METAMORPHOSIS: Five Forces Transforming the Legal Services Marketplace
Predictions are a mugs game. If youre right, no one remembers, and if youre wrong, no one forgets. But when you look at the incredible upheaval the legal profession has experienced over the past few years, you know that the future of the legal services marketplace will be radically different from what came before. Bearing that in mind, heres a picture of what that marketplace could look like between 2020 and 2025along with a look at five catalysts that are leading us there.
IT’S THE YEAR 2022. Thanks to the growth of online and offshore providers and other sources of competition, clients now have a wide range of alternative legal service providers (ALSP s) from which to choose. ALSP s (the preferred term for “nonlawyers”) draw up and administer most wills, agreements and contracts and handle many other personal and small business transactions. They’ve either taken his work from lawyers altogether or forced lawyers to become much more efficient and affordable if they want to compete in these areas. ALSP s are regulated by the state, which still allows the profession to govern itself but no longer permits it to govern the legal services marketplace as a whole.
Most lawyers provide advocacy (assisting parties in publicly and privately run court systems and online dispute resolution) and counseling (providing advice, analysis and judgment on significant decisions in the life of a personal or corporate client). Large law firms still operate as high-end adjuncts to global clients on multinational matters, using technology to integrate with clients and provide services as efficiently as possible. At the other end of the spectrum are the lawyers competing with ALSP s for consumer work in bulk-services law firms, some owned in whole or in part by large commercial entities.
The resulting selection of service providers is arrayed along twin axes of price and sophistication. For clients who seek the highest level of accuracy and ingenuity and are willing and able to pay for it, lawyers’ services remain superb. However, for both business and consumer clients who can’t or don’t want to spend much and are content with “good enough” results, there are now plenty of cheap-and cheerful ALSP s available to handle their matters. This makes “access to justice” a reality for more working-and middle-class people than ever before.
The price of legal services varies widely, partly because competition has deepened the market and partly because lawyers’ remaining clients have long since rejected lawyer-driven pricing. Fixed-fee pricing is used in the majority of legal services transactions. Accordingly, cost control and internal efficiency are the keys to lawyer profitability; most successful lawyers are trained in project management. Other common pricing models include a monthly retainer that covers all but the most exceptional services and an hourly rate for assignments so unique as to defy pre-costing.
The impact of globalization and the Internet is ubiquitous in the legal services marketplace. Offshore lawyers still provide some cut-rate services for Western clients, but the gradual deregulation of India’s legal profession has given rise to India-based law firms that compete with U.S.- and U.K.-based firms for business—a trend that’s spreading to other non-Western countries, too. The sophistication of automated legal products and services is hard to overstate. Countless clients receive legal assistance without once interacting directly with a lawyer—corporate compliance, for instance, is the growing domain of lawyer-designed online courses and checklists.
As part of all of this, law firms have fewer “associates,” as the term used to be understood, since many of the tasks that associates once did have been outsourced or automated. Most law firm lawyers are equity partners, and admission to partnership occurs earlier in a lawyer’s career. Why? For one thing, new law graduates are older and more experienced in business and practical skills than in the past; 20-something law graduates are now rare. But also, firms seldom recruit a lawyer unless they’ve already decided that he or she is partner material.
Here are the overarching themes of this scenario:
■ The loss of control that lawyers have traditionally held over legal services delivery
■ The competitive impact of new providers and better technology
■ The overdue arrival of business sensibility in law firm management How will these changes come about? The process is already under way.
Catalysts Leading the Transformation
Five catalysts already present or emerging today are pushing the profession forward in new directions and might well result in the picture just painted. Here they are, in ascending order of importance.
5. New Lawyer Training The combined effects of the recession, client pressures and low-cost alternatives for handling basic work will see larger firms hire fewer new lawyers. Since large firms provide a great deal of new lawyer training, and since most law schools don’t instruct students in hands-on lawyering skills, a new lawyer competence problem will quickly become apparent, bringing the simmering issue of lawyer training to a rapid boil.
It’s well-known that few law schools make a priority of clarifying students’ expectations of a legal career or otherwise preparing them for the day-today aspects of professional practice. In fairness to the schools, that’s not what they do: They grant law degrees. They have no obligation to address the bar’s training concerns apart from educating students in the substantives of the law itself. If lawyers’ governing bodies have decided the resulting degrees are the default educational qualification for a legal career, that’s the profession’s problem—a problem that will shortly demand a solution.
To address the training gap, the profession will have to rethink the entire lawyer preparation process—and it seems very likely that the profession will assume much greater control over the process, too.
There are various ways in which this could happen. The less radical alternative is already taking shape, with a few firms introducing apprenticeship programs, similar to Canadian articling years, designed to provide their new lawyers with enough practical skills and training to shorten their learning curves and accelerate their development into productive practitioners. The more radical solutions are difficult to imagine today: law schools wholly owned and operated by law firms or corporations; bar leaders sitting on university boards of governors and directing law schools’ curriculum choices; schools coordinating their faculty choices with lawyers’ governing bodies. Unlikely, but far from impossible.
4. Regulatory Revisions The most high-profile example of regulatory change right now is the 2007 Legal Services Act (LSA ) in the United Kingdom, which has authorized non-lawyer investment in law firms by mid-2011. Smaller consumer-focused firms in the U.K. could be swept away or bought up by large consumer-focused businesses. Corporate law firms could float shares on the stock market or invite private-equity investment, putting the proceeds into talent, technology, marketing or infrastructure to improve their competitive position. Either way, starting in 2011, management of legal services delivery in the U.K. will become the partial domain of the corporate sector, which has a far more entrepreneurial view of market expansion and business development than most lawyers do.
While regulatory reform appears unlikely to follow this course in North America, don’t count out the potential impact of trans-Atlantic mergers. Should a global firm with strong bases in the U.K. and the United States take advantage of alternative business structures under the LSA , current regulatory restrictions on non-lawyer law firm ownership in American jurisdictions could be challenged. At that point, all bets would be off.
But even if regulatory reform doesn’t directly trigger change, a demographic tsunami currently heading toward many Western nations could accomplish the same end. The boomer generation’s exit from working life has perhaps been delayed by high levels of debt and retirement-savings losses from the financial crisis. But it’s coming nonetheless, and its impact on the post-war legal profession that boomers helped to shape will be profound. The first wave will manifest itself in a relative shortage of lawyers, especially in smaller and rural communities.
Practitioners outside urban areas are significantly older than average and have few if any younger partners to whom the practice could eventually be passed. But based on current trends, not enough young lawyers are willing to move to those communities to replace the aging practitioners who are getting ready to wind down their practices. Faced with the specter of a widespread shortage of legal services in smaller communities, governments might well ask non-lawyer providers to step in to fill certain voids, effectively throwing the door open to entirely new types of competition. Today, lawyers still decide who’s competent to offer legal services, and those who aren’t can be prosecuted for the unauthorized practice of law. Demographic change could accelerate the end of that tradition.
3. Globalization In 2009 three remarkable developments served notice that legal process outsourcing (LPO ) to offshore providers is fast becoming a major catalyst for change in the legal services marketplace. In June, mining giant Rio Tinto announced it would send millions of dollars worth of work annually to Delhi-based LPO company CPA Global. In October came a report that Slaughter & May, one of the U.K.’s most high-end and conservative firms, was preparing to send due diligence and document review work to an overseas LPO provider—one rival firm’s managing partner described it as “a watershed moment for the entire U.K. legal industry.” And in November, reports indicated that Lloyds Banking Group was preparing a bid to purchase CPA Global for $700 million. Indian LPO can’t be dismissed as just “call centers for lawyers.”
The outsourcing to low-cost foreign jurisdictions effectively breaks the near-monopoly that lawyers hold in the North American marketplace, including how they price their services. Generally, law firms tend to exercise a certain genteel restraint among themselves about undercutting each other’s rates so as not to create undue competitive pressures. So when CPA Global told Rio Tinto that it would charge 85 percent less than what Rio’s large Western law firms were asking, previous assumptions about how much legal tasks should cost were exploded. Corporate clients can now use the threat of off-shoring to drive down their law firms’ prices, or even to bypass the firms altogether.
Globalization’s impact doesn’t end there, though, because there’s no reason to believe overseas lawyers will be content to keep taking on due diligence and document review indefinitely. In the wake of the financial crisis and the damage suffered by the Western banking industry, “developing” nations are poised to ratchet up their presence in the world economy. Already, new wealth is increasingly being produced and new deals are being made in the BRIIC countries ( Brazil, Russia, India, Indonesia and China). Eventually, law firms in these countries will start competing at the global level as well. U.K. firms have figured this out faster than North American ones, striking up numerous alliances throughout Southeast Asia. LPO is only the starting point for offshore legal providers.
2. Collaboration Tools Collaboration in the practice of law can be divided into three different streams: lawyer-to-lawyer (L2L), lawyer-to-client (L2C) and client-to-client (C2C). L2L options include shared calendars and documents, wikis, online meetings and webinars. Examples of L2C collaboration include the foregoing as well as extranets, real-time document assembly and tools that increase transparency of the legal work process generally. But C2C collaboration, as identified and described by Richard Susskind in The End of Lawyers?, is the potential game-changer. It has the power to disintermediate lawyers from the legal services delivery process.
Through C2C collaboration, clients can pool their own legal knowledge and resources to form a vast living database that could replace some of what lawyers now sell. Imagine millions of social micro-networks cropping up, each devoted to discussing and helping people deal with a single specific legal issue. Members contribute anecdotes, post documents from their own cases as templates, fuel Q&A sections, and console or encourage fellow members in forums. The end result could be a civilian version of a kind of advanced law firm KM system: a database of known facts, creditable experiences and reasonable extrapolations of what will happen in a typical matter of this type. Pure client-only communities should be only a matter of time.
The future of collaboration doesn’t need to be lawyer-free, however. A lawyer-client collaboration network could tackle matters far beyond the scope of a single deal or transaction. A law firm and corporate client could create a unique online network in which both parties get to know better what everyone does, find the right person to answer key questions, and identify emerging legal and business issues that affect the whole team. This network would essentially be a 24-7 combination of strategic planning session, knowledge management portal, CLE seminar and social event. Such collaboration networks would offer countless possibilities for deeply entrenched integration of inside and outside professional teams—and help redefine the nature of what lawyers provide to clients.
1. Systematization In a business model predicated on the billable hour, inefficiency is profitable. Work is assigned to people higher in the talent and experience chain than required, kept a safe distance away from knowledge management and other work-flow efficiencies, and sold at rates higher than those at which it would otherwise be priced. But that approach is suffering, thanks largely to corporate clients’ demands for lower and more predictable fees and their increasing ability to enforce those demands.
Accordingly, more and more firms are discussing the institution of fixed-fee billing regimes. This will be a challenge for many because, in law firms, internal cost is the driver of external price, whereas in most marketplaces, it’s the other way around. Nonetheless, in future, “price” will be what the market will pay and “cost” will be whatever the firm incurs to deliver its services; profit (or loss) will be the difference between the two. As a result, firms will increasingly have to streamline their costs of production, resulting in much greater systematization of legal services delivery.
From work-flow analysis to project management, from business process outsourcing to just-in-time delivery, systematization has revolutionized enterprise by reducing the cost of manufacture and delivery, generating more profit for the manufacturer and lowering prices for consumers. Similar tools can be applied to many legal tasks to enable more efficient completion of work, too.
In fact, numerous forward-thinking firms are already using systems and processes to automate predictable tasks, retrieve established know-how, and manage case plans and budgets. But as the technology becomes more sophisticated, firms will increasingly be able to streamline more components of the legal work, too. Work can be assigned not to the costliest performer, but to the most efficient performer or system that can produce cost-effective accuracy. “Real cost savings,” as KM and off-shoring expert Ron Friedmann has blogged, “mean changing the process, focusing on how lawyers practice.” Even if some lawyers don’t want to institute these types of systems for fear of what it will do to profits, there’s no doubt that their competitors certainly will and are already doing so. Indeed, it’s the key to much outsourced work, from document review to due diligence.
Lawyers have rarely needed to worry about process or efficiency before, because they could take as long as they liked to do their work and could carry it out in whatever fashion pleased them. That’s coming to an end. How lawyers work is becoming at least as important as the work lawyers do.
About the Author
Jordan Furlong is a partner with Edge International, consulting to law firms on strategic planning and tactical matters, and a senior consultant with Stem Legal, providing media and communications advice to lawyers and legal organizations. Formerly Editor-in-Chief of the Canadian Bar Association’s National magazine, he authors the blog Law21: Dispatches from a Legal Profession on the Brink.