Preparing and Implementing the 21st Century Legal Business Model
A summary of a presentation by Jordon Furlong to the LMA Toronto Chapter on June 23, 2011
By Helen Kohl and Catherine Mitchell
We are poised at the brink of a brand new legal services marketplace – a Perfect Storm of Changes, spawned by generational shifts and economic changes that started 15-20 years ago and accelerated during the 2008 financial crisis.
In Canada, our strong oil & gas, lumber and mineral resources may have mitigated the impact of the recession for our corporate and institutional clients. But we share a border with the U.S. – an economy that will not, according to The Economist, rise to its feet again until 2014. Our corporate clients – across the board – are responding with marching orders to chop outside counsel spending by up to 25 per cent.
The impact of globalization – epitomized by mergers, expansions and consolidations underway in the trans-Pacific area, China and California as well as British Columbia – has also radically changed the marketplace.
Within Canada, we have already seen the merger of Miller Thomson and Balfour Moss in Saskatchewan and McMillan with Lang Michener. The world's legal profession is noticing Canada as well. Norton Rose, for instance, which has 2,700 people in offices around the world, was first to come here, but won't be the last. DLA Piper is speaking to half of Bay Street. Other firms close to setting up shop here include Allen & Overy, Vinson & Elkins, and White & Case. This trend won't stop.
*On June 28, 2011 – five days after Mr. Furlong's presentation – British legal giant Clyde & Co. demonstrated its enthusiasm for crossing the pond by announcing its merger with Canadian boutique insurance firm Nicholl Paskell-Mede LLP.
These events have set the stage for unprecedented, extraordinary changes in the delivery of legal services. Read on to learn about these changes and what law firms need to start doing – now! A video summary of the discussion is also available, view it HERE.
What’s Going On?
Trend 1: Segmentation of client work. Clients are becoming increasingly sophisticated. They are beginning to stratify the legal work they require into one of three groups:
- Mission-critical work (comprises 10-15 percent of a law firm’s work). These are “bet the company” deals, where the client must win, the deal must close, and/or clients are willing to pay top dollar because they must be able to say, “We hired the best.” Law firms like these high-earning deals. Clients, naturally, don’t.
- Ordinary course of business (comprises 35-45 per cent of a law firm’s work). These deals, where clients need a competent lawyer rather than the very best, might come up a few times a year. Clients can push for a good price, so they will differentiate among lawyers and law firms based on fixed or predictable fees, not solely on whether one is a good lawyer from a good law firm.
- Commodity work (comprises 40 to 50 percent of a law firm’s work). This is repeatable, routine, relatively low-earning work, such as compliance. Entry-level articling students or first- and second-year associates can do these jobs. Clients often ask themselves, “Do I even need a lawyer for this work?” They often respond, ”No.” This work is extremely price-sensitive. Law firms don’t like this relatively low-earning work, but clients do.
The reality: Mission-critical work is becoming ordinary work, and ordinary work is becoming commodity work. But many firms still consider all their work mission-critical. They neglect to see that this is the smallest proportion of their work, and that, from their clients’ perspective, most legal services are not worth paying top dollar.
Trend 2: Competition. Competition from non-legal service providers is growing at an unprecedented rate, within and outside the legal profession.
This trend is clearly in place on the consumer side, where organizations are leveraging the power of the Internet to reach customers. Kits, guides and online resources relating to wills and estates, family law and real estate law are proliferating. Legalzoom.ca and other such entities are providing business incorporation kits and services. And dynamiclawyers.com provides visitors with access to a wide range of lawyer-prepared legal forms, video guides, advice, and much more.
On The Corporate Side:
- The status and responsibility of in-house counsel is increasing.
- Legal Process Outsourcing (LPO) entities are entering the marketplace. Companies such as Mindcrest, CPA Global and Fronterion, largely based in India, can provide clients with commodity work services – the entry-level work of first to third year associates – for 85 per cent less than North American firms. Eighty-five per cent! That’s a significant savings, in light of the mere 10-15 per cent discount offered by today’s law firms. These LPOs have more than a competitive price advantage: clients – Rio Tinto is a prime example – are beginning to ask their law firms to consider these LPOs as extensions of their in-house counsel teams. Rio Tinto tells outside counsel to use CPA Global for every major transaction. And Pangea3, founded in India in 2004 and now the world’s largest legal process outsourcing company, opened the first LPO on North American soil this year.
The reality: This is how a paradigm shift looks. Do what you do best in-house and outsource everything else.
Trend 3: Regulatory changes will end our market monopoly. Regulatory changes are expanding the purview of services that lawyers – and only lawyers – were authorized to provide. As evidence:
- There was a time when lawyers tried to close down the Paralegal Society of Ontario. Today the society is a member of the Upper Canada Law Society, and paralegals work side by side with lawyers. In British Columbia, notaries are beginning to gain this same status.
- The Legal Service Act. 2007, passed in England and Wales, authorizes alternative business structures and enables legal non-lawyer ownership of (or investment in) law firms – a practice currently illegal here with the exception of patent and trademark agencies. Once this trend moves across the Atlantic, we could see law firms in Wal-Mart or Canadian Tire, for example, selling customers on the convenience of getting their wills done while they shop. The day may also come when major financial institutions or investment firms can own law firms. Imagine that!
- Here in North America, U.S. firm Jacoby & Meyers Law Offices LLP, have filed lawsuits challenging state laws that prohibit non-attorneys from owning stakes in law firms.
What Can We Do About It?
- Invest in systems. Law firms will need to automate the repetitive and stop handling every new job from scratch, as though they’ve never done that type of deal before. They will need to create systems, i.e. become business process-based operations that use Legal Project Management (LPM). A law firm equipped with LPM makes the most of checklists (The Checklist Manifestois a great book that explains how checklists have revolutionized aviation and healthcare), flowcharts, decision trees and Gantt charts.
- Abandon the clock. A lawyer’s time and effort are irrelevant to clients. They care about the result and the price. Alternative Fee Arrangements (AFAs) – which have gained considerable attention over the last two years – are far more than mere discounts off hourly rates. They enable law firms to:
- Provide more predictability. Give clients a price range for the work; knowing how much it’s going to cost will massively differentiate your firm from the competition.
- Share the risk. If it goes well we’ll get a bonus, if it goes badly we’ll take a penalty (or nothing). That’s a language that clients get.
- Communicate. An open conversation about pricing and cost with your client is the single-most important contributing factor to a successful alternative fee arrangement
Rethink our approach to legal talent.
As indicated above, do what you do best and outsource the rest. Knowledge-based workers can work anywhere – so move your talent outside your walls. While face time can be important at times, every person in your firm does not need to be there, in your shared office space, every working day, to create value for clients. Let your talent work from home or from the client’s location, and use today’s technology options (such as iPhones or BlackBerries) to stay connected.
The new rules aren’t yet in place, but
a brand new legal services marketplace is coming.
Now’s the time to plan for it. Your firm can lead the way.
Jordan Furlong is an internationally recognized speaker who has been chronicling the changes in the legal marketplace since 2008 on his award-winning blog Law21: Dispatches from a Legal Profession on the Brink. A lawyer and Queen’s University / University of Toronto graduate, Mr. Furlong practiced at Blakes before spending more than a dozen years leading three top Canadian legal periodicals – the Canadian Bar Association’s flagship National Magazine, the Canadian Corporate Counsel Association’s CCCA Magazine, and The Lawyers Weekly newspaper.