Gina Passarella’s recent article, “Talking Business of Law: The Dance Around Change,” explores whether the long static legal industry is undergoing real change or simply dancing around it. The analysis emanates from her attendance at a panel discussion on law firm innovation hosted by an international firm. Let’s put aside the irony of a law firm hosting such a discussion and return to Ms. Passarella’s article and its somewhat halting conclusion that legal change is real even if incremental.
The author notes that clients and firms share common frustrations—and explanations– for why firms have largely stood pat. Partner blowback—even when management pushes for change and not enough financial pain is the principal reasons cited. This is the view from the law firm perspective—-“it’s not broke yet, so why fix it?” But the client view—the one that matters– paints a very different picture: “law firms are not giving us what we want, so we are turning to other sources.” Those options are presently taking work in-house and/or sourcing it to tech and process-enabled service providers that have a corporate structure and culture that aligns well with the clients/customers they serve. Clients and firms might agree on the explanation for firm stasis, but clients—and service providers– are doing something about it. Consider were law’s situation to play out in the sports world–owners and coaches might agree on why the team is not living up to expectations and justifying payroll, but guess who gets fired?
Ms. Passarella identifies several legal industry developments that suggest change is far from illusory. She cites the emergence of the Corporate Legal Operations Consortium (CLOC) as an industry force advancing operational change, and she could add the Association of Corporate Counsel’s Legal Operations Group (ACC Legal Ops) as another powerful industry driver. She adverts to managed services and the legal supply chain that pairs law firms with service providers. This is far more significant than mere collaboration within the supply chain. It speaks to the bifurcation of legal service into “practice”—what law firms sell—and the business of delivering legal services—what service providers offer. Practice is shrinking and legal delivery is expanding because providers are working with clients to automate, routinize and deploy the right resources—human or technological—to certain tasks/matters that cut across the enterprise.
Disaggregation—stripping tasks once performed by law firms and now performed by corporate legal departments or service providers– is also mentioned. So too is ALM’s own Intelligence’s Report revealing 73% of legal work is now performed in-house with another 2% sourced to service providers. While some might question the market impact of service providers, consider that: (1) the U.S. legal industry is pegged at $400M/year—that means service providers now account for $8B per annum—and rising; (2) the ALM’s 73% in-house figure includes “insourced” legal services work performed by corporate legal ops teams which means that the 2% service provider share is considerably higher; and (3) law firm share is declining because legal ‘practice’ is now separate from ‘legal delivery’ and is steadily shrinking to include only those tasks (trial work, large transaction counsel, client consultation) that lawyers with differentiated skills and knowledge provide. Translation: elite lawyers are more valuable than ever but others in the firm are no longer presumptively a condition precedent to their retention. This real story behind the legal supply chain is that clients, not law firms, select the resources.
Ms. Passarella notes that law firms are pretty much standing pat even as clients have figuratively spray-painted a neon message on BigLaw’s wall that reads: “You’re not the only game in town.” This begs the question—raised in the article: why are firms not sounding alarm bells and rushing to put out the fire? Answer: partner financial self-interest. Most senior partners are within hailing distance of retirement and have little—if any—residual financial stake in the firm’s future. Profits are whacked up every year rather than—with corporations—reinvested in human and technological resources, research and development, and other keys to long-term organizational success. The partnership model is fraying in no small part because of a structure that promotes a short-term, transactional approach and jeopardizes sustainability in a rapidly changing marketplace.
Ms. Passarella notes the persistence of the urban myth still held by many firm partners that their work is bespoke. She notes that’s true for a handful of partners at a shrinking number of firms that are assigned such work, but for everyone else, the bespoke myth has been largely debunked. Consider, for example, that Shell Oil has its own global litigation team that handles most of the company’s most complex matters once assigned to law firms and that service providers are sourced more—and more complex— “legal” matters with enterprise implications. The law firm piece of the pie is shrinking—and not simply because of high cost. There’s a new buy/sell dynamic; legal consumers are themselves re-engineering the delivery of legal services. Part of that process is their dual role as consumer and provider. This transformation has occurred in no small part because as businesses became more complex, the alignment of in-house counsel with the enterprise became even more crucial. Corporate counsel differs from their law firm counterparts because they are both defenders of and business partners with the enterprise—law firms tend to play defense only. The alignment of elite service providers with customers also differs from firms. The top service providers are transparent, digitized (e.g. always accessible and agile), metric driven, result-oriented, tech and process-enabled, and efficient. This is not the traditional law firm/client dynamic, either.
Ms. Passarella suggests coyly that, “the last thing I want to be, or that I want The American Lawyer to be, is the Chicken Little of the legal industry, yelling that the sky is falling when everything is really just fine.” She adds, “But something about now is different.” It sure is– legal practice—the core tasks that lawyers should do—is bifurcated from the delivery of legal services/the business of law. Law firms are still practicing law and selling legal expertise, but that’s a shrinking element of legal delivery. Legal operations teams are reinventing the way technology and process can be leveraged to streamline the delivery of legal services. Law firms had an opportunity to corner this market but elected to persist with a “brute force” approach that deploys high-priced labor to do “the best job possible” no matter its value rather than to deploy technology and process to streamline delivery. BigLaw’s double-down on its labor-intensive approach is a gamble that paid off in the short-run but will prove disastrous in the longer term. Legal operations teams—whether housed in service providers or in-house—are not only taking on more and more complex- work but also, more significantly, identifying ways to automate, routinize, productize, and leverage ‘legal practice’ in ways that will benefit clients, not law firms. That’s the real reason why law firms are in trouble.
Ms. Passarella suggests that firms might be wise to consider “stepping out on the limb” regardless of partner opposition or client diffidence. Sage advice but, for most firms, it comes too late. The limb is already populated by birds of a different feather. Those birds—elite corporate legal departments and service providers– have a different DNA than firms. It is corporate, client-centric, proactive, collaborative, efficient, cost-effective, knowledgeable of the customer’s business, accessible, and result driven. They are a different species well-adapted to a new legal ecosystem where clients, not providers, are calling the shots.