Change

I shake my head whenever I read articles like this that suggest that the legal services profession will continue unchanged. It feels like so much "whistling past the graveyard." The reality is that we are in the early stages of a seismic shift in the traditional cost and delivery model for legal services. I see it every day in my interactions with the law firms that support us and in my discussions with peers at other companies. This change is the result of three major factors: the current economic downturn, the rise of alternative legal service providers and the lifestyle choices of the newest members of our profession.

The global recession is causing all commercial enterprises to scrutinize their cost structures. As part of this, in-house legal departments are expecting their legal service providers to provide similar efficiencies. Recently, we asked one of our partners, Howrey, to represent us in some corporate litigation. As part of this engagement, we had an initial meeting with two partners from the firm, Robert Gooding and David Lisi, to discuss case strategy and also the anticipated cost of defense. To my surprise, Bob and his partner proactively offered a variety of cost structures (including flat fee and quarterly fee caps) as alternatives to the billable hour. They were also happy to work with the legal staffing vendor we use for litigation support and offered other suggestions for lowering our litigation costs. I can tell you that this is a conversation that would never have occurred with any firm five years ago. At least, not without significant prodding on our part.

The availability of alternative legal service providers in lower cost geographies is also increasing competition in the legal services market. In part, this is due to the almost frictionless ability to transfer legal work around the world via the Internet. The result is that legal service providers in lower cost locations are able to use price to more effectively compete for work. Over the last few years, we've seen this in the way important, but more routine and repeatable work, is being handled in lower cost areas in the U.S. and other countries. As professional licensing regimes are harmonized, this trend will continue and, as these lower cost providers gain greater experience and training, they will move "up the stack" providing increasingly more valuable and higher margin services.

The career perspective of the newest generation of attorneys is an additional factor in driving these changes. They desire a different lifestyle than what was offered in the past. I know this from first hand experience. As I'm writing this, I'm sitting in a conference room with a number of our law school summer interns. They work differently than I did when I was in law school - collaboratively, in communal spaces, streaming music, while interacting with peers via Twitter, Facebook and other social networking sites. To many of them, flexibility, mobility, a collaborative environment and interesting work are paramount - and not always what law firms can currently offer.

Interestingly, I had lunch yesterday with the managing partner of one of the larger firms that support our company. (I'd disclose the name, but I feel that much of what we discussed was in confidence.) It's clear that he understands where our profession is heading. His firm is automating routine work like the creation of incorporation documents; increasing it's use of cost accountants to better understand his firm's cost structure enabling it to more effectively price work; and encouraging clients to use flat fee and other alternative billing models. His firm is also actively exploring ways in which they can better meet the career desires of their newest generation of attorneys. Some of the things that are being considered include abandonment of the traditional partnership track structure (based in part on graduating class year); training partners to be more effective managers; and creating a career path for those attorneys who are more interested in lifestyle balance than a corner office. At the end of our discussion, he expressed certainty about the changes to come, but with some wistfulness for the past.

Change is always difficult. But, all of us in the legal profession - whether in-house or firm - need to embrace it. For as Benjamin Franklin once said: "When you're finished changing, you're finished.

For those of you that are interested in being part of the conversation, here's a good place to begin.

Comments:

The conversation can't happen just among clients, unfortunately- it needs to happen at the law school level as well. This very good article points out that law students have so much debt that they pretty much actively seek out the high-profit models aided and abetted by the billable hour. (http://www.law21.ca/2009/06/04/the-legacy-of-work-life-balance/)

Relatedly, you probably know this already, but your firm is not the only firm considering significant changes in compensation and promotion schemes. The firm I summered at last year was making substantial plans in that direction that were to have gone into effect this year. Not clear if they still will, given all the other uncertainty in hiring and recruiting right now, but they had begun to meet with associates and even summer associates about it last summer. So this is coming sooner rather than later.

The tie between the two: I was shocked at how negatively my summer classmates reacted to this discussion by the firm. I thought it was great- made the firm seem forward thinking, realistic, etc. But most of them were really, seriously concerned that any change might make it harder for them to pay off their loans. (And of course on their behalf the firm was worried that it would negatively impact recruiting.) Don't discount this as a factor that will help constrain the pace of change.

Posted by Luis Villa on June 18, 2009 at 10:12 AM PDT #

Mike,

I, and others (http://tinyurl.com/56g8oq), agree we are in the midst of a seismic shift in the cost and delivery model of legal services.

Any thoughts on the role that small firms and solos may play in commercial enterprises, perhaps niche areas that might be better suited to this more flexible group?

How involved should legal teams be in an enterprise's online presence management (website, blogs, social media like FB, Twitter, Linkedin, etc.), any room here for smaller firms?

Tim

Posted by Tim Kennedy on June 19, 2009 at 06:57 AM PDT #

The article you reference says:

"Law firm respondents of all sizes identified four areas that will undergo permanent change: an increase in price competition, a longer partnership track, more use of contract lawyers, and more nonhourly billing arrangements with clients. (Respondents from law firms of more than 500 lawyers differed from other survey takers on the leverage issue, with 40 percent of them viewing the change as permanent.)...Respondents across the board identified an increase in pricing competition as a permanent change. Still, no one is chopping rates in response to rate pressures, the survey reports"

It is clear firms of all sizes see the areas of change. The question is whether or not they understand that the changes they are making now will be permanent or not.

The firms who see the change as permanent are going to be at an advantage, because the ones who think life will return to the status quo are going to find a lot of push back from clients.

Posted by Michelle Bloch on June 23, 2009 at 02:53 AM PDT #

Thanks for for the informative post Mike.
Given all the disadvantages associated with billing by the hour, I am very interested in finding out what are some of the alternatives that a law firm may adopt?

And how effective are these alternatives for managing staff and for clients comparing rates?

Thanks.

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I am wondering if you took the alternative fee structure or went with the billable hour. It seems like there is a lot of talk about the alternative but for whatever reasons some business are not comfortable with it.

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I think you are spot on. Law firms, like most bureaucracies, tend to lag behind the will of the public. It is no surprise that some firms are already ahead of the curve while many wish to pretend things will stay the same. Things will never stay the same! You have to adapt.

Thanks for the content.

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With the recent change at Sun's senior executives after Oracle's takeover (including Jonathan Schwartz leaving Sun), I hope you are well Mike.

I don't know if you will be staying at Sun or leaving as well, I just want to publicly thank you for your time and effort in sharing your legal and other insights over the months/years you have this blog.

Your reader from day one,
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