December 22, 2008 6:10 AM

Welcome to the Future: Leadership, Accountability & Swimwear

Posted by Paul Lippe

I'm running something called Legal OnRamp, a Web 2.0 platform for lawyers, bringing together the best elements from Cisco, Wikipedia, Facebook, LinkedIn, software support, blogs, the Common Law, and regulatory comment processes. The platform strives to simplify innovation and value delivery, primarily for in=house lawyers but also for law firms, both by providing tools to innovate and by sharing examples of success.

We have 7,000 members, probably 3,000 of whom have contributed content or otherwise added value. Perhaps 1,000 have contributed ideas on how to make our service better. Ninety nine percent of the good ideas and 99.9 percent of the work have come from someone other than me. More than 400 law firms and more than 700 companies are participating. Although it's still in the early stages, we're getting pinged by law departments, legal publishers, legal professional associations and networks, and major law firms. There are at least 100 things that need to go right; there are 200 things that could go wrong. When we started, 80 percent of lawyers thought we were nuts; 14 months later, 80 percent of lawyers think we're the future. I "control," in a formal sense, very little of this.

Still, if Legal OnRamp fails, it's my fault.

There are no words we love to hear more than "it's not your fault." Whether from our mother, our friend, our cleric, or our consultant, when something goes wrong, we cherish absolution.

So let's be clear: if you are running a law firm and it fails, it's your fault.

Somewhere between three and ten major law firms will fail in the next six months, and the leaders at every one will say "it's not my fault."  We’ll hear that a lease was too expensive, a client went bust, a key partner left. The American Lawyer's post mortem will describe some external factor, some perfidious behavior, some unforeseeable event. (I was talking to someone who had insight into Heller's failure and he said, "we had a few pieces of big litigation and they all settled." Talk about your Black Swans!)

Why will some law firms fail? Because their business isn’t viable? Absolutely not. Need for law isn't going away, client relationships aren't going away, value for smart people isn't going away, and premiums for the advice of trusted experts isn't going away.

Those firms who fail will do so because their rate of change exceeds their leaders' courage. Because after raising prices for 15 years, the supply/demand equilibrium is shifting--not a huge amount, but enough--and prices will start falling. Some firms will prove to be less resilient than most other businesses.

From 1992-2007, law firms were in a boom. Guess what? The dynamic of global competition, innovation, technological substitution, quality improvements and cost reduction that has been driving 98 percent of the economy--anybody who isn’t an investment bank, law firm, or elite university--is going to hit law. And depending on the firm, revenues will drop 10 to 30 percent. For many industries, this recession will be a cycle, albeit a severe one; for others--e.g., auto, newspapers, and law--it will mean structural change. Which means law can't sustain ridiculous practices like those described in the ABA Journal where contract lawyers who are making $40/hour are being billed to clients at $180 for doing meaningless work and encouraged to do it slowly.

In case anyone will be tempted to say they didn't know, here goes...

As described in Altman Weil’s law department survey, law departments on average are planning 12 percent budget cuts. That will translate into a 15 percent plus average reduction in law firm revenues, and a substantially greater drop in profits. Why? Legal department spending is tied to core revenue generation and operations, so it will be cut much less than outside counsel spending. Some (albeit a small) percentage of outside spending will go to new model providers like Virtual Law Partners, UnitedLex, or Axiom. Traditional law firms will, effectively, if not explicitly, cut prices and deliver more value to keep business--individual partners will recognize how vulnerable they are within their firms if a major client goes away, so they'll do whatever it takes.

The downturn will be most severe at the high end of the market, because of the disappearance of several investment banks, the drop in M&A, and the collapse in derivatives origination. The government will put its thumb on the TARP scales to exert downward pressure on fees, and keep litigation and bankruptcy from consuming TARP dollars. The lawyers your firm lays off will compete with you, albeit at a much lower price, since they have nowhere else to go. And all this will hit most severely in Q1, creating maximum uncertainty.

But this is all completely obvious. Not one of the 300 or so people I've spoken to in the last month doesn't know this is happening. They just divide up into the 200 or so who have figured out how to make the change work for them, and the 100 or so who think it will happen to others, but not to them.

Is this the end of the world? Absolutely not. Managing the changes needed to succeed in this environment isn't rocket science. It may just be dismal science (i.e., Economics) 101. But it does require challenging the inertia and entitlement prevalent in law. It means the sensible law firm will re-set profit expectations back to 2003 or so. (Ask most Americans if they'd prefer their financial situation in 2003 over their situation today, and I'm sure 98 percent will answer an emphatic 'yes.')  Firms will dust off their client relationship and value delivery skills, remembering what the people who built the firm in the first place did. Smart firms will start looking at the many pockets of excess cost, from law school recruiting to vague marketing programs.

Warren Buffett has a great saying, "You only find out who is swimming naked when the tide goes out." There were undoubtedly many bankers who didn't realize they were suitless; but if you are running a law firm, you always have the wherewithal to send someone to Target to pick up an extra one for you before the tide shifts, just to be on the safe side. If you end up naked on the beach, it is your fault. 

Author's Note:  On the general theory that part of my job description is to be the Mikey of Legal Web 2.0, I just signed up to Twitter. I'm not quite sure how it works, and it may be excessive, but if you want to check it out, you can watch me struggle for a bit at twitter.com/paullippe and then try it yourself; also, The Am Law Daily's been testing out the Twitter waters, too--you can check in and follow the blog at twitter.com/amlawdaily.

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