Economics of the legal profession: levers that impact efficient and effective delivery

Richard Tromans (of Artificial Lawyer fame) spoke with Abhijat Saraswat at the Fringe Legal Virtual Summit on the economics of the legal profession – the levers that drive efficient and effective delivery of legal services. This article is a summary of that discussion using excerpts from their conversation.

Members can access the full recording of the discussion below.

This article should complement the opinion published earlier this week on the economics of legal technology.

The Fringe Legal summit discussed ideas and concepts impacting the future of the legal profession in the face of the current crisis. The stage for this discussion was set against the increasing pressures continuing to build within the profession; Further accelerated by the current crisis, which means that there will be increased price pressure on firms and corporates.

It’s important to understand the economic impact on the profession amongst the waves of change – this will help assess if we are indeed approaching an inflection point.

How we got here

Before considering the future, it’s important to review the past and understand why some firms are structured as they are today.

Two decades ago, some of the largest firms that exist today were composed of a couple of hundred partners. During the 90s, globalization was the hot ticket item. The large corporations were expanding globally and presented to their legal advisors to either come with them and expand or be left behind.

“What people were going to conferences for and talking about was globalization. Should we merge? Should we take over that law firm? Should we stay independent? And there’s a massive debate between independent law firms (whatever that means) and global law firms… law firms were literally splitting in half because half the partners wanted to join, I don’t know, Clifford Chance and the other half were like, no, no, no, we’re going to stay independent and we’ll never join an English or an American law firm”

This created two impactful shifts: (i) an explosion of mergers with the big U.S. and the big U.K. firms; and, (ii) the law firms that wanted to remain independent, quietly built their own large international referral networks.

This created a lot of strategic activity at that time and it plateaued in the early 2000s. But, would we see this surge of law firm M&A again, especially now?

The coming change

As we start looking ahead and cautiously speculate, first we must understand why mergers are so lucrative:

“one of the key reasons for a merger is you get access to new markets, you gain access to new talent, and you get economies of scale.”

Many of the large law firms already have this having already undergone the process.  Those now seeking to merge do so with greater challenges, having to offer greater reasoning and a stronger case. However, there is a hypothetical outcome to consider that may be driven by the crisis:

“…in the crisis, if we see a huge drop in income, will that drive more mergers? I think that’s possible. But again, would it drive US-UK mergers? I’m not sure. I think we might see some consolidation in the mid-market.”

More recently, further impactful shifts have occurred through the introduction of alternative legal service providers (ALSPs) and the big four. These are certainly growth markets, and appealing to investors. This is also increasing competition and making ‘traditional’ law firms rethink their strategic plans.

ALSPs are offering a different model to the traditional firms, which have built a trust-based relationship focused on high-level legal expertise over many, many, years. The ALSPs in comparison are not selling trust in long-term legal expertise, but instead going after medium-to-low complexity work that can be solved quickly using project management and process improvement, tapping tech, and better use of staff for specific workflows.

In parallel, we are seeing a new breed of General Counsel (GC) emerge. There are some fantastic GCs out there who are asking excellent questions of their firms and challenging the status quo, who are saying to providers:

“Let’s talk about how you produce work? How are you unbundling? What are the ALSPs you’re working with? Are you actually using tech? What type of technology has strategic, productive value? So, I don’t particularly care about, you know, your document management system, I might ask about it in relation to how it integrates with ours, if we’re sending documents to you and so forth, but on a true business level, what are you going to do for us?”

Eating the elephant

Reviewing first principles, the purpose of the legal market is to serve the needs of society, which is a rules-based system. Therefore, there is a need for legal services. However, society doesn’t want a very expensive and inefficient legal market. What is disappointing is that such blunt instruments – such as a global crisis – are often needed for corporates to stop and analyze what their legal spend is, and why they spend what they spend, in part because of increased budgetary pressures.

This is now starting to change – people are starting to pause and ask ‘why do we do it like this?’. Admittedly, it is a mammoth task that will require a deliberate effort.

“How do you eat an elephant? You’ve got to start. Wherever you start, you realize you’re going to have to start small. Even if you use the fanciest technology on the planet, you’re only going to make a small dent in the first couple of years in that legal spend.

And then, of course, you’ve got thousands of hygiene things to sort out – your knowledge management, figuring out where all your documents are, and making sure that everything is digitized and machine-readable, contract automation for all your standard documents, internal self serve, and building good relationships with ALSPs.

That’s all just table stakes really. And even if you did all of those things, and if they were all fully embedded, it would probably still only reduce legal spend by a few percentage points”

Companies are starting to see the writing on the wall, they know that it won’t huge net a result now, but they’re still getting into it – they see the benefits of the long-term project.

Readers of this site and those that are living within the legal tech or the innovation bubble might feel that so much has happened, however, we have only scratched the surface in terms of true transformation. The converted, including many readers of this blog and the summit, know this, and are trying to bring forth the transformation but, they need to bring everyone else with them.

“It’s about changing the means of production. It’s about changing the way that the legal market functions.

If we just get into some of the nitty-gritty of how law firms work. They effectively sell repackaged inefficiency. Bundled up into little packages of time.

The buyers say, okay, we accept this inefficiency because it delivers what we want. It’s the value. It ameliorates the risk, and this is the trade-off. It’s a very strange trade-off. Your benefit is we will swallow the risk and crunch it for you.

Risk distribution – that’s what’s happening. The problem is, that it’s just become too slow, too expensive, too inefficient. And you know, like going back to the point about shareholders and bad allocation of capital, I know total legal spending remains a relatively small percentage of total revenue, but even so, is there any other department in a large corporation that would be allowed to explicitly buy inefficiency?”

Change is needed across the entire legal supply chain, and like in the ‘eating the elephant’ analogy above you must start realizing the enormity of the task in front of you. Take people with you, and take action.

Takeaways

Law firms and other businesses within the legal profession should aim to ensure that people are able to focus on where they add the most value, and what they are best at doing. Once this is established, streamline and automate as much of the other processes as possible.

• Lawyers: we want more lawyers. We want to see lawyers really being lawyers, not being administrative assistants. People that are charging hundreds of dollars per hour should be adding value, not redlining or correcting spellings!
• Business leaders: making a law firm more efficient does not mean introducing the ‘redundancy disease’. Done right, done ethically, it could mean a much more powerful business.
• Technologists: you are the converted, bring forth the transformation. Keep things simple: stuff that should be automated, automate it (keeping the human in the loop where needed). Stuff that should be done by people, keep it analog.
• GCs/corporate counsels: keep engaging with your advisors, but also go away with some of your team, start analyzing your own data about how you do things, how much they cost, what the results were – know thyself and your business, then you can act with real impact.

What is needed is a symbiotic relationship between all parties. Collaboration is key, and collaboration is the future.