January 2012 | The Changing Practice of Law
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The Three-Dimensional Transformation in the Business of Law

By Edward Poll

There are three basic dimensions to the business model for legal practice that do not change:  marketing (secure new clients and maintain the ones you already have), production (do the legal work as efficiently and effectively as possible), and collection (get paid for your work and keep the firm in operation).  Many factors that affect these fundamental elements are, however, changing rapidly.  There is an over-abundance of lawyers in the profession, creating more competition and price pressure in the marketing arena.  Computer technology is making the production function so rapid and efficient that clients consider legal services as fungible commodities.  And the ongoing price pressure means firms need new sources of cash to grow.   

Every person who works in a law firm of any size – partner or associate, staff or administrator – must understand that the three-dimensional law firm business model has fundamentally changed, forever.  This is nothing unique to the law.  Travel agents … stock brokers … librarians … print journalists … these and many other respected and efficient “middleman” professions are endangered by overstaffing, loss of specialized knowledge as the Internet becomes pervasive, and commodity pricing. The issue in every such profession is the customer’s evaluation of cost versus benefit.  A speculative overview can show how this is transforming the legal profession.

Marketing and Oversupply
An oversupply of lawyers has impacted the marketing function even as it has strained the human resource dynamic.  With aging lawyers working longer, and law schools continuing to crank out 40,000-plus new Juris Doctors every year, something has to give.  De-equitization of “underperforming” older partners and layoffs of other firm members at every level are grudgingly accepted – law firms no longer have any such thing as tenure.  But there are wider implications than this for the future of law firm marketing.

Not long ago, I viewed a video of a brand new auto assembly plant that a global manufacturer has built in a rural area of Brazil.  The plant is a technological marvel of automation and flexibility, and apparently can churn out large numbers of cars using relatively few, non-unionized and modestly paid workers. But these cars are not sold in Brazil – the country built a new port facility adjacent to the plant so the cars can be exported to other countries with richer economies.

That, of course, is the problem with making large amounts of expensive products – what if the home market cannot absorb them?  Today, American law schools are like factories that continue to produce excess “product” – young lawyers.  The result is marketing trends such as these:

  • The “convergence” in which large corporate clients reduce their legal expenses by paring down the hundreds of outside counsel firms that they previously used to a few dozen or less. 
  • The “onshoring” by legal staffing companies that hire lawyers in lower-cost areas in the United States and pay them less compensation for repetitive work, which is provided through a virtual online relationship.
  • The proliferation of “do-it-yourself” websites purporting to offer advice, research and forms in such areas as family law, probate, real estate closing, even filing a patent. 

When the housing bubble burst in this country, it virtually overnight created ghost towns of brand new houses that suddenly no one wanted or could afford.  Quality houses still sell, but almost always at reduced cost.  Marketing legal services faces the same challenge. 

Production and Commoditization
Commoditization has become a major issue inseparable from oversupply.  Today’s firms are frequently expected to provide certain kinds of work with relatively steady volume (such as patent filings or employment litigation) at fixed rates over a certain period of time, turning these matters into the legal equivalent of a commodity.  With commoditized services lawyers focus on specific targets, like settling cases for the lowest legal cost and settlement amount where warranted.  Large corporate law firms and small solo practices are equally affected.

How are firms affected by the impact of commoditization? These are the considerations that define the transformation of the legal production function:

  • Very few matters are seen by corporate clients as bet-the-company issues.  As a result, there are fewer absolutes for what is “best” in terms of firm quality and reputation.
  • Leverage is no longer so powerful an economic tool for firms.  The principle of using associates and paralegals who are paid less to do work that is billed for more has been replaced by clients outsourcing this work, or taking it in-house to do it themselves.
  • To counter this trend, law firms increasingly use technology to control work flow, almost on an assembly line principle.  In a factory, the more equipment is used to make a product, the less labor is required and the lower the price can be.  With a lower price, volume can increase and prices rise.  Law firms will increasingly validate this principle.
  • Cost efficiencies can no longer be had by cutting overhead – whether that means people or infrastructure.  After years of recession, there is not that much left to cut.  The real need is not cost-cutting, it is efficiency.  And that means efficiency in use of human resources which is impacted by merit-based compensation, a smaller partner track, and the end of “up-or-out.” 

It also means using technology as a competitive tool.  This is a trend well advanced in litigation, as e-discovery software can analyze documents required for litigation discovery in a fraction of the time for a fraction of the cost when compared to using lawyers for the task.  Some programs to search electronic files not only find documents with relevant terms at high speed, they extract relevant concepts and deduce patterns that would have eluded lawyers examining paper copies. Inescapably, many lawyers who used to conduct document review will no longer be billable.  Profitability for the firm comes from swiftly analyzing the millions of equivalent paper pages that electronic documents represent.  This is the model for the future production function.

Collections and Liquidity
Law firms cannot continue to do marketing and production using the same tried and true techniques of past generations in the hope that somehow they will produce more revenue for the firm.  The result is inevitable. Collections and thus cash flow will decline in the heightened competition for reduced price services. One response to this dilemma has been the growing momentum for non-lawyers to take an equity interest in law firms, despite Rule 5.4’s prohibition of such an arrangement. 

Earlier in 2011 a nationally known law firm filed suit in several federal courts, contending that state versions of Rule 5.4 are unconstitutional because they allegedly prevent the firm from raising the money it needs to provide legal services – supposedly, violating the Constitution’s due process clause.  Perhaps not coincidentally, by year’s end the American Bar Association’s Ethics Commission recommended that states rules be changed to allow non-lawyers to own up to 25% of law firms so that U.S. firms can compete globally. The proposal did have a restriction, however, that any firm with non-lawyer owners must have “as its sole purpose providing legal services to clients.”

No matter what one thinks of this argument, the real motivation – bringing in outside owners to get more capital for expansion – removes the “membership” provision (having to be a lawyer to be an owner) and makes law firms like every other business. Bye-bye to the Guild.  The truth is that larger law firms are already looking very much like their business clients in the marketing and production functions, while solo and small firms are becoming more isolated in the marketplace.  That can produce desperation, and the kind of conduct that the Rules were made to address.   A colleague recently told me that chiropractic clinics in his large state are increasingly owned by non-doctors, who solicit and treat accident victims and refer their patients to small law firms that don’t question medical issues. On a broader stage, competitive pressures have led the largest national firms to propose to the ABA Commission on Ethics that megafirms need their own national regulatory code on issues like conflicts of interest, liability and lawyer mobility.  What happens to the profession’s ethical infrastructure as such trends advance?

New World, Old Formula
This review of changes in the marketing, production and collection functions undoubtedly raises more questions than it answers. It does seem inescapable that lawyers will have to alter their business practices and cost structures in the new world created by oversupply, commoditization and liquidity shortages. As a consequence, lawyers will need to pay closer attention than ever to the needs and wants of their clients. But this is nothing new.  Law as a profession must be client-centered in order for lawyers to retain the loyalty of their clients.   That requires lawyers and law firms to partner with their clients, and work to reduce client legal costs through efficiencies that bring in more work and revenue and thus maintain overall profitability.  Such a dynamic validates the unbreakable formula that defines all business success:  P = R - E.  Profit equals revenue collected less expenses.  Some things, after all, never change.

ABA TECHSHOW 2012 Law Practice Today on Facebook

About the Author

Ed Poll is a speaker, author and board-approved coach to the legal profession. LawBiz® and Fujitsu are sponsoring Ed's cross-country tour to reach bar associations and law schools. If you want Ed to stop in your community, or if you have questions about this article, contact Ed directly, at edpoll@lawbiz.com or call (800) 837-5880. Also visit his interactive community for lawyers.

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