The Three-Dimensional Transformation in the Business of Law

Published January 1, 2012

Reprinted from:

There are three basic dimensions to the business model for legal practice that do not change: marketing (secure new clients and maintain the ones you already have), production (do the legal work as efficiently and effectively as possible), and collection (get paid for your work and keep the firm in operation). Many factors that affect these fundamental elements are, however, changing rapidly.

There is an over-abundance of lawyers in the profession, creating more competition and price pressure in the marketing arena. Computer technology is making the production function so rapid and efficient that clients consider legal services as fungible commodities. And the ongoing price pressure means firms need new sources of cash to grow.

Every person who works in a law firm of any size – partner or associate, staff or administrator – must understand that the three-dimensional law firm business model has fundamentally changed, forever. This is nothing unique to the law. Travel agents … stock brokers … librarians … print journalists … these and many other respected and efficient “middleman” professions are endangered by overstaffing, loss of specialized knowledge as the Internet becomes pervasive, and commodity pricing. The issue in every such profession is the customer’s evaluation of cost versus benefit. A speculative overview can show how this is transforming the legal profession.

Marketing and Oversupply

An oversupply of lawyers has impacted the marketing function even as it has strained the human resource dynamic. With aging lawyers working longer, and law schools continuing to crank out 40,000- plus new Juris Doctors every year, something has to give. De-equitization of “underperforming” older partners and layoffs of other firm members at every level are grudgingly accepted – law firms no longer have any such thing as tenure. But there are wider implications than this for the future of law firm marketing.

Not long ago, I viewed a video of a brand new auto assembly plant that a global manufacturer has built in a rural area of Brazil. The plant is a technological marvel of automation and flexibility, and apparently can churn out large numbers of cars using relatively few, non-unionized and modestly paid workers. But these cars are not sold in Brazil – the country built a new port facility adjacent to the plant so the cars can be exported to other countries with richer economies.

That, of course, is the problem with making large amounts of expensive products – what if the home market cannot absorb them? Today, American law schools are like factories that continue to produce excess “product” – young lawyers. The result is marketing trends such as these:

• The “convergence” in which large corporate clients reduce their legal expenses by paring down the hundreds of outside counsel firms that they previously used to a few dozen or less.
• The “onshoring” by legal staffing companies that hire lawyers in lower-cost areas in the United States and pay them less compensation for repetitive work, which is provided through a virtual online relationship.
• The proliferation of “do-it-yourself” websites purporting to offer advice, research and forms in such areas as family law, probate, real estate closing, even filing a patent.

When the housing bubble burst in this country, it virtually overnight created ghost towns of brand new houses that suddenly no one wanted or could afford. Quality houses still sell, but almost always at reduced cost. Marketing legal services faces the same challenge.

Production and Commoditization

Commoditization has become a major issue inseparable from oversupply. Today’s firms are frequently expected to provide certain kinds of work with relatively steady volume (such as patent filings or employment litigation) at fixed rates over a certain period of time, turning these matters into the legal equivalent of a commodity. With commoditized services lawyers focus on specific targets, like settling cases for the lowest legal cost and settlement amount where warranted. Large corporate law firms and small solo practices are equally affected.

How are firms affected by the impact of commoditization? These are the considerations that define the transformation of the legal production function:

• Very few matters are seen by corporate clients as bet-the-company issues. As a result, there are fewer absolutes for what is “best” in terms of firm quality and reputation.
• Leverage is no longer so powerful an economic tool for firms. The principle of using associates and paralegals who are paid less to do work that is billed for more has been replaced by clients outsourcing this work, or taking it in-house to do it themselves.
• To counter this trend, law firms increasingly use technology to control work flow, almost on an assembly line principle. In a factory, the more equipment is used to make a product, the less labor is required and the lower the price can be. With a lower price, volume can increase and prices rise. Law firms will increasingly validate this principle.
• Cost efficiencies can no longer be had by cutting overhead – whether that means people or infrastructure. After years of recession, there is not that much left to cut. The real need is not cost-cutting, it is efficiency. And that means efficiency in use of human resources which is impacted by merit-based compensation, a smaller partner track, and the end of “up-or-out.”

Categorized in: Management, Marketing and Business Development

Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners