When structural change happens, we like to look for individual agency – find someone who made a mistake and blame them. But Dewey’s problems are more indicative of basic changes happening in law (driven by the broader world) than they are unique boo-boos by Dewey.
The best description of the legal market and the implications for firms in the New Normal comes from Jeffrey Carr, the General Counsel of FMC Technologies. According to Jeff, lawyers do four things:
Advocacy – representing the client’s interests in relationship to external parties, most commonly litigation;
Counseling – advising the client on actions that favor long-term over short-term interests;
Content – providing information about legal issues; and
Process – moving information from one place to another to create legal work product, typically either generating or analyzing contracts, or working through discovery-based work in litigation or investigation.
To use some simple numbers we’ve developed at Legal OnRamp (and no one has ever been able to tell me they have more accurate numbers), the high-end legal market (2,000 biggest clients - internal and external spend, and 200 biggest law firms - all revenues) is about $160 billion worldwide; for our purposes we can roughly estimate each of these four segments as a quarter of that, or $40 billion per segment, although it’s likely that process work represents a larger share. If anyone has more precise data, I would welcome it.
If you were to summarize the primary developments in the legal market in the last 30 years, it would be:
a. Massive growth in overall legal work, mostly process work driven by an overall information explosion; and
b. Relatively faster growth in in-house versus firm work, driven by a cost advantage, but without yet a strategic shift.
When lawyers describe what they do, they may say “we do very sophisticated, unique, bet-the-company work.” In fact, most of the work that actually gets billed is process work. Just look at an enormous bill like the Lehman bankruptcy. How many of those hours represent unique insight, and how many represent moving information from one place to another?
Jeff would say that lawyers are very good at Advocacy and Counseling, but not particularly good at Content and Process, which is no surprise, given that (a) all our training is around Advocacy and Counseling, and (b) technology and management techniques have radically changed Content and Process work in other fields. Yet we have only occasionally embraced those new methods in law.
As we accelerate into the New Normal, Jeff’s rubric illustrates why we will continue to see more Deweys, where, like in Casablanca, folks will be “shocked” by financial shortfalls:
Advocacy – work will remain dominantly the province of firm lawyers, but they will increasingly have to be good at true advocacy, not stretching out of disputes and process work. Both the price of an hour of advocacy and demand for it will continue to grow.
Counseling – much of the counseling work has moved in-house because it requires deeper understanding of the client and its people, but there will always be times when a firm lawyer can be better at counseling either because they have a more independent perspective, a broader set of experiences or greater reputational value in delivering unwanted news. The price of an hour of, and overall demand for, counseling is likely to be pretty flat.
Content – work has been shrinking overall for some time. How many times have you heard in-house lawyers say “we won’t pay for a memo?” In a Google-y world, the price (not value) of content will drop radically, and it will either be delivered by specialty content firms like Practical Law Company or the Legal Research Center, created by networks like the General Counsel Roundtable or ACC, given away to build relationships, or embedded in process tools. Content revenues will continue to decline for law firms. (Full Disclosure: My company Legal OnRamp works with most of the new providers and law firms described in this post.)
Process – work will continue to grow, but it will increasingly be managed like other process work in the enterprise, with a combination of lower-cost people, process and technology. Much of the process work has moved in-house over the last decade, but now cost pressures are forcing further change. Demand for process work will continue to outpace other areas of legal work, but the price of process work will be around $60 per hour. To use a rough analogy, law firms don’t mill their own paper or generate their own electricity, even though those inputs are essential to legal work. Unless they can show that their execution of the process work is both superior (remember that process work can be measured) and competitively priced, firms will lose a lot of the process work. And in any case, its role as a profit engine will diminish.
Let’s look at a few data points to round out this perspective:
Large law firms charge from $150/hour (paralegal) to $400/hour (mid-level associate) for process work.
In-house teams can execute process work for $100-200/hour, and much less if they organize for it as e.g. Cisco (PDF) has.
Non-traditional providers like Axiom charge perhaps $125-250/hr for process work, but are still often advantageous for clients, because they represent a variable, not fixed, cost, and don’t require supervision.
Legal process outsourcers (LPOs) can deliver process work (including onshore lawyers, technology and process) for around $60/hour with predictable quality, integrated with legal departments and with formal methods for delivering and ensuring quality.
Law firms have started to create their own ‘captive’ LPOs, like Orrick in Wheeling, W.Va., Wilmer in Dayton, Ohio, Allen & Overy in Belfast and Baker McKenzie in Manila.
For a generation, every time a legal department said it could do work more efficiently than a law firm it was able to do so. Now every time one of the “new providers” says it can do content or process work more efficiently than a firm, it has been able to do so. Law firms have been poorly attuned to this, thinking their competitive advantage in advocacy and counseling work gave them long-term immunity to efficiency pressures in content and process work. In fact, as we see greater focus on outcome measures, the more efficient providers will also be able to demonstrate better quality in the pieces of work that they do. Large firms will have to innovate if they want to improve profitability.
Firms playing for the long-term will take a candid look at which of their work falls into each of these four categories, and adapt to a world where they won’t be able to charge premium rates for content and process work, but still command a premium for advocacy and counseling. Those who don’t, like Dewey, will be shocked to find themselves facing headlines questioning their financial condition.
Paul Lippe is the 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.