How law firms can survive disruption in the legal industry

The legal industry is in the midst of massive disruption, at the core of which lies an apparent paradox.

On the one hand is an unprecedented uptick in demand. Dodd-Frank, the FCPA/UKBA/sanctions circus, increasingly harsh and complex regulatory regimes and greater international exposure are just the tip of the iceberg.

On the other hand, despite the growth in demand, law firms find themselves under pressure and many highly qualified law school graduates can’t get steady work.

What’s going on?

The answer is that an innovation revolution is taking place in which the cozy law firm model, with its pyramid revenue structure and hourly billing rates, is increasingly anachronistic and uncompetitive. The surge in demand is, ironically, exacerbating the problem. As the pie gets bigger, ever more players are coming to the table, offering clients smarter ways of working. They’re good. And they’re poised to devour the traditional law firm’s lunch.

Two trends are driving the innovation revolution:

The first is what I’d call the “great unbundling.” Clients no longer use law firms as a “one stop shop” for all legal work. Alternatives abound at all ends of the spectrum. Some examples:

Offshoring has made deep inroads, particularly at the “commodity” end of the spectrum. Teams of competent lawyers in India, South Africa, etc. are doing a lot of the work that historically went to associates at law firms in the US and EU.

In-shoring provides another alternative, particularly for mid–level work where clients may prefer qualified attorneys in their own jurisdiction and time zone. Many of these highly-qualified lawyers work for alternative legal providers such as Axiom, Counsel on Call, etc. that don’t have overhead of associates and expensive real estate. These companies are taking away a lot of work that historically went to mid-tier firms in the US and UK.

Legal outsourcing (often provided by in-shoring companies) provides another alternative for longish but non-permanent demand-spikes. The days of having to choose between eye-watering hourly rates for full-time associate support or the fixed costs of additional headcount are over. Now you can have an outsource attorney embedded in your operation for weeks or months at reasonable cost but only for as long as you need it.

In-Housing: In-house teams are increasingly hiring their own specialized experts to do the high-end, sophisticated work in areas of core risk. The means less need to outsource high-end strategic advice. It also means more proactive risk management and thus fewer blowups and less need for firms to help clean things up. That spells trouble for partners.

The second big trend is technological disruption:

Communication and productivity-enhancing tools reduces that need for teams to be in centralized locations. Instead, they can operate where they are most cost-effective or most needed, reporting in to a regional attorney at corporate HQ without communication hiccups.That reduces the need for regional or local firms in those places.

Self-help tools such as Practical Law, CEB, etc. allow in-house attorneys to pull top-notch “off the rack” memos providing basic introductory information, legal templates, research, etc. that would historically have gone to firms.

Efficiency tools such as contract management, e-discovery and matter management provide powerful, innovative tools to do things cheaper, faster and better. Many of these tools are cloud-based, eliminating the need for significant up-front investment costs and harnessing enormous power. And they’re getting better by the day.

Transparency tools, including e-billing software and on-line bidding platforms are giving clients analytics that enable them to x-ray their invoices against billing policies, negotiate better rates, eliminate waste and secure the best deal among competing firms at any given moment.

Artificial intelligence: Further down the line are technologies embodied by IBM’s Watson that will enable cross-disciplinary legal thinking, pattern spotting, analysis, etc., replacing legal analysis that is higher up the “food chain” today.

One thing these trends tell me is how relatively infrequently lawyers actually engage in value-added, bespoke solutions. A lot of what they do is actually lower-value, commodity work where the real focus is cost and process rather than bespoke tailoring. The disruptive trends are pulling these strands of work apart, enabling clients to strip out the less value-added work. In this kind of world, the days when clients are prepared to pay hourly rates for anything but the highest value work are numbered.

These trends pose a clear threat to the traditional law firm. However, they’re a blessing to in-house teams. Today’s general counsel is being asked to do ever more sophisticated and complex work with ever-fewer resources. They are embracing these trends and elevating procurement to a strategic level to take advantage of them. Witness the rise of Legal COOs and the armies of consultants who offer in-house teams their support and insight.

As has been the case in other industries that have suffered disruption, the firms that are quick to grasp and adapt will thrive. Those who don’t, will go the way of the Dodo bird and Blockbuster Video.

So how should law firms adapt? There are no simple answers as it depends on the individual circumstances and you need to think hard about how this applies to you. But, speaking from the perspective of a client, here are five obvious things I’d suggest:

Learn to think more like a businessperson and less like a lawyer. That’s what your competition is already doing. Identify your unique selling proposition – i.e. what your clients are willing to pay a premium for. Then outsource or eliminate everything else. That’s what your clients have done in their own businesses long ago.

Understand your clients. Have a passion and curiosity about how they make money. Take your cue from the in-house team. Adopt a client-centric approach. Promote only associates who get this.

Provide strategic partnership in which your focus is on proactive, preventative advice. Steer clients away from risk rather than just help when they go over the edge. That requires client insight (see Point 2).

Don’t try to be all things to all clients. Admit when you aren’t the best firm for a matter and help your clients find the best resource. Think long-term and invest in your client relationship by building trust.

Be cost-sensitive and strategic. Give freely in order to receive. Cross-sell through training and client development. Demonstrate cost-sensitivity and creativity by not always insisting on the “gold-plated” solution. Always put yourself in the GC’s shoes and imagine what you would want in an outside partner. Build the EQ of your team and nurture that quality.

In a world where change is the only constant, success will only come to those who can adapt.

Bjarne Phillip Tellmann, senior vice president and general counsel, Pearson