If you’re interested in the business of law, your life is incomplete unless you’ve read Bruce MacEwen’s “Growth Is Dead Series” on the Adam Smith, Esq. blog. Here’s a link to the first post, Growth Is Dead: Part 1-Setting the Stage, in which MacEwen discusses the performance of the legal services industry from the beginning of the economic downturn until now, as well as the pressures currently faced by law firms.
The Growth Is Dead series takes what many of us vaguely think and feel about the current state of things and explains it brilliantly and with clarity.
In a post mid-way through the series, Growth Is Dead: Part 4-Economies I & II, MacEwen takes David Brook’s concept of two co-existing economies — one in which companies face intense global competition and the other in which companies do not — to describe what the legal services industry (and BigLaw in particular) has been experiencing since the latter part of 2008.
Here’s an extended quote from a David Brooks column in the New York Times, which MacEwen excerpts in his post, that explains the concept:
Modern nations have two economies, which exist side by side. Economy I is the tradable sector. This includes companies that make goods like planes, steel and pharmaceuticals. These companies face intense global competition and are compelled to constantly innovate and streamline. They’ve spent the last few decades figuring out ways to make more products with fewer workers.
Economy II is made up of organizations that do not face such intense global competition. They often fall into government-dominated sectors like health care, education, prisons and homeland security. People in this economy believe in innovation, but they don’t have the sword of Damocles hanging over them so they don’t pursue unpleasant streamlining as rigorously. As a result, Economy II institutions tend to get bloated and inefficient as time goes by.
Although the legal services industry doesn’t occupy a space in Economy II due to protection from global competition by government domination of the sector, we haven’t faced a “compulsion to constantly innovate and streamline.” According to MacEwen, “[T]here is scarcely a scintilla of evidence that anyone is making the smallest move in that direction.”
Yet, we’re quickly being pulled into Economy I — complete with the intense competition and the need to innovate. According to MacEwen,
My thesis is that until now, the BigLaw stool has rested one leg in Economy I and two legs in Economy II, but that irresistible forces—the same forces that have proven their mettle by forcing revolutions in agriculture a century ago, followed by manufacturing (apparel, automobiles, machinery, furniture and appliances, consumer goods, electronics, etc.), followed by non-face-to-face services (call centers, finance and accounting, tax preparation, software coding, etc.)—are finally assaulting BigLaw.
Yet, we’ve still resisted innovating. MacEwen finishes his piece:
While other industries have relentlessly upended, reinvented, re-engineered, six-sigma’ed, and kaizen’d themselves, while being under the constant unforgiving glare of creative destruction, we are using fundamentally the same business model Paul Cravath invented over a century ago. Change? We prefer not to.
Why?
Because we’re lawyers. We know better. We know better than all of them.
Interesting. In the UK, the sword of Damacles has not fallen on BigLaw, but it has fallen on consumer-focussed areas of law, including personal injury, criminal defence, etc. The result has been a major shift – to non-lawyer-owned law firms, to non-lawyer practitioners, eg licensed conveyancers, to consumer-led regulation of lawyers, to new public procurement rules, and so on. Linked to this has been a shift to more “call centre” legal services, more use of paralegals, and so on. Another effect has been a reduction in the number of small “high street” (US: “main street”?) law firms offering a personal service and towards larger set-ups that can offer the call centre approach.
So far, the US bar has resisted the UK move towards non-lawyer-owned firms, but my sense is that the international trend is in that direction, despite rearguard action in several countries. Some parts of the EU are being forced in this direction as part of institutional restructuring that is being demanded as a condition of bail-out of struggling economies.
As for BigLaw, my sense is that as long as they get much of their revenues in the financial sector, dealing with other advisers who generate even higher fees than lawyers, and where clients are more sensitive to reputation and quality than they are to price, there won’t be much incentive to change. Lower down the food-chain, in mid-sized firms, there may be more pressure for change.
Mark: It’s interesting that there’s been a reduction in the number high street firms. Presumably that’s because consumer work is their bread and butter?
In the US I think there’s been a significant flow of work from large firms to in-house departments as corporations hire more lawyers, as I noted in this comment on Pam Woldow’s blog. But many smaller firms have seen opportunities as legal departments have been more willing to go down market to find better value during the economic downturn.
No matter how things shake out, I’m sure there will always be plenty of high-end work that isn’t fee sensitive and where there’s little pressure to change. Reading articles like MacEwen’s Growth Is Dead pieces though, it seems likely that BigLaw will be smaller in the future.
Seeing the large disparity in the investment banker fees in a deal compared to legal fees sometimes makes me feel like the pool boy.
Ron Baker writes in Implementing Value Pricing that “[c]ustomers are not price-sensitive; they are value-conscious.” I believe this too is Ken Adams’ argument; that is, our customers, regardless if they are BigLaw, SmallLaw or something in between want more value for each dollar of their legal spend. It’s up to our profession to determine how we will deliver more value to our customers. If it’s implementing lean six-sigma for service, legal project management, knowledge management best practices or automation of certain processes the result is a service (and solution) delivered more effectively, efficiently and, if the cost is thereby reduced because of the improved process, a better value proposition.
Bradley: I’ve got to read that book. One of my colleagues highly recommends it.
As other industries have improved their offerings, the value proposition offered by law firms has begun to look pretty shabby in some respects. If some law firms can improve also, their competitors’ offerings will look shabby in comparison too. In a healthy market, that would give them a competitive advantage. This process might be in motion — there’s certainly been talk — but it’s hard to tell.
Something else to consider is the variation in price points that are appropriate for various businesses. Some need very high-end work, and price is relatively unimportant. Others need less sophisticated work — which should be offered at a lower price point — but that doesn’t mean quality has to suffer. The larger market for those services should lower the per-matter cost as investments in the ability to provide the services well are spread over a larger number of clients. This assumes, of course, that non-bespoke pieces are systematized, standardized, and automated.
A very interesting conversation about these things broke out several months ago on a few blogs. Jordon Furlong’s piece The stratified legal market and its implications does a good job of capturing a lot of the discussion and providing links to relevant posts.