Legal Industry Evolution: Back To Business

by | Jul 28, 2014

Legal Industry Evolution Back-To-Business

Note: This post was originally published on Law360; follow author Mike Lipps on Twitter:  @LexisMike

It’s common to believe that resources are needed to nurture creative thinking to develop new opportunities. It’s the opposite that’s true, however counterintuitive: the limitation of resources spawns creative thinking and uncovers opportunities.

There’s another dynamic that inspires creative thinking. It is when it is out of necessity, as when there is a change in customer behavior or the market shifts. Markets shift all the time because that’s the nature of competition and innovation in business. These dynamics are playing out in the legal profession today: corporate legal spending has tightened, which means there’s less work overall while more of that work is being consolidated with fewer outside law firms.

The consequences are rendered in the form of experimental pricing models, process and technologies. To say the legal profession is evolving is an understatement. The economics that began in 2008 combined with the explosion of modern technology and a new generation of attorneys is clearly changing the industry. Consider the following:

1. Economics. The office of general counsel has never faced cost-pressures from the C-Suite that it is experiencing today, even as their influence is rising. Strategic business partners are accountable for the efficient stewardship of finite budgets that accomplish corporate objectives.

2. Technology. We are beginning to see a generation of attorneys who have never experienced a world without the web, smart phones, electronic research libraries or e-discovery. This concept extends to clients because just as in the case of the former, it changes the common expectation of both a work environment and a service provider.

3. Competition. Routine legal services are being provided through increasingly alternative means which focuses the existing competition on a smaller slice of a pie, all while the overall pie itself is shrinking.

As a consequence, today’s lawyers need to be more than great legal practitioners. They need to be creative business leaders to navigate a tricky, but still profitable landscape.

A New Reality for Law Firms

“Dewey collapsed under the weight of a toxic combination of high leverage, lavish financial guarantees to many partners and faltering revenue,” wrote New York Times reporter James B. Stewart in an article titled, Dewey’s Fall Underscores Law Firms’ New Reality.

“But the firm’s messy decline lays bare the harsh realities of today’s law practice, and shatters the perception, still held by many members of the bar, that however transformed in recent decades by the realities of the market, law is at heart still a guild, a brotherhood (and increasingly a sisterhood) — in short, a profession more than a business.”

In other words, Dewey collapse because the firm wasn’t run like a business; perhaps it wasn’t a business.

The distinction between a profession and a business is profound. No education, or bar exam, or higher ethical standards are prerequisite for starting a business. Obviously, the same cannot be said of an attorney at law — and yet despite the high achievement and talent of so many that pursue the noble profession of law, we collectively forget, or perhaps overlook, the fundamentals of business.

“We do not treat our businesses in a business-like fashion,” wrote Bruce MacEwen of Adam Smith Esq. LLC, which studies law firm economics. Yet, law firms are businesses — and require the same mix between the art of leadership, and the science of management. The gut feelings that influenced service offerings, client choices and competition are giving way to data-driven decision-making. The new reality of the legal profession is a return to the basics of business.

Corporate Counsel at the Center of Legal Gravity

Last fall, the LexisNexis CounselLink team released the first-ever Enterprise Legal Management Trends Report, which was based on some $10 billion in legal invoices. It’s useful to examine these trends since corporate counsel, as law firm clientele, is the center of gravity in the legal industry.

The overarching finding is that smaller rivals are taking market share from the largest law firms. In this context, these smaller rivals are not small — these are super-regional firms with between 201 and 750 attorneys, what we’ve called “large enough.” These firms are large enough to serve the needs of a global corporation at a better value. And as they grow, they need to be sure they don’t make the same mistakes as the firms from which they’ve taken market share.

Our research suggests there are two underlying drivers for the shift in the market share. These center on a) corporate legal departments are increasingly consolidating their legal work with the “large enough” and b) “large enough” firms tend to provide the same value at lower cost and are more inclined to experiment, for example, with alternative fee arrangements.

The latter is especially worth underscoring because it hints at the underlying economic cause. Businesses have two requirements of any department — continuously strive to reduce or at least maintain costs and provide budget predictability. Experiments, especially in alternative fees, provide precisely that predictability. And now that businesses have seen that legal costs can be maintained — that the mitigation of risk doesn’t require a blank check — it is never going to return again to merely accepting legal costs as the price of doing business.

Legal Decisions as Business Decisions

In many ways, corporate counsel is being empowered, if not forced, to comply with cost-containment requirements through data. Today’s corporate counsel has a budget and is accountable to that budget. Benchmarking data provides GCs with more aggregate information on what legal matters cost, how long these matters tend to last and, with increasing success, the probability of a favorable outcome on a given matter. In other words, legal decisions are rapidly becoming less about hunches in favor of data-driven decisions.

This trend is transforming the role of inside counsel from corporate cop and compliance chief, to a position of strategic business partner and the trend is debuting in other studies. In December, Georgetown University Law Center and the Association of Corporate Counsel published a study that found both company directors and general counsel expect the value of the general counsel’s strategic input into business decisions to increase in the future.

Seventy-one percent of general counsel and 37 percent of directors reported this responsibility to become even more valuable over the next five to 10 years, according to the report titled, Skills for the 21st Century General Counsel.

Four Ways Law Firms are Adopting 

The net effect for law firms is what BTI Consulting calls a “predator’s paradise.” The business strategy of law firms today focuses on retaining existing clients first, and secondly, on taking market share from rivals. The savviest of law firms are responding by implementing measures that while relatively new to the legal profession, are sound and seasoned tactics in the larger business community:

  • Reliance on the nonlawyer. While business development and IT staff are good examples of essential specialists without a law degree, it’s the rise of the “legal project management” and pricing specialists that are most noteworthy. An ALM study found that the title “pricing specialist,” introduced as a new role in roughly half of law firms just about two years ago, is now “here for good.” Given the plethora of pricing data their corporate counsel clients now bring to the negotiation table, the role is increasingly essential. We’d argue too, that especially in law firms, IT management staff will grow in esteem as law firms struggle to find ways to use technology to differentiate their offerings and gain a competitive advantage.
  • Outsourcing. GE’s Jack Welch cherished the idea that businesses should focus their efforts in what they do best and outsource the rest. Increasingly, law firms are outsourcing routine, or “assembly line” tasks, to lower costs and focus their revenue-generating attorneys on providing higher-value legal services. Meanwhile other firms are focusing nearly exclusively on commoditized legal work and developing highly efficient — and profitable — processes for completing the work.
  • Shift in staffing and compensation models. Law firm staff allocation is being completely reevaluated. A study by Lawyer Metrics shows that partners at law firms in the National Law Journal’s 250 now outnumber associates, even while they’ve added non-equity partners. In our view, this is largely the result of cost-cutting exercises following the recession in 2008 and today some are finding they are under-levered while still struggling to determine the appropriate staffing level. Firms ought to staff, not according to shape, but according to the unique fit required by their business model — which most certainly influences compensation — and hopefully provides law firms the option of rewarding talent based on goals that better align with the viability of the firm.
  • Technology challenges and opportunities. By virtue of the ever-increasing reliance on technology, it is becoming simultaneously a competitive advantage and a distraction in the legal industry. From concerns over “bring your own device,” or BYOD, to questions of the cloud, to the clear advantages of mobility, big data and predictive analytics, technology is omnipresent in the business decisions of law firms. The business of law, and legal technology, are inextricably linked and the path forward is paved by finding ways for technology to a) reduce costs b) perform more efficiently and c) manage data and legal content for a competitive edge.

A decade ago, these trends would have seemed unimaginable to the relationship-driven law firm. Clients were stable, new legal work was abundant and the model and structure of a law firm was unbendable. Today, we as an industry are facing a very different dynamic.

What appears to the casual observer as constraints and limitations are in reality presenting the opportunity to develop new and creative ways to approach the business of law. In many ways, this is what the fundamentals of businesses are all about: finding creative ways to solve business problems for a fee. And law firms, after all, are businesses.

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