Division of Labor and Law Firms

by LeClairRyan
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legal_disruptionTwo recent articles/blog posts piqued my interest. The first was written by Pam Woldow of Edge International (link), and the second by Robert Gogel of Integreon (link). Both were insightful, and I would like to both share the insight and add to them. In the interest of full disclosure, my firm, LeClairRyan, maintains a working relationship with Integreon.

Pam Woldow’s article speaks to the use of LPO and LPM as methods of increasing efficiency. Robert Gogel’s provides some historical perspective to the concept of the division of labor, something my readers are very familiar with from previous posts. Both recognize that the new normal will include “new” collaboration.

Historically, the division of labor is nothing new, as pointed out in the Gogel article. Adam Smith, in his venerable Wealth of Nations, described anecdotally how the division of labor concept could be as old as the caveman. The caveman whose dexterity was such that he would make a better bow may have traded such bows for pelts or meat. As his speed in making such bows increased, he would be able to generate more “income” for his family than he could by engaging in the hunt itself.

While the story itself may be apocryphal, it is plainly an example of how simple the concept is. Henry Ford made good use of it by developing the moving assembly line. Move the product, leave the human resources in place, and create experts at specific tasks. I’ve read a lot of articles saying that the legal industry has simply never adopted the concept. This is inaccurate, of course.

Examples of division of labor are common in the legal industry, albeit perhaps less so at the top level. Particularly with repetitive tasks or what I have called portfolio practices (where the type of work is substantially similar and, therefore, easily repeatable), law firms have consistently looked for ways to divide labor appropriately. The difference, as pointed out in Pam Woldow’s article, is that many firms have been loath to perform any true cost analysis or become more efficient, because those costs have always been subject to pass through to the client.

However, the client still reaped a benefit, at least at some levels. As I’ve discussed in the past, my career has taken me through different derivations of firms. I went from a small insurance defense firm (<20 attorneys when I left) to a large, regional firm (400+ attorneys when I left from an office with about 200) to my current firm that is about the same size, but is far more spread out and occupies the business space between the two. I have never been a solo, and I have never worked for an AmLaw top 20. But my experience is that the clients do reap benefits from the division of labor that does exist.

To take a page from Adam Smith, imagine a mid-sized firm that is trying to maximize profit but does not have the ability to increase rates by 7.5% every year or continually hire more associates to support the rear ranks. One of the ways to do it is reduce overhead. Once the offices are properly staffed and organized, and the appropriate space is leased (in kind and size), then what?

The owner of any business will tell you the two largest expenditures are typically real estate and human resources. So the latter is where changes are made. Keep in mind, just like Ms. Woldow, I am not talking about cutting corners. I’m talking about right-sizing, and making sure the right people are doing the right work. If that is done appropriately, the firm continues to profit at an acceptable margin, and the clients of that firm may benefit in two ways. The greater use of paralegals and associates reduces the realized rate for the clients (assuming hourly rates assigned by title). Further, the firm may maintain the same rate structure longer.

legal services disruptionDespite the above protestations, the model is still unsustainable. Legal Process Management is on the verge of being all but required, especially at the higher rate levels. Whether that comes internally or through an LPO is more likely a matter of preference of both lawyer and client.

I suspect that more firms will begin to finalize arrangements like LeClairRyan has with Integreon and UnitedLex (link). Legal departments will continue to feel pressure to reduce costs. However, I sincerely believe that many, if not most, clients will be reluctant to substantially increase their own administrative burden in the search for reduced cost. I have dealt with clients at every point on the scale of demands and requirements of outside counsel: from do nothing without checking with me to let me know when it’s over unless it’s blowing up. (Ever mindful of “bring me good news or bad, but never bring me a surprise.”)

Thus, I suggest that there will be a movement towards maintaining law firms as “one-stop” providers, along with increased demand for reduced costs, increased predictability, and better metrics. Collaboration between outside vendors, whether LPOs or more specific providers, will become more and more ubiquitous, and moving forward, such collaborations will be as common as relationships between firms and court reporting agencies and copy centers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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