Let me line up side by side for you some very current perspectives on the larger issues facing BigLaw.
The impressively thoughtful (and articulate) Dr.. George Beaton wrote less than a month ago, in Without re-invention firms’ profits will plunge in line with industry:
There’s no doubt about it. In advanced economies the legal services industry as we know it is in the late mature stage of its life cycle. Declining demand is secular, buyer power is in undisputed ascendance, many services are perceived as commoditised, labour input costs are still outpacing price, successful substitutes are emerging, and more.
In the next decade, without re-invention firms’ profits will plunge in line with the industry. Let us share with you why we say this.
The only way for organizations in “late mature stage” industries to progress is to navigate around the status quo and reorganize themselves to take advantage of—rather than resist—forces bringing enormous stresses to bear on the extant industry model. That of course does not come naturally, for reasons we’ll elaborate upon anon.
In March of this year, Beaton had this to say in Law firms are worrying about the wrong things (emphasis mine):
More than 500 people gathered at the LawTechFutures conference in London last week and concluded that most law firms are worrying about the wrong things. The key take-out, in a sentence, was that no one with a blank sheet of paper would design a law firm like those we know today. Headline-catching, yes. Exaggeration, no. The rapidly converging trends now in progress make it certain that external and internal forces will change the way firms are configured to serve clients, the profits they make and the way people work in them.
There were very few nerds and their acolytes amongst the speakers, panellists and audience. Some seriously heavy-hitting law firm leaders were there to learn and share ideas. And learn we all did. This wasn’t an IT or a technology conference. ITC and related vendors were there in droves because technology is a big part of the future and an enabler, at times a driver, of change. Rather LawTechFutures was focused on clients’ needs and the strategic options, future shape, governance and prosperity prospects of law firms. And the picture that clearly emerged wasn’t very pretty for traditional law firms and their owners.
The challenges stem from the convergence of many trends with so many things happening concurrently–and with great speed–that firms’ leaders are struggling to see the patterns, in which lie huge opportunities for the truly nimble, and threats for those who don’t read the tea leaves. And if the leaders are struggling, then workaday partners have little chance of grasping what’s afoot. In the partnership environment therein lies the danger, with their heads down looking after clients they cannot see the horizon and the future that’s arriving with frightening speed.
For law firm leaders, a key dimension of the challenge is that the critical forces at play—which will determine the prosperity, if not the survival, of many firms today—are no longer dynamics internal to the firm, but forces completely outside the firms themselves. Foremost among these external forces is the UK’s introduction of alternative business structures (ABS), whose uptake by the market appears to be accelerating with shocking speed. (Beaton reports that in the first two months of the legislation’s effectiveness more than 200 applications were submitted to the regulator.) The dynamic is this:
Not that large corporate law firms are going to sell partially or fully to investors, rather because a large chunk of the commoditising work done by these firms–as much as 70% in some cases–will be taken away by much more efficient providers using technology and funded by private equity and other investors hungry for this new asset class. And not just LPOs in India and elsewhere, but by so-called non-firm firms such as Axiom and Advent, IT vendors and others. … America is stirring–and change will come. The avalanche has begun because entrepreneurs see the fallibility of the traditional law firm business model and know the profits to be made.
Disaggregation of legal services is nearly a decade old and still only has a 1% share of the global market, so why should large law firms worry about Pangea3 and other the hundreds of other LPOs and Axiom, Advent, Clearspire and their many imitators? The answer is because these are innovators and early adopters in the new ways. They have taken the risk, proven the concepts and in many cases already provided handsome returns to their private equity backers. Now the majority are following, with even deeper pockets, to invest in scale and sophisticated technology. As Tom Peters once aptly put it, danger lurks in that slither of the pie chart marked ‘Other’. How true in the legal sector.
And as for “worrying about the wrong things”?
Worrying about minutely fine-tuning the model you grew up with, or worrying about whether to offer X, Y, or Z lateral partner a particular deal, are all very familiar and (come on, admit it) comfortable and easy things to worry about. Even if you get them wrong in retrospect, how much damage can be done?
As Beaton reminds us, Steve Jobs famously observed that you can’t connect the dots looking forward, you can only connect them looking backward—and by then it’s of course too late as disruptive competitors have redrawn the landscape you can now see clearly laid out at your feet. Your problem then is that they redrew it to their specifications, not yours—and it’s too late to influence what it looks like and their attention span for listening to you explain to them how they got it wrong is, I will confidently predict, quite short.
Finally, in the ABA Journal Paul Lippe rehearses a great deal of the fast-developing literature on “the new normal” (much of which is probably familiar in thrust if not detail to regular readers of Adam Smith, Esq.), but concludes with a challenge (emphasis Paul’s):
Interspersed with these energizing discussions, I’ll always run into some status quo-ers, whose challenge boils down to: “Well, of course everything you’ve said makes sense. How could law not be impacted by a changing world? But doesn’t everybody know that there is some unarticulated secret power in the status quo that will keep us from being the next Dewey?”
I don’t think the status quo has a secret power, and I’ve yet to meet any status quo-ers who are as prolific, experienced, passionate, connected or insightful as the New Normal Mishpocheh. And the fact that no one can articulate it speaks volumes. So I am happy to offer a challenge. If there a managing partner in an Am Law 200 firm who thinks that the status quo is fine, that the New Normal Mishpocheh is off its collective rocker, that Dewey is an aberration, and that things won’t change—then let’s debate—the question of whether Dewey is an aberration driven by Dewey-specific factors, or a sign of accelerating change. We can do it here, at the ABA Journal’s Web home, or perhaps a video feed.
If the status quo can prevail in the marketplaces of ideas and services, then so be it. But if it can’t, let’s stop pretending there’s a secret sauce and just acknowledge that while change takes a while, that not only are the New Normal Mishpocheh having more fun, they’re also right.
Paul’s piece has been up for nearly six weeks and evidently not a single “status quo-er” has taken him up on the challenge. Now, silence doesn’t always indicate assent, but you would think at the very least that if any of the Type A hyper-verbal status quo-er’s had a snappy comeback we would have heard it by now.
Now this may all seem a bit (or a lot) apocalyptic.
The BigLaw business model has survived and thrived for over a century without material change, clients have huffed and puffed about fees and “value” before, there’s always some upstart promising they can do it better-faster-cheaper (or, grant me this, cheaper), our firm focuses exclusively on the high-end, price-insensitive bespoke work which clients wouldn’t dare risk entrusting to an arriviste whose business model is unproven (the lawyer’s nuclear-tipped kiss of death), and besides these so-called, wannabe, “disruptors” just plain aren’t as good as BigLaw.
What we have here, folks, is Clayton Christensen‘s famous “Innovator’s Dilemma.” (I’ve always believed a more accurate moniker for it would have been the “Incumbent’s Dilemma,” but I think I lost that argument before it began.) For those of you who aren’t familiar with the concept, or could use a handy-dandy refresher:
The central thesis is that there two types of technologies, sustaining and disruptive and that to succeed a firm must replace the former with the latter–or eventually be beaten by the disruptors.
Sustaining technologies improve product performance and are familiar. They improve well-established products. In law, word processing and email are such sustaining technologies. But they are generic, so the industry and its clients benefit, not any one firm.
There’s quite a bit more (I’m quoting here from Beaton, emphasis mine):
Lawyers and their firms have big problems dealing with disruptive technologies because these innovations almost certainly “result in worse product performance…at least in the near term.” This very feature of disruptive technology means an intrinsically conservative, risk averse, partnership-based profession focused on today’s needs of its clients and its duties to courts does not even contemplate disruptive technology. In fact it fights, resists and obstructs, witness the New York City Bar Association recent reaction to ABS.
For law firms the trouble is–while disruptive technologies occur less frequently–they cause the failure of highly successful firms that are only capable of using sustaining technologies. Disruptive technologies are not embraced because they do not initially satisfy the demands of the sophisticated end of the market, typically where others look to for leadership. Because of this large firms choose to ignore–even discredit–disruptive technologies until they become more attractive in terms of profit.
Disruptive technologies, however, eventually surpass sustaining technologies in satisfying market demand with lower costs. And when this occurs it does so quickly; game over in a decade or less. Those who did not invest in the disruptive technology sufficiently early are left behind, wither and fail.
Like large companies, large law firms have barriers to innovation which make it difficult, even impossible, to invest in disruptive technologies early on. Their values, customs and practices, rules and ‘profit this year’ mentalities mean they have set ways in approaching new technologies. Sunk costs and historical baggage hinder their responses to disruptive technologies.
Finally, did we mention lawyers hate uncertainty? And as many a VC (and entrepreneur) has observed, markets that do not exist cannot be analyzed. “How can one possibly move forward without analysis!?”, I hear some in the audience spluttering noting. The answer is, by experimenting, in iterative, “discovery-driven” ways. This is anathema to firms’ partnership structures and their inability to risk failure, even on the tiniest of scales and even for the greatest of potential payoffs.
We may think our risk-aversion is sane, prudent, well-advised, and far preferable to the alternative. But I have news for those of you eager to play the “unproven” trump card: The market cares not what we prefer, or where your comfort zone is.
Think “it can’t happen here?” Tell that to Digital Equipment (Intel), Sears (Wal-Mart), American Motors (Toyota), or to about 27 of the 1962 Fortune 50 – who, within the span of one generous career (50 years), are no longer there.
There may be no entitlement to success as an innovator, but history and the market teach even more resoundingly that there’s no entitlement whatsoever to incumbency.