The New Normal
The Rise of Two-Tier Law
Posted Oct 24, 2012 7:30 AM CST
By Paul Lippe
The New Normal thesis is:
1) That law is in the process of becoming more "normal", i.e., more like other complex activities that go on in sophisticated organizations.
2) That this will be enabled by technology and process improvements.
3) That this will be led by general counsel.
Much of this change will be beneficial, but certainly not all of it. And I continue to be surprised at how many lawyers are denying the handwriting on the wall instead of actively managing the change consistent with their professional values. (See this blog post by Legal Services Institute director Stephen Mayson: "Law firm partnership: the Grand Delusion.")
It is increasingly looking like we’re right on No. 1, but only partially right on Nos. 2 and 3—the most dramatic catalyst for the New Normal may be an abrupt shift in the legal labor market.
Call it the rise of two-tier law. Recall that in the airline and automotive industries, when cost pressures got too great, unions and management agreed to two-tier wage structures in which current employees got wages and benefits grandfathered to older, higher levels, and new employees got lower wages and benefits. Without wading too deep into the political waters, that's also what some politicians are talking about when they suggest that Medicare benefits will be kept the same for workers 55 and older, but changed for younger workers and what’s happening in universities with the increase in non-tenure-track jobs.
Two-tiering is a pretty ugly practice and obviously raises serious questions of intergenerational equity which should embarrass all of us Boomers.
There are four background trends.
First, individual lawyer billing rates are mispriced. While it's easy to kvetch about the $1,000-per-hour partner, a good senior lawyer who can quickly get to the heart of the matter and favorably influence the outcome is worth a very high hourly fee. Conversely, the highly credentialed but not especially focused associate billing a premium rate is not a great value, and increasingly clients are telling firms they won’t pay premium rates for younger associates. As long as rates are mispriced, clients will seek to use fewer young lawyers from firms.
Second, law schools have continued to produce 40,000 “non-practice-ready” new grads every year, emphasizing reputation rather than performance.
Third, most large law firms are focused on one short-term goal: maximizing distributable cash to high-earning partners. They are not only tightening compensation for associates, but they are making it less and less likely that associates will become partners within the firm.
Finally, law firms are not the only way to organize young lawyer work to deliver value. Both GCs and new-model service providers are capable of organizing young lawyers to deliver value. Firms have historically enjoyed a “reputational premium” for this type of work, but like anyone who rests on reputation rather than performance, that is a wasting asset.
Historically, the grand bargain in law has been that clients wouldn’t push back too hard on fees with the implicit understanding that firms would use the fees to invest in the future capacity of the firm, associates would chase the brass ring of partnership, law schools would be indirectly subsidized, and somehow it all supported the rule of law and the public good.
But now that bargain is breaking down, and one consequence will be more two-tiering. To be clear, I am not advocating two-tiering, I am just describing the phenomenon that is under way, and will accelerate, unless everyone changes their behavior to be more long-term oriented.
As the value of (part, not all) of legal work can be captured in defined processes, the work can be done by less expensive people. Some work will be delivered by legal process outsourcers like Infosys or contract employment agencies like Axiom; some will be delivered by companies organizing their own “centers of excellence” like Cisco; and some will just be sourced through services like JD Match. If I can go out tomorrow and engage 20 very solid, U.S.-resident fourth-year-associate-level lawyers at $25 to $50 per hour for a project like due diligence or revenue recognition, you better believe that will impact the market. While young lawyers who get two-tiered will hate it for a while, the smart ones will figure out the “engineering” aspects of law and come out very well on the other side (remember that in the capital-intensive auto and airline industries, two-tiered workers had no way to directly access the market).
If you don’t believe me, ask FMC Technologies general counsel Jeff Carr.
“One of the interesting possible disruptors is the large number of tech-savvy, unemployed law grads and underemployed young lawyers," Carr says. "Uncorrupted by the traditional model—not by choice, mind you—this pool provides a rich resource to be marshaled and organized into new legal service provider platforms. This, of course isn’t new. Firms like Axiom, Clearspire, Riverview Law and others have used this pool to largely eliminate the partner take along with the brick-and-mortar cost to significantly reduce costs. In other words, they have changed the old traditional model of one-third, one-third, one-third by reducing the partner profit portion for distribution, reducing the [general, sales and administrative expenses] of the infrastructure, and paying their worker bee lawyers less.
"Going forward, the New Normal will be characterized by the rise of wholly different legal service provider models that will leverage technology to streamline process and capture and reuse content to satisfy the need for the vast majority of hours spent today by lawyers providing legal service: In other words, by elimination of the vast majority of hours being provided by extremely high-cost providers. At the same time, higher-level services characterized by the application of legal judgment will become the province of a fewer number of lawyers as the relative need for services where lawyers actually have a competitive advantage will be significantly reduced. The primary question for the New Normal is whether lawyers will organize and run those new platform legal service providers or whether others will arise to do so. I predict both will arise and coexist for some time.”
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.