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September 29, 2008 5:00 AM

Welcome to the Future: Law After the Boom

Posted by Paul Lippe

I recently saw a fabulous movie called Bottle Shock. The film portrays the Judgment of Paris, a 1976 blind taste competition that pitted California wines against the traditional world-beaters, the French. Chateau Montelena, a California chardonnay, won the competition and shocked the world, representing the first successful challenge to the conventional wisdom about the unassailable superiority of French wines.

Stephen Spurrier, the English-born, Paris-based wine shop owner who had organized the event, closed the movie by saying to the shocked French oenophiles, "Welcome to the future."

So, let's just make it official: The boom in the legal industry, sustained by the boom in financial services, is over.

Welcome to the future.

For those of us who've spent most of our careers as clients, it seemed pretty obvious that the legal business was in an unsustainable boom. Consider: In a country where most people's incomes have been flat or declining over the last eight years, and most companies face increasing global competition and flat profits, partners in big law firms generally saw their income double every four to six years over the last 15 years. And the firms have generally grown in profits, staffing, and revenues faster than most of their clients.

Many folks in law firms have come to believe that the law business operates according to a different set of economic rules than their clients' businesses, but the truth is much simpler: When you're inside a boom, you always think your industry has achieved immunity from the laws of gravity, because it's the only reality you can see. I was in Silicon Valley in 1998, believe me, I know.

That's not nuts. As noted business strategist Geoffrey Moore wrote a decade ago in his book Inside the Tornado, when you're [in a boom,] the first rule is "just ship." Translation: Respond to demand, don't think too much. As Cadwalader chairman Christopher White recently acknowledged, "There was a bubble, we rode that bubble, it contracted, and we adjusted. Even knowing what I know now, I wouldn't have changed a thing."

But what happens when the boom ends?

The first order of business is to quickly get past the denial stage and move to acceptance--be honest with yourself and your team about what's happening. Post-boom, law firms must get back to the basics--delivering value and listening to clients.

All the other elements of "strategy" that so many firms have embraced over the last ten to 15 years--increase concentration on the financial services industry, raise prices, grow for growth's sake, increase leverage by hiring more associates, make fewer partners, and deequitize existing partners-- have been about the firm and not about the clients. They made sense only in the context of a financial services-driven boom.

My purpose in this space is to begin a conversation about what the future of law and the delivery of legal services will look like, as today's widely held assumptions are turned on their head in our fast-changing world.

As a lawyer who has spent most of my career straddling law and other domains--and lived and managed through the tech boom and post-boom--my goal is to explore:

• What's changing in the world of clients?
• How will those changes affect lawyers?
• How much of the language that lawyers use reflects yesterday and not tomorrow, clouding their ability to see the world that is emerging, and reducing trust among clients who are not only more a part of the emerging world, but shaping it?
• How can lawyers readily adapt to the future in ways that sustain and enhance the best aspects of their jobs, even if it causes short-term discomfort?

I will relentlessly challenge the conventional wisdom of today's law firms. Those of you who think I'm way off, I ask, indeed beg, that you comment on my post and explain why I'm wrong.

I'm an optimist. I believe the post-boom world will recapture the best qualities of the legal profession, the reasons we went to law school and became lawyers in the first place. I predict that over the next few years there will be positive change for those prepared to embrace and promote it.

I'm working on a project helping a large company rethink some of its legal work. Today I'll be meeting with an Am Law 20 partner who handles a lot of the company's work. I'll explain to the partner that every day of the year, every one of my client's thousands of customers around the world asks, "How can you deliver more value to us for less money?" And every day, my client asks its suppliers, "How can you deliver more value to us for less money?"

At first, the partner will look at me like I am a little crazy and will say, "But you don't understand, law is different."

And I’ll reply, "Law is not different. Being in a boom is different, and now the boom is over."

Welcome to the future.

Paul Lippe is a founder and chief executive officer of Legal OnRamp.

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Now that the country appears to be prepared to convert to a European-style socialist economy, life will change for all of us. We will earn much less and expend far greater effort on the banalities associated with an incompetent bureaucracy. Many of us who have led the charge against the evils of free markets from our comfortable perches will now feel what the rest of the working world feels, and long for the days of yore.

I partly agree with your premise. Yes, those sectors of legal practice that intersect with collapsing markets will be directly / proportionally effected by the financial collapse. One could even argue, as i think you do, that all legal sectors are touched. I'm not sure the argument holds universally true. Take the example of the .dot coms:

Just prior to that bubble bursting there was a big wave of hiring and salary increases for 1st year associates. This was well publicized at the time. By the end of 2000 / first half of 2001 most of these same firms found themselves regretting this move. The .dot coms did not recover and the M&A market has never really been the same. This, however, does not speak to broader legal sectors. Ask the firms that cleaned (and continue to clean) up the mess. Litigation blossomed as derivative actions took root.

The Fed getting involved this time does put a different, and likely quashing, spin on some litigation this time around... but let me suggest that there may be other sectors that thrive in the coming year(s) based on new technologies or foreign markets. Heck, those firms working in defense of on-going criminal investigations are likely licking their chops right now.

My point here is not to say the golden years will always be here, but simply that the discussion is likely more nuanced...

Law is a business in that a service is provided for a price. This notion was anathema in my law school and among most all my law professors when I graduated in 1979. Today, however, acceptance that law is a business is pretty much universal in all private U.S. law firms.

Paul Lippe is mostly dead on. I agree that the law firms which continue to provide quality service at good value will flourish, even in the face of ever heightening competition.

This is happening just as the most productive attorneys - the senior associates - are being turned out of law firms at alarming numbers. Many will either begin solo practices or create small firms - and be in a position to provide quality services at a much more attractive price point. The next few years will be very interesting in our profession, that's for sure!

Paul - you're dead on. The existing model is unsustainable and we've reached a tipping point where the customers appear to willing to drive change. Delivery systems for legal services are antiquated, inefficient and ineffective. They fail to deliver value to the client by avoiding -- indeed by virtually punishing -- those that leverage prior work product, streamline processes and focus on profitability through cost reduction as opposed to top line revenue growth. Efforts afoot to drive change include the rise of wiki-based collaboration sites on Legal On Ramp, alternative providers of legal content such as PLC, and new world service providers such Summit, Valorem, Axiom, and Lion Tech. The ACC Value Challenge and efforts by other groups such as The Texas General Counsel Forum offer customers and providers a chance to participate in change -- all of us in the industry can play in this scary sandbox or we can pay the ultimate price of denial. As the old saying goes, "If you dislike change, you're going to dislike irrelevance even more." The time is now, the choice is yours.

"Law" after the boom? The answer depends upon how you define "law". You are absolutely right that the financial/transactional side of "law" will contract with the economy. However, the litigation side will largely not be impacted. Indeed, bankruptcy litigators will likely see a reverse boom. Basically, all those deals that ignored the details by saying "just ship it" will often be mopped up by the litgators. Those law firms that gambled on continued economic good times by concentrating too much on their transactional business will suffer the most and those that continued to diversify should be fine.

Very insightful article! But are all of the trends involved tied to the bust/boom cycle? Insulation from pricing pressure seems to be. However, the trend towards ever-larger firms mirrors what has happened to accounting firms, for example. And de-equitization and reduced partner promotion rates bring large firms more in line with other similarly-sized institutions (albeit without public shareholders). Increased equity partner profitability is more a function of the institutionalization of the firm. Profitability isn't spread equally across large and small firms or even within large firms.

I posted a response earlier that didn't appear -- I believe there was a technical error so I am reposting, but apologies if both later show up.

Is there business which should not be thinking, "How can I deliver greater value?" As law firms move into a new era they will truly have to take new stock of both their relationships with clients as well as their relationships with their attorneys. Moving to the Jerry Maguire model will become prevalent as attorneys will finally realize that building relationships with their clients is often more important than billing hours to our clients. The same will prove to be true with the relationship between attorneys and their firms. While there are those who are in the legal field for the paycheck, many would clearly sacrifice some of their paycheck for a better balance and some loyalty from their firm.

In the end, many firms rode the law firm bubble -- paying outrageous salaries, demanding outrageous fees, and creating huge billable requirements for lawyers. Following this path leads to a short term windfall with a long term penalty as clients see a decrease in value.

Paul, I agree that for law firms this really is a case of "Welcome to the Future" and that, with the good times over (although not, perhaps, for the litigators of course!), Law firms will need to re-look (or perhaps look for the first time) at the way they are structured and how they serve clients.

An additional dimension to this "future" that the firms are going to have to deal with is the ubiquitous access to information that is already upon us and will only get more and more so (and therefore not be chargeable). For those interested in how access to information will change (and may therefore change us all) in the next 20 years or so, I would recommend reading Ray Kurzweil's book "The Singularity is Near" (recommended to me by Richard Susskind, another person whose views are worth listening to).

As information becomes free, it will be wisdom (being able to make sense of all the information) that will valuable. How law firms deal with this will be interesting to see....

Paul--

I think we should establish a Las Vegas betting pool (sort of an over/under) on how many outside counsel understand that the gravvy train has ended. We can no longer ignore the needs and wishes of our clientele. The notion that litigation will pick of up the slack of a devastated economy ignores too many contrary examples of firms failing before our eyes.

One of my favorite quotes from a now-retired Army Chief of Staff is apropos here: "If you don't like change, you're going to like irrelevance even less."

I appreciate all the excellent postings – let me try to respond.

1. I have no doubt that law overall will continue to grow, driven by globalization, regulation (and lack of harmonization) and intangible-based business models. And some practices (perhaps bankruptcy or litigation) will grow faster than others. But the sense of legal industry “exceptionalism,” that law as a business is dominated by its unique characteristics, which has been supported by its close ties to the financial services industry’s exceptional returns, will end.

2. Although I have frequently been a customer of accounting firm services, I am not an expert on the accounting firms, so let me just note two fundamental differences. The accounting firms are much more explicitly about “norming” than law firms – they don’t claim to craft unique approaches to every situation. And the combination of the personality of accountants, the lack of conflicts rules, stronger management cultures and greater retention of capital means that they have been much more serious about managing scale than law firms. I suspect there are fewer direct lessons to be gleaned from accounting firms for law firms than appears at first blush.

3. As for Jeff’s comments, well obviously I agree. Jeff is one of the leading GCs in the country, and one you’ll be hearing more and more about in the next few years. Ditto for Richard Given from Cisco. I think the key metaphysical question in response to Jeff’s comment is what % of inhouse folks does it take to make a Tipping Point? Is it 3%? 50%? In between? Lawyers have a tendency to think it takes a consensus before change happens, but these social models illustrate that a small group can “tip” change. My primary worry is that lots of traditional lawyer groups will claim to be doing something and muddy the waters for real change.

4. I totally agree that the impending Associate “Diaspora” will be one of the major demographic events in law. I was law school class of 1984, so most of my classmates came up for partner in the 1991-92 law recession and almost none became partner (I was happily ensconced as a GC). For sure in their retrenchment mode law firms will make fewer partners, and the “lost generation” will end up creating new model firms that in 10 years will be seen as among the most important changes in the law business.

5. Notwithstanding the 'end' of the dot-com Boom, the Internet overall has grown precisely as predicted (John Doerr told me in 1997 that ‘the Internet is under-hyped’ and he was right), and the returns of Google, Amazon, eBay and others have more than compensated for the losers. So the end of these things doesn’t mean the end of the world or the end of opportunity, it mostly means the end of the good times for the mediocre players.

In the tech boom, law firms in Silicon Valley were “firing” public company clients because they couldn’t get equity participation, and so preferred to work for private companies who would “soon” become public companies. Similarly, in the Law Boom firms were dis-engaging from traditional manufacturing companies who are more rate sensitive in favor of financial services clients.

6. I welcome Patrick’s (by the way, Patrick is one of the best new model firm innovators) over-under comment. In this space I will be making very specific, measurable predictions about the future – and welcome others doing as well.

7. Like a lot of people, I am pretty dismayed by the events of the last 8 years, culminating in the events of the last 8 weeks. And I genuinely believe that lawyers have a vital role to play in preserving Democracy, Rule of Law, and the fundamental integrity and fairness of society. So I think the stakes are pretty high in lawyers doing their job right.

I look forward to continuing the conversation with you.

Thanks

Paul

One lesson I have learned from the experiences of the last 15 years is that one bubble is usually replaced by another. I think you are way off because law firms will simply jump on another bandwagon. I don't know what it is going to be, but I have no doubt that two years from now lawyers will be riding high again. Looks like we are learning different lessons from the same thing.

Paul--I am wondering how you can possibly compare what happened during the internet bubble to companies who's entire business model was web-driven with little or no operating history to diversified global law firms?

Do you think broad litigation work is going away?

Do you think patent litigation is going away?

Do you think bankruptcy work is going away?

All will be increasing. To say nothing of all kinds of work outside the US.

Large law firms--well run ones--will always adapt and yes they are more immune to the bubble than traditional one product line businesses.

--Neil

And now comes the only billing decision that makes sense; flat fee billing. PI lawyers have been doing it for years; they figure out how much work a case will take and how much the case is worth to them. If they figure right most of the time they make money, if they don't they go out of business.

The same will hold true for law firms of the future, they will strive to tell clients upfront how much something will cost. Imagine going into a fast food restaurant and ordering a hamburger, you don't know how much the hamburger will cost when you order it, you will only know after you have finished eating and then a month later you get a bill.

Clients do not like the unknown anymore than lawyers. Welcome to the new world order.

Michael Kassing
MarkTend.com

Paul- congratulations on your new column.

ACC believes that the disconnect between the cost and the value of legal services has never been greater or more pronounced, especially as clients in the corporate sector are going to have ever-greater pressure in the coming months to scrutinize their costs and the value received for each expenditure.

Clearly the time for action has come. Last week’s launch of the ACC Value Challenge project (which Jeff Carr noted in his post above) brought together experts from corporate practice, law firms and law schools to address this problem. Law firms must recognize that clients define value. Clients must reward firms that are willing to change how they do business to provide value. We’ve built and posted a law firm economic model on our website, for instance, that presents powerful, quantitative evidence that profitability and value are not mutually exclusive.

Have we reached a tipping point? Time will tell, but ACC plans to do all it can to bring all 25,000 of our corporate counsel members to the table and ask them to bring every one of their law firms to join the conversation, too. Perhaps by beginning these discussions and committing to help develop the resources necessary to support real solutions, we might help firms and companies build sustainable relationships where both parties thrive.

The ACC Value Challenge mission, working plans, models, and tool kits are online and open to all at www.acc.com/valuechallenge.

Fred Krebs
Association of Corporate Counsel

One big change coming is the use of the internet by non-lawyers to research and collect information that normally a lawyer bills his client for.

As a computer nerd I have been watching the RIAA vs the general public. For a long time the RIAA has been winning case by default as the people they have been suing saw no way to pay what was need to defend themselves from a large well paid organization.

Lately however, the RIAA has started to lose their weaker cases (which is most of them because of poor standards of evidence collection) and the main cause is the people being sued being able to collect case info themselves and pass it on to their lawyers.

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