Michael Corkery’s recent New York Times article, ‘Is Retail at a Historic Tipping Point?’ is well worth the read. It describes the retail industry’s rapid transition from stores and malls to online shopping. The article exposes the the human toll the transition has effected–fewer jobs and lower pay except for senior management. Technology has changed the buy/sell dynamic, enabling new delivery models to unseat the incumbent one. Let’s examine Mr. Corkery’s analysis of retail and compare it to the legal marketplace.
- Retail is shifting from large, real-estate centric operations with armies of salespeople to e-commerce distribution centers employing far fewer, lower-paid workers operating from highly automated warehouse space.
Law firms still occupy expensive, high-end space in population centers, but they are reducing that reliance– adopting ‘hoteling’ arrangements, an agile workforce, and decamping back office personnel offsite. Some firms have outsourced infrastructure to service providers altogether.
- Between 2010 and 2014, e-commerce grew by an average of $30B annually. During the past three years, the average annual growth has increased to $40B. Many economists believe this is a tipping point heralding an even more accelerated path to online domination.
Law firms have ceded substantial market share to in-house legal departments and service providers during the past decade. Numerous legal industry reports confirm a growing delta between an increased demand for legal services and a declining call for law firms.
- Store closures come at a time when consumer confidence is strong and unemployment is low. This suggests a fundamental restructuring of the retail industry rather than a dip in the normal business cycle.
The list of law firm failures grows longer even as overall demand for legal services is up. Buyers have stepped up disaggregation of legal services–insourcing it by creating legal operations teams and/or outsourcing to more tech and process savvy service providers. This work was formerly performed by law firms. The shift is a structural change in the legal buy/sell dynamic, not a dip in the business cycle.
- E-commerce vendors are reaping the benefits of the ‘instant gratification’ of online purchases and its ease of access.
Corporate legal departments are growing in part because of ease of access– no need for conflict checks, RFP’s, fee negotiations, and IT compatibility analyses—not to mention lower cost, better client relations, and a superior knowledge of the client’s business. Corporate legal departments and service providers typically operate with greater efficiency and price predictability than law firms.
- Retail stores grew steadily during the decades preceding the 2008 global financial crisis. A ‘bigger is better’ approach taken by retail produced gargantuan malls—many of which are now being converted into trampoline parks and community colleges. The retail industry built out too much space and is now choking on it.
Law firms experienced enormous growth between 1980-2007. They morphed from local/regional providers to national/international ones. This created leverage for their pyramidal structure and fueled sky-high partner profit (PPP). That is changing. Dentons, the world’s largest law firm, recently announced partner and staff layoffs. Several other firms have begun to downsize, too. And while firm mergers are at record levels—reminiscent of the consolidation of large retailers several years ago—this has not stanched the migration of work to other providers. New business models with delivery capability enabled by technology and process/project management capability are transforming the legal industry.
- Many investors believe that online retail and traditional stores can coexist and thrive–Amazon is experimenting with operating physical stores to complement its online marketplace. To be effective collaborators, traditional stores must provide a differentiated customer experience; they cannot operate as they have because customers have a surfeit of new, convenient, and more cost-effective options.
Traditional law firms can coexist and prosper with ‘alternative’ legal service providers. Take, for example, UnitedLex, a global legal business solutions provider, that has partnered with several large firms. UnitedLex creates “business solutions centers” inside the firm that provide end-to-end data management, contract management, and other mission critical delivery components to augment the firm’s legal expertise. This typically results in business impact for clients, the firm, and United Lex—a true alignment of interests. Allen & Overy, a leading international law firm, has recently collaborated with Deloitte to create a new tech-driven system to help banks deal with regulatory requirements. Collaboration enables each participant to leverage its core competencies and to achieve a differentiated delivery capability in the marketplace.
- Retail stores must address job insecurity, high turnover, and low morale that contribute to lackluster job performance. Some, like Bloomingdales, are taking steps to invest in its workforce.
Law firms no longer provide the training, advancement opportunity, or job security they once did. Turnover is high– most associates leave the firm within a few years. Likewise, experienced ‘service partners’—high client value lawyers with no book of business—are also on shaky ground. The vast majority of traditional firms take a short-term view designed to maintain PPP. They fail, however, to address client dissatisfaction and, so, imperil the firm’s viability. Turnover extends to partners who are more peripatetic than ever. Firms would be wise to invest in their workforce.
- The retail industry personifies what economists call ‘creative destruction’—a downsizing of an uncompetitive economic model. For many, this results in job loss or working for less. Automation reduces headcount and drives down pay scale—except among senior management.
Demand for legal services is rising, but law firm market share is declining. There are three key reasons for this: (1) the incumbent law firm delivery model is not in sync with customer expectations; (2) client dissatisfaction is high and loyalty is low; (3) clients have other options for most legal matters that are often ‘faster, better, and cheaper.’ An expanding list of ‘legal’ tasks once performed by law firms is now routinely in-sourced to legal operations units or outsourced to specialized service providers. The migration of work from law firms results in fewer high-paying jobs for lawyers—especially younger ones– and less job security for everyone else except those with differentiated skills or books of business.
The legal industry–like retail and other verticals–is experiencing a paradigmatic shift in its buy/sell dynamic. Technology has facilitated new business and delivery models that will ultimately supplant the incumbent law firm partnership model. Demand for legal services is increasing as is consumer demand for providers that deliver measurable results with efficiency and at predictable, reduced cost. Law’s new buy/sell paradigm is a byproduct of technological advances, the global financial crisis of 2008, and globalization. It is equally the legal consumer response to law firms that have failed to adjust to a changed business environment that demands ‘more for less.’ Law firms would be wise to address client dissatisfaction and to restructure their delivery models lest they go the way of shopping malls.
Editor’s Note: This post was originally published on Forbes.com.