Paul Lippe: Preview of The 2011 Legal Landscape
Posted Oct 14, 2009 8:00 AM CDT
By Paul Lippe
I appreciate being invited to participate in this “Rebel-Fest,” but want to start by taking issue with the notion of being a “Rebel.” My first boss was Senator Moynihan, D-N.Y., and he used to say that “words matter.” Labeling folks who want to restore the best part of the legal profession as “Rebels” is, I would suggest, part of the problem.[Tune in at 2 p.m. CT this afternoon for live Web radio chat with Paul Lippe at this link.]
Lawyers should be operating at three levels:
• To help society run more justly and efficiently
• To help clients succeed, in part by emphasizing the long-term over the short-term, but also by being focused and managing costs
• To succeed as professionals, including making a good income, having reasonable professional independence and satisfaction
Over the last 15 years or so, lawyers (and here I am focusing on the AmLaw 200 world I am most familiar with) have, to a greater degree than ever in our history, emphasized the third leg of this stool, and even within that, emphasized the income component relative to professional independence and satisfaction. Where did this come from? It’s pretty obvious.
• With the American Lawyer Magazine publishing annual profit figures (and lacking other metrics), it was easy for lawyers to channel their natural competitiveness into trying to stay ahead of the other guy in profits, even that wasn’t the key to happiness;
• With consultants pushing a false notion that bigger was better and profits per partner were the same as stock price, profitability and size became the dominant objective for managing large firms and hourly rate increases and leverage the dominant tools;
• With classmates in the financial services industry and CEO ranks, plus celebrities and athletes all making astronomical sums (even as 90% of Americans saw their wages stagnant), lawyers could easily say they were only keeping pace with their peers.
• With most operating companies facing global competition and intensively managing costs (although managing legal costs much less than other costs), firms emphasized serving financial services clients because they have been less price sensitive. But much of that work (see Oct 5 New York Times lead story on Simmons mattress) was financial engineering that by its nature is unsustainable. http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?_r=1&ref=business
Try this simple test. Ask any law firm managing partner (or consultant or law school dean) to write an essay saying:
• My firm is organized optimally for clients, society and the long term
• I am proud of the role I have played in the development of my institution over the last decade
• We don’t need to change much
In preparing for this session, the ABA Journal asked a number of law firm leaders to engage in a debate and argue the “status quo is good”; I am participating in panels in New York (this month) and Toronto (next month) with law firm managing partners. We have also extended the same invitation on Legal OnRamp.
So far no one is taken us up on this offer, no one is willing to publicly defend the status quo.
That’s a fairly remarkable statement.
In a profession that proceeds by public argument, no one will step forward to defend the status quo.
So what might change look like? Well, not at all a “rebellion,” but much more likely a return to the way the legal market operated a generation or so ago.
A mere 17 months ago (a lifetime in Meltdown years), a group of industry experts published the Legal Transformation Study. The Study outlined four scenarios for the evolution of the legal industry by 2020. They are offering a free webinar to introduce scenario thinking. Let me offer my own 2011 Scenario in the simplest possible terms.
The recession will last through 2010. Law firms will use this period to substantially restructure, and beginning in 2011, things will start growing again. While there’s a lot of detail and nuance around the form this restructuring will take, it can be described in very simple terms.
A typical law firm bill in January 2011 will generate the same dollars for partner work as it does today, but will generate half the revenue for associate work. Consider a bill in July 2008 for $1,000,000, representing $450,000 of partner contribution, $500,000 of associate contribution, and $50,000 of ‘other’; in January, 2011, the bill for an essentially identical project will be $800,000, reflecting $450,000 of partner contribution, $250,000 of associate contribution, and $100,000 of ‘other.’
Whether this is accounted for as hourly billing or “value billing” is not particularly strategic, other than insofar as starting to measure differently will of course incent firms to be more thoughtful about how to structure work.
Where will those dollars go? Four places.
• Clients will just flat out spend less, drive harder bargains and get more for their money
• Some work will go to outsourcers, whether onshore or off
• More work will go to contract lawyers or proto-associates not on any kind of partnership track
• Some associate time will get replaced by technology
How can I be confident this will happen?
First, associate time is a pricing mechanism, not an indicator of value. Like so much in the modern law firm model, the explosion in associate hours, rates and leverage began with the Cravath IBM antitrust defense in the ‘70’s and ’80’s, when they discovered that in the quintessential “bet the company” case IBM would pay full freight for associate time doing massive and pretty routine document review, driving up profits dramatically. Since this wasn’t particularly compelling work for the associates, they had to raise salaries to keep folks, triggering the great associate salary escalation.
Second, clients have always recognized that associate time is over-priced. Every client I know views associate time as the price for getting access to partner time and the firm “brand.” In truth, there are two billable hours: the partner’s, which should reflect deep expertise and judgment about the client, the law and best practice; and the associate’s, which is generally spent on some form of information processing, which clients recognize as relatively poorly managed compared to other arenas of information processing. As Susan Hackett, general counsel of the Association of Corporate Counsel, put it “I don’t have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn’t worth it.”
Third, as individual partners follow the example of Fred Bartlit and others and spin out of big firms with an “anti-leverage” model, they will be able to charge substantially less than traditional firms. While some sliver of work will still require the very large firm, enough will not that firms will have to largely match the boutiques for efficiency gains, or shrink radically if they want to do just “high end” work.
In recent London meeting I attended, a very able head of knowledge management for a Magic Circle firm quoted the Nobel Prize winning physicist, Sir Ernest Rutherford, "Gentlemen, we have run out of money. It is time to start thinking.” Pretty good advice.
My own background is as a lawyer, and my current role is running a Legal Web 2.0 collaboration company called Legal OnRamp. Working with Cisco and others, we’re bringing Web 2.0 to law, and demonstrating how collaboration (nor just social networking) is transforming knowledge-based industries. Lawyers (and most professionals) do five things: read, create documents, find stuff, communicate and think. The first four are at an inflection point that will be streamlined by inexpensive Web technologies build around the network that enable Collaboration, allowing lawyers to spend more effective time thinking and solving complex problems.
Many lawyers, like most other highly educated US professions – doctors, university faculty, much of the finance industry, until recently, journalists – have, for the last generation, been insulated from global competition and technological disruption; a lot of folks who should be helping us lead change have lost their “change mojo,” and lack confidence they can successfully shape and lead the future. I am optimistic they can, and that’s what I have bet on professionally and personally.
The quickest way to see this is talk to two different groups of folks running law firms – folks who have started their own firms, and those who have inherited the leadership mantle at established firms. It is almost as if they are from different planets. The entrepreneurs will talk entirely about what they can do and what they are changing; the successors will talk about what they can’t do and how hard change is and how many obstacles there are.
One final point – the ABA should be leading the profession, looking out for the long-term interests of the profession and the role of law in society. Is it? Is the ABA widely seen as a force for helping to positively manage change?
Paul Lippe is the founder and CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering. Lippe formerly was an executive at the electronic design automation company Synopsys and later was CEO of Stanford SKOLAR, a medical digital library and e-learning company sponsored by Stanford Medical School.