The
legal industry is transitioning from guild to marketplace. Differentiation is becoming
critically important in a field long known for the homogeneity of its
providers and the acquiescence of its buyers. When legal delivery was
exclusively about lawyers and firms, there was little need for them to
differentiate. The profession operated from a self-regulated cocoon of ‘lawyers
and non-lawyers.’ This spawned several industry myths: lawyer exceptionalism;
all ‘legal’ work—as defined by lawyers-- must be performed exclusively by them;
legal work is ‘bespoke’; every case is unique; and lawyers are uniquely
qualified not only to deliver legal services but also to procure them.
These myths remained largely unchallenged for
decades because lawyers controlled all facets of the legal ecosystem--
regulation, education, licensure, delivery, and buy-sell in the corporate
segment. Absent competition, and with little grousing from consumers, the legal
ecosystem remained monolithic and static--albeit with internal,
pedigree-related stratification. Law was an insular world characterized by
conformity, adherence to precedent, labor-intensity, leverage, and preservation
of the status quo.
Law firms had similar business structures, economic models, reward systems, and
yardsticks for success—profit-per-partner (PPP). Except for a handful of
specialized and/or brand-differentiated elites like Cravath and Wachtell, most
firms became undifferentiated big box stores offering the same practice
capability at similar pricing delivered from an identical economic model and
objective—maximization of PPP.
Law firms focused on input—hours and origination--
and applied a brute force, labor-intense approach to all tasks and matters
regardless of client value. ‘Budget’ was a foreign term, and law firms
rationalized their ‘scorched-earth’ approach by conflating it with ‘practice
excellence.’ Firms sold legal expertise, and they were the dominant providers
because they cornered the market on legal talent. Corporate counsel—many of
whom were alums of firms with whom they retained ‘relationships’—were largely relegated
to overseeing work sourced to firms.
In recent years, a significant volume of work has
migrated from law firms to corporate legal departments. The 2017 Georgetown Report cites, ‘erosion of the traditional law
firm franchise,’ a euphemism for ‘clients no longer need large law firms to
handle many legal tasks. ’ There are many reasons for the migration of
work in-house—cost; knowledge of the client’s business, objectives, and risk
tolerance; the dual role of in-house counsel as enterprise defender and
business partner, etc. Still, there are more similarities than differences
between corporate legal departments and firms. Disruptive change—new
delivery models, more pervasive, efficient utilization of technology and
process, enhanced use of big data, artificial intelligence, and the move to
digitization has been incremental in law compared to other industries. Why?
Change in the legal marketplace will accelerate
when lawyers no longer control both sides of legal buy-sell. While some regard
the ascent of in-house departments as a bellwether of disruption, partners and
senior corporate counsel—whatever their differences-- are both lawyers and were
indoctrinated with the aforementioned legal myths. Casey Flaherty, an astute
industry observer with experience on both the buy and sell sides recently wrote
a thoughtful article making this point. Bill Henderson,
a noted law professor with his hand squarely on the legal industry’s pulse, put
an even finer gloss on Casey’s thesis: “’The lawyer theory of value’ — solving
legal problems one at a time with smart lawyers — is an unstated and unexamined
preference of lawyers, not a viable long-term solution for the clients they
serve.”
That’s changed. Legal consumers—not
‘smart lawyers’--are now calling the shots. Technology, the global financial
crisis, and globalization have produced a new buy-sell dynamic for goods and
services—law included. Consumers demand more choice,
transparency, competition, price predictability, and direct access to
providers. The corporate C-Suite has mandated General Counsel ‘do more with
less,’ and to comply with that edict GC’s are necessarily more receptive to
traditional law firm alternatives than they were even a few years ago. CFO’s
and procurement are also commonly involved in buying legal services, and they
have applied business discipline to buying legal services.
Law has
become a three-legged stool supported by legal, business, and technological
expertise. Lawyers and legal delivery are no longer
synonymous; legal services are delivered by lawyers, other professionals,
paraprofessionals, and/or technology. Legal ‘service’ is substituting
products for services, automation for labor-intensive repetition, and data
instead of speculation. Law is not solely about lawyers anymore, and that is
putting enormous pressure on the traditional law firm structure and economic
model. Consumers—not lawyers-- determine what is ‘legal,’ whose expertise is
required, when it is needed, from what structure/business model it is
delivered, and at what price point it is valued. Practice expertise was long
the dominant element in the legal mosaic. Now, it is one piece in a legal
mosaic where technology and process have recast delivery, reframed customer
expectations, and redefined ‘legal expertise’ and when it is required.
A Functional Definition of
‘Differentiation’ in Law
I recently had a conversation with Steve Immelt,
CEO of Hogan Lovells, a powerhouse global law firm. I asked Steve about
challenges confronting firms, and he quickly cited the need to differentiate.
He divided differentiation into three parts: (1) practice—differentiated expertise, skills, and judgment;
(2) delivery capability- the effective
deployment of legal expertise, technology, and process to solve client
challenges; and (3)customer satisfaction—achieving
results and providing an excellent consumer experience that promotes trust.
Steve noted that practice differentiation is shrinking and largely confined to
‘bet the company’ matters. That means a firm’s unsupported claims of ‘elite
legal talent and top-notch legal work’—without more—will no longer cut it. For
firms to be competitive, they must also possess—or collaborate with-- legal
operations teams that provide transparent, efficient, real-time accessible,
cost-effective, price-predictable, expert legal delivery capability. There are
three options: build, buy, or rent (collaborate). For most firms,
collaboration is the best option. The remarkable growth of CLOC and ACC
Legal Operations and well-capitalized, tech and
process-savvy law companies—like Elevate, UnitedLex, and Axiom—evidence
the industry's newfound focus on legal operations and ‘the business of law.’
This helps to explain why demand for law firm service is waning at a time of
increased demand for legal services.
Steve also stressed the importance of customer
service and measurable results. This is another area where most law firms
are faltering. Old-fashioned customer service and measurable
results are key elements of differentiation not only for firms but equally for
in-house departments and law companies. Law firm reliance on ‘practice
excellence,’ pedigree, and reputation—without more—is no longer sufficient to
be competitive or sustainable. Clients demand expertise, service, value, and
results that integrate delivery and practice excellence.
The Legal Pyramid is Turned on its Head
Law firms constructed a pyramidal business model
where partners leveraged the time and expertise of other lawyers to service
clients and maximize PPP. They prospered with this model for decades.
That structure is no longer sustainable because: (1) much of the ‘leveraged’
work is now performed outside law firms (disaggregated); (2) at the lower
rungs, machines, paraprofessionals, and/or lawyers operating in lower-cost
structures and/or markets are now performing the work; (3) many ‘legal’ tasks
have been transformed from ‘services’ to ‘products’; (4) law companies that are
well-capitalized, tech and process savvy, and with customer-centric models
aligning provider to consumer economically and culturally have migrated up the
complexity chain. They handle a growing portion of the ‘fat middle,’ matters
sandwiched between ‘grunt’ work and ‘bet the company’ matters; (5) the practice
of law and the instances when differentiated practice competency is required
has been teased out from the delivery of legal services; (6) few law firms can
compete successfully for bet the company work, and the competition for
everything else requires that legal expertise is paired with delivery
capability and a customer-centric approach to access, pricing, transparency,
efficiency, and cost; and (7) that means that firms must collaborate with
others in the legal supply chain to be competitive in today’s market and limit
their practice to those areas where they truly excel. Law, like medicine, is becoming
more specialized. In sum, the traditional law firm pyramid has been turned on
its head.
The implications of the pyramidal
inversion are profound. The skills, players, delivery models, pricing,
structures, performance and reward standards, and training for the new legal
marketplace are different than they were even a decade ago.
Law is not simply about knowing—or selling—legal knowledge. Practice
expertise must be leveraged by technology and process to provide consumers
‘faster, better, cheaper’ and quantifiable results on a predictable,
transparent, real-time accessible, and customer-centric basis. And if this
sounds different than the traditional law firm modus operandi, it is.
The distinctions the legal industry draws between
‘law firms,’ ‘corporate legal departments,’ ‘legal service providers,’
‘diversified professional service companies’ (think: Accenture and the Big
Four) are becoming functionally meaningless. What is important is
that the appropriate resources—human and/or machine— and expertise are integrated
to produce results that achieve consumer objectives efficiently,
risk-appropriately, and cost-effectively. Providers that can consistently
deliver legal services this way—whether utilizing internal resources or
collaborating with others in the supply chain—will be dominant players in the
new legal mosaic.
