by Mark A. Cohen, Columnist & Featured Contributor
[su_dropcap style=”flat”]S[/su_dropcap]OME FRIENDS WHO run a successful legal consulting boutique called me the other day to wish me a Happy New Year, to catch up, and to talk about their marketing plans for the coming year. “We have decided to concentrate on the AmLaw 200,” one of them said, “so where would you focus were you to consult with them.” “Elsewhere,” I replied.
This response led to a spirited exchange about the traditional law model and quickly spanned the gamut of the legal ecosystem. At each step along the way, my friends would preface the forthcoming discussion by asking, “How about this segment of the market.” After a while, I began to feel like Dr. No, because I consistently dissuaded them from focusing on different targets– first in-house counsel, then law schools. Finally, determined to offer an alternative, I volunteered that their focus should be on where the (new) money and ideas are coming from in the legal vertical: entrepreneurs, the funding sources backing them, as well as established legal service providers looking to branch out.
Before proceeding to that new money and fresh ideas, let’s briefly review why I tried to dissuade my friends from the “usual suspects” of legal consultancy: law firms, in-house legal departments, and law schools. Unquestionably, each segment of the legal marketplace would benefit from sage counsel—and doubtless each does keep many legal consultants gainfully employed. But each has its own reasons not to embrace significant change. These reasons shed light on why the legal marketplace is the way it is and why change is occurring more slowly than many—myself included—would hope for.
The AmLaw 200
The AmLaw200 is becoming segmented into two categories: the 20 or so “bespoke” law firms whose brand enables them to rake in the most important corporate matters and to preserve their existing models with impunity, especially as to billing. They are the 1% of the legal world. But for the remaining 180 firms, it’s a different story altogether. They are in the unenviable position of confronting heightened competition for a shrinking pool of business (due to more work being brought in-house as well as “unbundling” of legal tasks and the rise of service providers); lack of differentiation from their peer group (excepting individual attorneys who are acting as free agents and hop-scotching to firms with higher PPP); and increasing price pressure from clients. Faced with this situation, many of them are merging (hoping they become “too big to fail”) while others are trying to create ways to distinguish themselves from the herd. So why would these firms not be ripe for consultants?
Obviously, some seek out consultants (several of whom I know) but, for the most part, these firms are controlled by a small cadre of equity partners, many of whom are in the twilight of their (firm) careers. With obvious exceptions, it’s fair to say that for most of them the inclination to “run the table” and to preserve the status quo has a strong economic incentive. Moreover, absent a complete teardown of the firm model, it is very difficult to alter the fundamental structure of these firms. They are ships that were built for different seas. Understandably, the desire for real change among the leadership is just not there and, if it were, it would be limited by the existing model.
In-House Legal Departments
The past couple of decades have been generally kind to in-house counsel. Their status and compensation has risen. And most of them have taken in more work—at the expense of outside counsel—particularly post the 2008 financial meltdown. A combination of sky rocketing outsourced costs and a perception that “we know our client’s business better” have contributed to the ascendancy of OGC’s. True, they are increasingly facing pressure to “do more with less”, but this hardly elevates to the level of an existential threat. And of course, many of them retain consultants but, increasingly, those services relate to technology and legal products rather than to general organizational counsel. After all, it is not easy for a consultant to walk into a GC’s office for the purpose of demonstrating how s/he is not doing the job as well as s/he might. Again, there are obvious exceptions, but it’s a tough sell to convince someone whose stock is rising that they are underperforming. It’s a much easier sell to provide them with a product—such as best practices compendia or data related to legal spend—than to provide a service that seeks to pinpoint organizational weaknesses.
By now, most people agree that law schools are failing miserably because: (1) they are too expensive and burden graduates with excessive debt; (2) they do not produce market-ready graduates; (3) their Career Placement Departments generally lack a keen knowledge of the contemporary marketplace; (4) too many graduates are unemployed/under-employed; and (5) too much emphasis is placed upon faculty “research” rather than teaching and mentoring. But rather than to confront these issues head-on, many schools have focused instead on identifying new revenue streams such as LLM programs tailored to foreign law school graduates, one year primer courses designed to provide a general “exposure” to law, etc.
One would imagine that this lamentable situation and broken model would be fertile ground for legal consultants, but such is generally not the case. In the first instance, most law schools will plead poverty, even as they construct new workout facilities and student lounges. Also, the Academy, like BigLaw, is controlled by a small group of stakeholders who are generally content to maintain a status quo that is treating them quite well. They are generally not interested in material—much less radical—overhauls of their curricula or teaching methods. I have personal experience with this. Last year, I was invited out to the West Coast by a top-20 law school to give some lectures, teach a few classes, and to discuss ways to “contemporize” the curriculum. The lectures and teaching went well, but the Dean and senior administration had no interest in discussing curriculum review. Instead, their exclusive focus was on “new revenue streams.” Lesson learned: most law schools are not interested in retaining consultants (and I was working pro bono), especially those who propose to upend, rather than to sustain, the status quo.
Follow the Money
So where is the real action in the legal vertical and where would I focus attention were I consulting? It would be the entrepreneurs, institutional money, and the established as well as nascent service providers who are entering the marketplace in increasing numbers and scale. Why? They see an unprecedented opportunity to command the legal industry because of the unsustainability of the traditional legal model and the inherent difficulty providing a meaningful fix. This, of course, affects both law schools (who have their own set of issues and remain largely tone deaf to the marketplace) as well as in-house legal departments whose expansion is the lesser of two evils or a palliative, not a cure.
The innovation and fresh perspectives brought by new entrants includes both services and products. The latter is not limited to technology; it includes “packaged” documents (think: LegalZoom and Rocket Lawyer) that are delivered as products rather than services. Of course, services can result from those products such as the specific interpretation of a regulatory change and its application to a particular company or individual. And products are not only generally more cost-effective for the client (should I say “customer”), but also, they yield recurrent revenue, something that law firms crave.
But I digress a bit from why I told my consulting friends to focus on entrepreneurs and service providers. It’s worth noting that in the UK, Australia, and perhaps soon, Canada, investment can be made directly into law firms, not just legal service providers. And if the distinction between the two seems artificial and strained to you, it does to me, too.
The innovators still need one essential element: legal expertise and, more specifically, in-depth knowledge of legal models. This knowledge must encompass all facets of those models: economics, HR, process, IT, etc. Many of the new entrants into the legal space—especially those who flirt with the idea of providing “higher-end” services (or products) must understand the many nuances between the “traditional” and new models. This is where consultants—or W-2’s—can earn their keep and deliver real value.
What This Says About the State-of-Play
The legal system is in a state of disruption and, by now, most people recognize it even if they do not know quite why or where things are headed. This provides great opportunities for thoughtful individuals who understand the reasons for change and, more importantly, can offer real-life experience as to what works and what does not in today’s marketplace. But it starts with knowing where we are, because, to paraphrase Joe Walsh, one of my favorite rock musicians,
You can’t know where you’re goin’ if you don’t know where you are. “