External Relationships, written and published in partnership with the ACC Legal Operations Section. Find more of his writing here. Connect with Casey on Twitter and LinkedIn. Or email casey@procertas.com. 

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