by Mark A. Cohen, Columnist & Featured Contributor
So many options, so little time.”
[su_dropcap style=”flat”]T[/su_dropcap]HAT COULD WELL BE the lament of General Counsel, Chief Legal Officers, and others charged with engaging the services of lawyers. Not too long ago, it was a much simpler process: select a law firm; send them the file; and pay the invoice. No more. Technology—most notably e-Discovery–, globalization, the steady and cumulatively astronomical rise of legal fees, and regulatory issues—not to mention the global financial crisis of 2008 and its aftermath—have created a new landscape for lawyers and the clients they service. This was underscored by the ACC’s launch of its “ Value Challenge” amid the financial crisis, a clarion call by its membership for large law firms to bridge the “cost-value” divide and to provide enhanced value for their services.
It is against this backdrop that the aforementioned “many options” arose. A snapshot of the new landscape includes the following reference points:[message type=”custom” width=”100%” start_color=”#F0F0F0 ” end_color=”#F0F0F0 ” border=”#BBBBBB” color=”#333333″]
- A proliferation of legal service providers. Unlike law firms that are strictly regulated, service providers are largely unregulated and employ attorneys (as well as paraprofessionals as well as professionals from other disciplines, notably technologists and consultants) in an ever-widening array of legal tasks once performed exclusively by law firms. In fact, if you were to put the service areas of some of these providers side-by-side with the practice area sub-specialties of law firms, the two would be virtually indistinguishable. The difference: law firms “engage in the practice of law” and service providers do not (or at least should not lest they be slapped with unauthorized practice of law claims “UPL”). Such claims are rare in the corporate end of the legal marketplace (as opposed to the retail side where lawyers are frequently whistleblowers, even when they are jus tertii complainants). And there is another difference between law firms and legal service providers: price. This stems not only from the providers’ abdication of risk retention (borne either by the client or the supervising outside law firm depending upon who is in privity) but also because the service providers are not encumbered by the cost-escalating structure endemic to the traditional law firm model.
- Increased competition among law firms. It’s a buyer’s market. Not only can GC’s routinely exact significant discounts from firm rack rates, but they can—and frequently do—put firms through RFP’s, demand alternative fee arrangements (“AFA’s”), and decree who can and cannot work on their outsourced files. Put another way: the days of law firm carte blanche and “for services rendered” invoices are over (excepting a handful of bet the company matters handled by a small number of brand differentiated, elite law firms).
- Foreign competition as well as the threat of new entrants. It is only a matter of time before UK-based firms, who operate in an alternative business structures (“ABS”) environment, set up shop in the States. How can they do this? There are several viable workarounds for the existing U.S. regulatory system which prohibits key elements of the ABS structure including multi-disciplinary practice, non-lawyer ownership and management of law firms, and other measures intended to encourage innovation, reduce legal cost, and otherwise benefit clients, not lawyers. Already, Dentons, the world’s largest law firm by headcount, has doubled-down on its U.S. presence by acquiring McKenna, Long. That’s not to mention U.S. firms looking across the pond as a base camp for global expansion; Cahill Gordon recently did just that when it became the first U.S. law firm (and an elite, brand-differentiated one), to secure an ABS license. All this ups the angst for U.S. firms and provides clients with even greater leverage to demand more value from their incumbent firms. That is not to mention the real threat posed by the BigFour as well as other consultancies with global brands and footprints, substantial war chests, deep and broad client relationships, and large legal teams not currently “engaging in the practice of law” but performing legal tasks.
- The “competition” from in-house legal departments. Many companies have decided that, for a myriad of reasons, it is preferable to beef up their in-house departments than to outsource the bulk of their legal work. Take the case of Shell, which has a 650 lawyer in-house “firm.” Why single out Shell? Here are two data points that underscore their amped-up internal law firm: (1) they have assembled an internal global litigation team of 80 lawyers spread across 15 countries (litigation has long been a practice area largely outsourced by OGC’s) resulting in greatly reduced outside spend; and (2) when the company divested $5.1B of assets in 2014, its outside legal spend was $100,000. That’s an ominous portent for outside law firms.[/message]
It’s far from gloom and doom for all AmLaw 100 partners. In fact, 2014 was a terrific year for many of them. But there are multiple signs that the traditional law firm model is unsustainable and that the legal vertical is ripe for disruption. The frenzy of law firm mergers (many firms seem to be taking the “too big to fail” route); peripatetic rainmakers who jump to firms with higher profit-per-partner (“PPP”); and the increase in Swiss Vereins are three examples of instability that presage true disruption in the way corporate legal services are engaged and delivered.
One thing is certain: law firms as we knew them are under intense pressure from multiple directions, both within and outside the legal vertical. “What is a law firm?” is a valid question, because the global behemoths that are springing up—most the products of voracious acquisition strategies rather than organic growth—bear little resemblance to law firms even a generation ago. And so too is it fair to ask “What is a lawyer?” at a time when so many tasks once performed by attorneys—in a law firm setting—are now performed either by lawyers working outside the law firm framework or by paraprofessionals or non-lawyers.
Where will it end? No one knows for certain, of course, but it’s clear that clients (buyers) are increasingly flexing their muscles and insisting that lawyers—like others in the business world—deliver greater bang for the buck. And that applies whether they work in-house, at a law firm, a service provider, or at an accounting or consultancy practice performing what used to pass as “legal” work.