Our friends at Thomson Reuters Legal Executive Institute asked us if we might share some thoughts with them on this year’s always enlightening and probing Report on the State of the Legal Market and they published our reflections a few days ago.

We are delighted to take them up on their gracious offer to permit us to reproduce it in haec verba here.

In reading this year’s latest 2018 Report on the State of the Legal Market produced by Thomson Reuters Peer Monitor and the Georgetown Law Center for the Study of the Legal Profession — always a trenchant and engaging contribution to the turn-of-the-calendar retrospectives — we were struck by the chorus of familiar phrases describing law firms’ reactions to the post-Great Recession market landscape, which is increasingly unforgiving, abrupt, volatile, hyper-competitive and flat out perilous.

For example:

• The reflexive escalation of commitment;
• The sunk cost fallacy;
• Confirmation bias;
• Loss aversion;
• “Pluralistic ignorance” (failing to speak up for fear of being a lone irritant);
• Resisting change in all its forms; and
• The diabolically descriptive “consensual neglect.”

Yes, we have heard all these before: Our point precisely. So, this year shall we expect more of the same? The annual sounding of the alarms followed by a brief spasm of reporting before law firms can comfortably go back to their old ways for the next 51 weeks of the year?

To illustrate how tempting it is to slide into the familiar “what’s worked in the past” in times of threat or stress, the Report employs the brilliant opening metaphor of the French military’s pre-World War II faith in the Maginot Line — essentially a very long and highly embellished trench — designed and built on the French generals’ assumption that the next war would be like the last. The problem for the French was that the German military had other ideas: Scarcely a month after the Germans launched their unprecedented (and if nothing else, militarily creative) blitzkrieg, Paris itself capitulated, followed by the entirety of France surrendering a week later.

So, the critical question is whether Big Law would be safe to react to the Report with another 51 weeks of passivity, punctuated by yanking harder on the familiar, well-worn and, we believe, thoroughly exhausted levers of performance. (Rate increases, anyone? Everyone?) To help answer that, we draw your attention to a few subtly drawn but potentially devastating new developments outlined in this year’s report.

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So, the critical question is whether Big Law would be safe to react to the Report with another 51 weeks of passivity, punctuated by yanking harder on the familiar, well-worn and, we believe, thoroughly exhausted levers of performance.

With a nod to equal time, we’ll give each of the three primary sectors of the legal services industry — In-house, New Law and BigLaw — representation.

1. DXC Technology (formerly HP Enterprise, a Fortune 200 firm) outsourced 200 of its law department staff, including senior lawyers, to UnitedLex in a five-year deal, netting DXC a 30% cost-savings. So what? It baldly exposes this reality outlined in the Report: “[C]ompanies view their legal work much differently than law firms do.” Indeed they do — DXC evidently views much of its law department the same way it views its copying/mailroom/shipping, office cleaning and cafeteria units: Peripheral, not core, somewhat generic, and therefore ripe for off-loading to a substitute provider perceived as providing higher quality at lower cost. (And you thought having the purchasing department review your RFP submission was an affront?)
2. Karl Chapman, founder and CEO of Riverview Law, one of the fastest-growing and most successful New Law entrants, noted in a talk in London late last year that if law firms had been more responsive to the needs of their own market, Riverview “would not exist,” and he “marveled” that a startup could so quickly and easily displace long-embedded client/law firm relationships. The authors of the Report dryly observed: “His point is well taken.”
3. Meanwhile, what’s the view back in Law Firm Land?

“What is becoming increasingly clear is that the market in which law firms are required to operate today may in reality be quite different from the one that most law firm partners have fixed in their minds.”

May we stipulate —and we do not view this as calling for heroic assumptions — that all three sets of observers are looking at one and the same market?

Then where does this take us? When the different perspectives are not grounded in actually seeing more than one reality, but in how different market sectors choose to perceive and interpret the same reality, the only explanation can be that the divergence stems from attitudinal and psychological differences. One might expect this from New Law; its leaders are mostly businesspeople and entrepreneurs, not lawyers. But in-house counsel vs. law firm partners? They’re all lawyers, right? They went to the same caliber of law schools and started as law firm associates. In fact, all that separates their roles is a hard-working revolving door. Why do they clearly view the world so differently?

When it comes to perplexing psychological dimensions of lawyers, there is no more eminent expert than Dr. Larry Richard, to whom we turned for insight. (Larry graduated from Penn Law School and was a trial lawyer for 10 years before earning a Ph.D. in Psychology; he has decades of experience consulting with firms on lawyer behavior.)

In a personal email communication, this is what Larry had to say: First, two of the six large-outlier lawyer personality traits, skepticism and autonomy, “are somewhat attenuated when I look at my in-house data.” Larry’s hypothesis is that too high a level of skepticism, inside the in-house departmental hierarchy, “can easily come off as uppity.” And too strong a dose of the autonomy-seeking missile trait can make the corporate hierarchy “feel like you’re in a straitjacket,” so much so that you’ll be prone to depart. (Strictly speaking, this does not mean some members of the high-autonomy crowd can’t end up in-house; it just means that group self-selects out the door.)

I would add from personal experience (Bruce here), corporate CFOs can pull rank on the GCs and, short of malfeasance or criminality, not vice versa. In other words, corporate law departments march to the beat of the finance department and corporate budgeting priorities. In-house lawyers have well internalized where ultimate approval and power resides, and it’s not with the other lawyers. A mandate to cut legal spend is not an idle suggestion which you may adopt or not as you might prefer.

Then Larry added a bonus observation: “Law firms usually have cultures of negativity [and] there are few if any forces to counterbalance or offset that negativity, so it carries on full blast.” By contrast, the vast majority of corporations work hard to promote positive attitudes and feelings, encouraging teamwork, a can-do spirit, gratitude, social connections, creativity and imagination.

This matters, because “solid neuroscience research” links a positive attitude with facilitating innovation and a negative attitude with shutting down that same innovation-tropic mental circuitry. Maybe it’s the case that law firm partners simply can’t help themselves but stand astride the path of history yelling “Stop!” (with apologies to the late William F. Buckley.)

Really, what other explanation could there be than the attitudinal/psychological for the radical difference between how corporate counsel and law firm partners interpret the market? Law firm partners live in organizations of, by and for lawyers. In-house lawyers live in an unapologetically business-centric environment with a different power structure and different incentives. Again this matters, because psychological attitudes tend to change and generalize across populations at glacial pace. We’re going to be living with this divergence for a while.

Add the reality that law firms had a fabulously successful run for a very long time: At least since the early 1980’s and the beginnings of globalization and the ubiquitous wave of technological innovation we recognize today, all the way through the implosion of Lehman Brothers and Bear Stearns and the global meltdown of 2008, Big Law grew its headcount, revenue and profitability at a pace that CEOs in almost any other industry would kill for.

For example, average Profits per Partner (PPP) for 1985, the first year the then-AmLaw 50 was published, was 19-times the average US per capita income; by 2017, the most recent figures, the ratio had risen to 45.5-times.

The question poses itself: How long can this be sustained? And the indisputable answer from economics is, not in the long run. Industries with supernormal profits eventually, but surely, attract new entrants who compete for the excess earnings (which law firms distribute to their partners as PPP). That fresh competitions brings down those profits to “normal” levels, meaning the degree of reward sufficient to keep providing the service and taking the risks intrinsic to the business. Jeff Bezos explained this dynamic succinctly: “Your margin is my opportunity.”

For Big Law, it is bad, but inevitable, news that paying non-superstars way above “normal” market compensation must come to end.

Thus, it’s also understandable that Big Law partners would fall prey to the “escalation of commitment,” “sticking to an existing course of action, no matter how irrational,” according to the Report.

The question poses itself: How long can this be sustained? And the indisputable answer from economics is, not in the long run. 

But “understandable” is itself a description rooted in psychology, not economics and marketplace realities. What’s happening in the legal services sector right now is yet another chapter in the long history of strong industry incumbents facing disruptive new entrants. Logic would argue that the incumbents should tend to win these pitched battles — after all, they have the talent, entrenched client relationships, name brands, rich and dense social and business networks, thick supply pipelines and, at least at the beginning of the story, an incalculable advantage in revenue and profitability. Logic might argue so, but business history has another story to tell altogether.

Time and again, the incumbents fail to respond fast enough or convincingly enough to the new emerging reality. In mid-2007, Nokia had just over a 50% market share in smartphones; Steve Jobs introduced the first iPhone that fall. Nokia’s CEO at the time later published a memoir recounting what he did that very day: He polled his 12 direct reports on what they thought the iPhone meant for Nokia. Ten of the 12 called it an “existential threat.” Yet five years later, Nokia’s market share was 2.5%.

The point is that even when incumbents know exactly what they’re up against, they can find it unbearably difficult to change what they’ve always done and respond effectively.

A final point — In trying to assess market dynamics in the future, it’s often useful to ask: “Who has the power?” Or, more bluntly, “Who has the money? Who’s the buyer?”

It’s certainly possible (for one thing, it has happened every time in the past) that this year’s Report will be a one-week media wonder. But if it is, Big Law will have only itself to blame. Shall we dig the Maginot Line deeper, ladies and gentlemen?