A World Without Lines Means Lawyers Have To Move Beyond Just Law

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The following is authored by Patrick Lamb, founding partner of ElevateNext Law, LLP and vice president, Elevate Services, Inc. for Ark Group’s publication Future Law Firm Business Models. Patrick will also be speaking at Ark’s 2nd Annual Law Firm Change Management Summit: The Legal Innovators Dilemma, taking place June 25th in Chicago.

When I started practicing law, excellent lawyers were identified by their ability to know or research “the law” and apply “the law” to facts so clients could make decisions. Lawyers of all ages spent a lot of time reading cases to understand the law and then writing briefs or memorandum to argue to judges how he or she should apply the law. White papers were popular and 50-state surveys of a legal nicety were in vogue. The practice of law was all about “the law”.

Then the world began shifting. We moved from simply learning and knowing the law, to applying it for clients. This era was the heyday of two-handed lawyers, who advised clients in classic “on one hand…. and on the other…” fashion.

These changes continued. As they say, “shift happens”, and we have shifted through eras at a faster and still faster rate. These new eras have included the one where excellence was knowing the business and becoming a trusted advisor, to the one where budgeting and price predictability was the critical attribute, and, to a lesser degree, to the efficiency era.

Each era was an add-on to prior areas – lawyers were evolving, but always inside the legal vertical. The pace of this change was sufficiently fast that some debate whether law is going through evolution or revolution. As if the characterization matters. Change, be it evolution or revolution, is happening at an accelerating pace. And, as with all changes, those who adapt first have the best chance of coming out a winner, while those slow to adapt have the best chance of finding their way to history’s scrap heap.1 Thus, it is important to understand the direction of change. No one can be 100 percent correct in predicting change with precision, but understanding change from a directional standpoint helps decision-makers orient their organizations in the right direction.

Where we are now

The role of general counsel or chief legal officer is complex. According to Altman Weil’s 2018 Chief Legal Officer Survey, CLOs spend 37 percent of their time advising their organizations’ executives, 22 percent practicing law, 20 percent on other corporate responsibilities – and just 18 percent of their time managing the law department.2 Despite the relatively little time spent managing the law department, CLOs admit there is a growing expectation from their CEOs that the law department operates like other business units in the company.

This isn’t new, just more prominent than ever before. “More with less” has become a mantra for nearly all corporate law departments, and they have found many ways to serve this mantra. Since approximately 2010, law departments have been growing in size to cover an increased overall workload. Law firms were not an option for this growing work demand: law firms were – and remain – too expensive. And many law departments sought assistance in taming the law firm beast. Almost 40 percent of all law departments employ a legal operations professional, up six points in just two years.

It is apparent that even as demand grows, law departments are attempting to address this demand with an approach other than further use of outside counsel. Most law departments responded by increasing their headcount and bringing work inside that previously was handled by their law firms. We are in an era where law departments aggressively compete with their own law firms.

There is a clear, unambiguous message in such data and trends. Law firms, however, appear not to have gotten the memo. Though the US inflation rate in 2018 is less than 2 percent, billing rate growth is running at almost 4.5 percent, a return to halcyon days of more than a decade ago. Firms continue to rely on steep billing rate increases to generate profits and pay for exorbitant increases to associate salaries (now $190,000 for many new associates). General counsel know they can hire highly experienced in-house attorneys for that amount. Still, firms keep doing what they have always done.

The legal world, however, is no longer about just law firms. Since the 1990s, law companies have been carving out a piece of the legal pie, now capturing over $8 billion in legal revenue. That amount is growing at an incredible pace as more law departments learn the value that law companies and alternative legal service providers can deliver.

Where do we go from here?

Herbert Stein, an esteemed economist and former chair of the Counsel of Economic Advisors, is the creator of Stein’s Law, which applies to the legal market:

If something cannot go on forever, it will stop.

The current trends cannot sustain themselves, leaving only the questions of when they will stop and whether they will end through a slow and natural transition to a new era or because a cataclysmic event forces change. The experience of the Great Reset in 2008 should be fresh enough in many minds to lead people to believe change will be driven by an event rather than be something that “just happens”. Bill Gates famously said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in ten. Don’t let yourself be lulled into inaction.”

If we look closely, we can now see the direction of looming change. We can see enough that we know the change will likely be profound. And despite Bill Gates’ viewpoint, we also know that the pace of change, particularly in the business world, is accelerating. Think in exponential terms, not geometric. And because the legal world is so linked to the business world, the pressure for law to keep up will be intense.

Let’s look at several threads and consider whether they weave together:

  1. Law firms continue to increase their cost structures, most recently seen in significant salary increases for their associates;
  2. Law firms have not materially changed their business model, still favoring expensive downtown real estate in major cities, reducing their ability to materially reduce their cost structure;
  3. Client demands are increasing as businesses become larger and more global, with so many regulatory and compliance issues;
  4. Lean, Six Sigma and other process-focused disciplines have become well-entrenched in the business world, while the “we’re special” claims from lawyers seeking to be exempted from such thinking have become party jokes;
  5. In-house counsel are rapidly learning that fundamental components of much of their legal work are best handled in a highly structured, process-led, scalable and repeatable manner, helping law departments fit into the Lean/Six Sigma/process-focused world of their business colleagues;
  1. Chief legal officers are serving more and more as strategic business partners to fellow c-suite executives, changing their roles to essential business executives, which changes the way they look at their own law departments;
  2. Technology continues to evolve in law and, more importantly, outside of law, leading CLOs and others in law departments to embrace the critical role that the right technology can play in achieving the law departments’ missions;
  3. Alternative Legal Service Providers (ALSPs) working in staffing have shown that labor arbitrage works, but only to a degree since it does not reduce demand for services;
  4. Law companies, which take the ALSP model to the next level, have established that the delivery of managed legal services can achieve better, predictable quality at lower cost, and with tech and other features, can reduce demand on law department resources; and
  5. The Big Four accounting firms have cast their eyes on legal. PwC now employs 2,500 attorneys globally. EY employs 2,100, Deloitte 2,000 and KPMG brings up the rear at 1,700.3 To put these numbers in perspective, if these groups within the Big Four were standalone law firms, each would be one of the 30 largest firms in the world. The Big Four have yet to focus on the US market, but such focus seems only a matter of time.

Despite these threads, the most important trend may be about lines. Not ones that you wait in, but the lines on organizational charts. The legal profession has always existed in a binary world of lines that defined the legal vertical. Inside counsel versus outside counsel. Law department versus law firm. Indeed, law department versus business unit. Partner versus associate. Plaintiff’s lawyer versus defense lawyer. Always one or the other, never “all of the above”. These types of lines are not unique in the legal vertical, but they are more pronounced and meaningful than in any other area.

We are now learning these historic lines hinder business success. As a result, there is growing pressure to bypass, erase or otherwise overcome these lines. Some examples demonstrate this:

    1. The problem: A large company selling a commodity product has several thousand contracts per month. It has a large, consistent number of disputes with its customers relating to the products being ordered. These disputes lead to compromises with the customers, resulting in erosion of profit margin in a low margin workstream. The disputes are handled by the law department and consume significant in-house time. The issue is whether legal or operations controls is responsible for fixing the problem.

The solution: Ignore the lines. External consultants review the contracting workflow used by the business, leading to workflow revisions and automation of portions of the process. The new approach would yield process cost savings and less erosion to thin margins. It also reduces demand on the law department, freeing up its resources to address other issues.

    1. The problem: Contract disputes frequently occur because the people who are supposed to perform the contract were not the ones who negotiated it, do not understand it, and are exasperated trying to figure out what to do. So they do what they think is right and end up being sued.4

The solution: Contract review and approval is just left to the lawyers, but is pushed to the relevant operating business unit to approve the commitment being made by that business unit, answering the question “Can you do what you are promising to do?” If there is a technical component to the promise to perform, a technical representative has to affirmatively answer the same question. Someone from Finance has to answer the question regarding the acceptability of price in light of expected margins. And, finally, the law department reviews to determine whether the risk (“Will we accept unlimited consequential damages?”), dispute resolution and other legal provisions are acceptable. This review process should, of course, then inform the contract drafting process. The review by the operating business unit is the most important because a contract that is properly performed hardly ever results in a dispute, which is the cornerstone of review by legal.

The largest example of line erasure is technology. Some talk about “legal technology”, but technology has no unique link to law, and technology applied to problems that involve legal issues is no different than other technology. Take basic contract review technology that reviews documents to find out if the provisions of a contract conform to approved standards. There is nothing legal about this sophisticated word analytics.

The same features could be used to determine if a contract conforms to technical or operating standards. Artificial Intelligence may help companies evaluate data that could have implications for HR conduct that reduces the number of claims. While the tech may be legal in that it reduces claims, it is also HR tech that drives better conduct, helps improve hiring decisions and so on. The categorical adjective applied to tech puts guardrails around tech that it neither needs nor desires.

What does all this mean for the legal vertical?

In short, the trends suggest an existential threat to the vertical aspect of legal. The lines that define the legal vertical are disappearing, right now, in real time, before our eyes. We have learned that despite the engineering precision with which the profession has created these lines, they are blurring and will eventually vanish. We know that in life, very little is black or white. Much of life is lived in shades of gray. And while the lines that define the legal vertical seem precise and straight, the edges of the lines are blurry and the path of the line is not straight. Shades of gray.

The lines were intended to serve a different purpose. People fear crossing lines, of invading another’s territory or having someone else invade our space. These lines create comfort for us, providing an element of certainty we are each in our own space. We see this in the guild mentality of lawyers, especially with regard to non-lawyer ownership of law firms. It doesn’t matter that expanding those who can be involved in the practice of law is good for clients. It is perceived as hurting lawyers and law firms, so the guild must resist.

Mark Cohen, an insightful commentator on the state of the profession, recently wrote:

Service providers tend to be more client-centric than law firms; they do not gauge success by profit-per-partner (PPP) because there are no partners. They have a corporate structure and, unlike law firms whose approach to legal delivery has remained largely static, service providers offer a seat at the management table for technologists and business experts as well as lawyers. This inter-disciplinary approach to legal delivery plus investment in technology and process has enabled them to steadily gain larger market share and to migrate up the complexity chain of outsourced tasks.5

The first line is the key – law companies focus on their clients, law departments. Law firms actually focus on their clients too, but their real clients are the partners who conduct their own individual practices out of law firm space. Law firms are, in fact, akin to hotels for partners. You learn this as an associate when the way you do something for Partner A differs from the way you do the same thing for Partner B.

The other factor favoring law companies is their business model. The chosen business model for law firms creates disincentives for investment, including investment in technology for law departments and their own workflows. Law companies, on the other hand, use a standard business model, where the desire to grow enterprise value leads to significant investment in developing products in collaboration with their law department customers. The residents of the law firm hotels receive every comfort imaginable to justify the exorbitant rent, while law companies are focused relentlessly on reducing the cost of production and investing in tools that increase service velocity and quality.

But, as with many things today, the business world doesn’t particularly care about lawyers’ comfort. It does not care about the lines. When problems arise, there is no time to debate whether it is a legal problem or not. Nor is there value to doing so. The problem simply needs to be solved, effectively, swiftly and as cheaply as possible. This need does not mesh well with “the legal vertical”. It meshes effectively with multi-disciplinary problem solvers, another factor favoring the rise of multi-disciplinary law companies.

Conclusion

Lawyers are now challenged to move beyond just the law – because the problems have moved beyond just the lawyers. There is always, to be sure, an anecdote or two of a firm that “gets it”, and many will take comfort in those anecdotes. The march toward the elimination of the lines on which the legal vertical has been built is inexorable. Too often, however, firms and their partners are focused on fighting today’s fires rather than changing to meet looming demands. And that blind spot will be the undoing of many firms as the market shifts.

References

  1. Of the 30 companies on the Dow Jones Index, 22 were added after I began practicing law in 1982, 11 were added since 2000 and six were added this decade. www.fool.com/investing/2018/07/06/all-30-dow-stocks-ranked- by-tenure-in-the-index.aspx The turnover in the companies comprising the Fortune 500 is also an indicator of how much and how fast change is occurring.
  2. www.altmanweil.com/dir_docs/resource/154F22DC-E519-4CE2-991D- 492A0448C74F_document.pdf
  3. www.bna.com/big-firms-plot-n73014477247/

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