By the time I go home I’ll have been over here for a week; some impressions are forming and it’s not too soon to start airing some thoughts.
For starters, pretty much everyone agrees, implicitly or explicltly, that we’re in a flat (“stable,” if you prefer euphemism) market. To coin a phrase, “Growth is Dead.”
Last Thursday and Friday I was at a firm’s retreat in Surrey, primarily aimed at clients—and which through strenuous exertion they had managed to keep off-limits to a very high percentage of their partners, which after all was the whole point.
Among many topics of discussion one stood out head and shoulders above all else: The changing law firm/client relationship. The salient points, which for regular readers need no rehearsing, included:
- Clients have market power—and they’re using that muscle with firms (we’re talking about fees here, folks).
- Firms and clients need to work together in new ways to wring excess out of law firms’ working habits.
- And most fascinating to me of all was that there was candid discussion of whether clients were at all complicit in the demise of Dewey. Answer: “Yes, but….”
The first point is inarguable and I have believed for years and years that clients have market power; the issue was they didn’t know it, or if they did they didn’t exert it. Now the shoe is on the other foot. I believe firms have market power, which they’re too lacking in self-awareness, or simple courage, to deploy.
Simply put, clients and firms need each other. Not in the blank-check way clients used to need us, but for all the caterwauling about the sun setting on BigLaw, a sophisticated law firm remains an amazing source of rapidly deployable expertise for which there is little substitute in exigent circumstances.
Here’s the fascinating point about the balance of power between clients and firms: Convincing empirical evidence was provided by George Beaton that what clients actually care about most—in terms of how they actually behave as opposed to what they say—their #1 priority is cost consciousness by their firms and not the total amount of fees, a/k/a cost per se. (No, this doesn’t mean you can take rich advantage of your clients any more than it means they should nail you to the wall on every little detail, but it seemed to come as a surpirse, even a revelation, to most folks in the room.)
Now that this hypothesis-supported-by-empirical-work is out in the open, it strikes me as intuitively correct. Clients (human beings) don’t want to feel their money is being wasted. But/and they’re happy to pay fair remuneration for value delivered. This is certainly worthy of fuller treatment, which it deserves and which it shall receive.
The second point about wringing out excess really goes to the heart of something we have not yet done in all but the most unsophisticated of ways, using quite blunt instruments. We haven’t changed what we really do or how we do it. I think it’s safe to say that every mainstream innovation in law land in the last decade or more, in terms of cost reduction, has been one species or another of labor market arbitrage.
Move the back office, and lawyers, out of Class A real estate in Class A cities. Introduce a non-partner track for associates. Introduce contract, staff, and temp lawyer tracks. Hire on demand from staffing agencies. Look tentatively and skeptically at Integreon, Pangaea, et al.
To which my reaction is: Be my guest. Labor market arbitrage can be an effective strategy tactic, and can deliver meaningful cost savings, but it’s fundamentally uninteresting and there are no meaningful barriers to entry. It should and will run its course. But in terms of re-thinking what we do, how, and why—not just doing the same thing with a different who and where—we’ve barely taken the hesitant first step.
Now, #3: Clients’ complicity in the Dewey implosion.
Full disclosure: I introduced this topic, with the advice and consent of my hosts, and it generated more instinctive assent than I ever would have imagined. Part of me anticipated, “OK, one less law firm to worry about,” but there was almost no such reaction.
I based my belief that clients shared some responsibility on their conspiring in, if not actively encouraging:
- the star system
- the associated toxic notion that you hire the lawyer, not the firm
- and their associated demonstrable willingness to chase their chosen stars from firm to firm as need be.
To some extent, this is self-evident and entirely unremarkable. We’ve known for years that some firms (the Magic Circle, the NY elite) tend to have very sticky institutional clients loyal to the firm above any individual. But a change, driven I believe by clients and not by us, began going all the way back to the deal-driven 80’s when i-bankers began to emerge as stars in their own right and suddenly (for example) Chase Manhattan wasn’t quite as immortally wed to Milbank as it had been, nor Citi to Shearman & Sterling.
The personal dynamic of this was simple: Lawyers at these well-bred white-shoe firms were even more intrinsically conservative than your average risk-averse adult who had spent his entire life making the safe and sound choices and avoiding even a whiff of iconoclasm (wearing a bow tie once a month would count as radically nonconformist), and they appeared, to the hungry and aggressive i-bankers, “not commercial.”
Since the bankers’ pay depended on getting their deals done, and done fast, they would go to their superiors and ask for the freedom to select a “more commercial” lawyer at, inevitably, a different firm. And so it began.
Today the dynamic of latent firm/client hostility plays out differently, yet I heard a hair-raising story of the senior partners of three (unidentified) Magic Circle firms heatedly commiserating with each other about what a nasty and brutish client such-and-such an (unidentified) global mega-bank was, nickel and diming them on everything conceivable and inconceivable, and when our intrepid observer reported the gist of this exchange to the GC of MegaBank, the reaction was, “Great! We’re doing what we intended.”
So far is this from a marriage it approaches domestic violence.
“Can’t put the genie back in the bottle,” I hear?
Actually, I think we have a better chance of cabiniing in these kinds of dysfunctional behavior than we ever would have had a prayer of during the boom. If you wish to call that a silver lining, be my guest.
Here’s what I mean: If we are to behave seriously as mature and collaborating adults with a shared purpose in mind to (1) temper the potential destructiveness of mutual market power; (2) think hard and creatively about truly new and superior ways of doing things; and (3) use the shocking implosion of Dewey as a wakeup call about client behavior which acts as an enabler of such tragedies, then now, folks, is the time.
Because universal was assent to the proposiiton that we’re not going back to the 80’s, the 90’s, or 2007 for that matter.
We need to find a sane, productive, and yes mutually profitable, modus vivendi. The difference between the boom years and now is that then it didn’t matter terribly. Now it does.
A faithful reader who requests anonymity writes:
I enjoyed your recent letter from London, particularly the point that labour arbitrage should run its course but it’s essentially hygiene, at best provides a temporary benefit and isn’t a true competitive advantage. Of course many firms don’t have the management skills or internal infrastructure to properly tackle those hygiene factors, let alone all the work involved in “rethinking what they do”. You would hope that the best and largest firms are thinking about both strands at the same time (ie how do we remove cost and how do we add value to our product?) but I’m not sure they are. Many are too busy patting themselves on the back for removing a £1m here or there from their cost base! I find that many partners simply lack the imagination to think differently about their product and that support professionals know that this is a key area but are not familiar enough with the product to really help (far easier to talk about salary and premises savings!).
A story from my non-law world that may be worth thinking about in connection with your recent themes in Law Land; you will have seen the headlines in London. Rio Tinto yesterday announced that they will write down a further $13+Billion, and sacked the CEO and one of his commodity-unit directors (for energy). The initiating cause: good old-fashioned failure of due diligence in M&A. The heart of the problems arose from cloudy thinking about the nature of the business, the company’s position in the “hierarchy” of world mining, and what constitutes value, ultimately for the shareholders. It was exacerbated by rounds of re-arranging the deck chairs, whinging about government interference and labor costs, and wishful thinking about leap-frogging competitors in total valuation. With those sorts of complications and blind spots, it is not even very clear what “due diligence” would mean.
Rio will be alright, provided the Board and the new senior management sort themselves out on the fundamentals. In today’s world, how would we know that our company will continue to be successful, much less a “world leader?” If value were easy and quick – in mining or law – everybody would already have solved it.
Assigning clients a share of responsibility for the lateral market frenzy is an unexpected insight and hopefully helps to rationalize a high stakes game that can, in the near term, have a compelling logic and yet, in eventual impact, be utterly self-defeating.
Your Letter from London is a welcome reminder that the challenge to innovate confronting law firms is about more than internal cost-cutting and shuffling partner ranks. Even assuming these as a given at this point in our history, the hard work lies in finding with clients a common understanding of value, and then extrapolating back from that into everything that we do.
As a potential client, it always helps to know right away what I can get from the firm. If I can sense that my money would probably subtly wasted, then obviously I wound want to argue for the sake of getting what I deserve.