When we ended Part 2 of this series, we had discussed the data showing (1) that the conventional wisdom about the AmLaw firms growing relentlessly to the sky was, uh, Fake News (h/t to Jae Um), (2) that the real picture is one of increasing segmentation among law firms,  and (3) that the volume and pressure behind clients’ mantra of “More for Less” had steadily grown since the GFC to the point where in-house tools enforcing policing of and hygiene around billing, and serious investments in “legal operations” had essentially reached market saturation.

The heat around the “more for less” conversation has only grown even as its substantive content has degraded into zero-sum unilateral demands.  This has been going on for 10-20+ years with nothing in prospect to get us out of it:  Unproductive stalemate dosed with massive aggravation as far as the eye can see.

Finally, we asked if we can’t do better.

Time to outline some options—from the law firm side of the table.

One answer—a tried and true one with examples replete throughout business history—is to respond to new entrants into one’s market by partnering and cooperating with them.  So, for example, HoganLovells struck a deal with Elevate to handle some routine due diligence and discovery, Epstein Becker Green partnered with Deloitte so both could complement each other’s services and offer a more integrated package, while Allen & Overy enlisted the expertise of Deloitte to help create its “MarginMatrix” online subscription service.  Think of this as neither “build” nor “buy” but more like “rent.”

Don’t just take our word for it.

This is a real, and growing, trend.  According to Thomson Reuters’ October 2020 “Law Firm Business Leaders Report” (outlining the results of a survey of COO’s and CFO’s at 91 US law firms), 59% of “large firm” respondents have or will by year-end be collaborating with NewLaw companies, and a similar percentage also say their firms’ compensation systems will reward that behavior.

A second response is rather more ominous: To acquire potentially threatening arrivistes in order to kneecap or bury them.  The high-tech sector is either famous or notorious or both for adopting this as a standard business M.O.

But it’s a no-go for law firms for at least two reasons:  “Functionally” it’s a non-starter because law firms have no retained earnings to use for cash acquisitions, no stock to swap as consideration, and, prudently, no appetite for borrowing from the partners to fund non-core activities. And “reputationally” so because no law firm wants to be seen as engaging in “catch and kill.”  Both those aside, query whether it would even be feasible for a BigLaw firm to shut down a NewLaw rival.  You can’t patent every idea about smarter ways to triage a gigabyte of e-documents and forget shutting down labor market arbitrage in the form of outsourcing hourly workers to lower-cost North American, EU, or Far East jurisdictions.

But a third, far more ambitious, creative and—if well-conceived and executed—more profitable strategy is to build the new capabilities internally.

This is the highest risk/highest reward alternative.  The risk of course is of botching the job—having it require more investment than the firm can stomach, take more time, end up being insufficiently capable, or just lose out in the competitive marketplace to NewLaw or other BigLaw firms that have floated manifestly superior offerings.

The reward, on the other hand, is of capturing internally the revenue and profits that would have gone outside. Under this scenario, a law firm sets out purposefully, deliberately, and intentionally to build capabilities outside its classic approach to the practice of law—solving client problems exclusively by applying highly credentialed lawyers with years of training behind them to the matter.

Rather, the firm adds an entirely new operational layer and structure of talent and set of capabilities:  Building, operating, and continuously improving business process expertise to enhance the efficiency and profitability of all of the routine functions that are necessary components of delivering legal solutions to client matters—whether or not those components and activities require a law degree to perform.

If you read that to mean that firms pursuing this “build your own” strategy need to welcome business professionals as co-equal members of client service teams along with lawyers, move to the head of the line.  Excise the word “nonlawyer.” (We’ve said this often before and until we no longer need to say it, expect to hear it from us again.)

“Co-equal” business professionals means among other things (a) client-facing roles; (b) comparable market-rate-or-better pay vs. what those professionals could earn in Corporate America; and (c) unfeigned cultural parity.

And—we promise never to kid you—it gets more complex from there.  Housing two or more quite different business functions within one firm poses a managerial challenge of a high degree of difficulty for the typical “management lite” law firm.  (Not so much for a Fortune 500, perhaps, but then even Fortune firm #500 [Huntington Bancshares] had revenue larger than the top three AmLaw firms combined.)  Essentially, you have to manage the migration from the left column of this table to the right:

One unavoidable objection to this route will come from partners and others who ask why the firm should shift work that is now done by $750+/hour lawyers to ~$200/hour experts, or priced under a fixed-but-not-terribly-rich fee.

Shortly after Allen & Overy launched its Belfast-based “PeerPoint” offering in 2013, using far cheaper resources than could possibly be sourced in the central City of London to perform the more routine, “standard temperature and pressure” functions involved in large-scale engagements, I had the opportunity to watch a presentation about PeerPoint in New York given by A&O’s then-managing partner, David Morley.   He received the utterly predictable challenge:  “Aren’t you charging a fraction of what you used to for an awful lot of work?”

His response was unforgettably succinct:  “Our partners realize the alternative to charging our usual rates is to lose the work altogether.  That objection has actually stopped coming up.”

Never mind that A&O has an eight-year head start on you; you too can get there some day.

A final observation about building business process optimization and process management tools internally—this is the part where we announce that we’ve changed our mind about a long-held belief.

For a long time we have maintained that there are no “economies of scale” in Law Land.

We now have a different, more nuanced, view.

As a matter of definitional (micro)economics, scale economies are cost advantages organizations can obtain by growing their operations such that the cost per unit of output shrinks.

Since the classic law firm revenue/production model requires more lawyers and more billable hours to increase “output,” on essentially a one-to-one linear basis as far as the eye can see, we rejected the notion that scale economies played any meaningful role in law firm economics. (Be our guest and argue that some occupancy costs and support staff can be spread over more and more lawyers as a firm grows–that relationship is pretty close to linear, even ignoring higher managerial overhead.)

Our thinking has now come around to recognizing that scale can be your friend if you’re serious about building process optimization and management capabilities internally.

These are costs and skills that delight in being amortized over a larger foundation of matters, clients, experience, and revenue.  The marginal cost of applying these tools, once they’re built, is greater than zero (they do require some care and feeding and management) but trivial in the larger scheme of your firm’s affairs, especially given their attractiveness to clients.

To hark back to the microeconomic foundations of what we’re proposing here is to point out that you’d be changing the “factors of production” from essentially pure labor to (labor + capital + proprietary IP).  No wonder you can build a new revenue model on that foundation, with lower/fixed prices but, if you do it right, richer margins.

If you believe this combination observation/prediction from the just-released Thomson Reuters’/-Georgetown Law “State of the Legal Market 2021,” this is going to be more and more true as time goes on:

One of the most effective strategies for managing the costs of external services may, however, be tied to a significant change in the organization and management of corporate legal departments themselves. In recent years, an increasing number of legal departments (particularly large ones) have created legal operations staffs with the specific mission of managing the overall operations of the department – including the oversight of outside counsel. The directors of legal operations in these companies have taken an increasingly active role in the hands-on management of the relationships with external counsel.

In the 2020 LDO Index survey [Thomson Reuters’ annual “Law Department Operations” research], 81 percent of legal departments now report having dedicated legal operations functions. That represents a 24 percent increase from 2019, when only 57 percent of companies had such capacities. Moreover, the survey also noted that expanded use of legal operations professionals is no longer just a large company phenomenon, but one common among smaller companies as well. The continuing expansion of this trend is almost certain to result in more detailed oversight of the work of outside counsel, as well as better internal coordination of the work of legal departments themselves and a more sophisticated use of technology.

Is your firm prepared for a future that may look as much like Amazon as like Cartier?