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There are two clear signs that the traditional law firm business model has run its course. The first is that many firms with this model — especially mid-sized and large firms — find themselves struggling in this marketplace to one degree or another. The old way of doing things isn’t producing the glitzy results that it once did, and that’s causing consternation.
But the other, more telling sign is the growing number of small firms launched in the last few years that have partly or entirely abandoned that model. More small firms are starting up today with a whole new set of assumptions about how a law practice should operate. That makes sense, when you think about it: if you’re starting a business in the 21st century, why would you use a business model imported from the 19th?
So if, as it appears, these new firms will feature prominently in the legal profession of the 2010s and 2020s, what is it that they’re doing differently? The range of new approaches in these emerging firms is so broad and varied that a complete inventory would be a challenge. But we can identify three general categories of innovation upon which these new models are being built.
1. Lean operations
Consultants who contrast law firms with companies of similar size in other industries often remark that the biggest difference is the near-absence of business process in law firms. This will come as little surprise to anyone familiar with the perverse incentives of the billable hour: when revenue is directly linked to time spent, why would you compromise your profits by creating efficiencies and reducing labour?
Modern firms, however, see the equation in reverse: why would you incur unnecessary costs that cut into your profit margin? So they invest in technology that automates repetitive tasks, reduces waste and systematizes procedures. They use project management to guide workflow according to systems and budgets. They don’t reinvent wheels; they invent ways of doing a given task faster and cheaper. They’re “competing on cost,” a businesslike way of running a law practice.
Lean law firms also make a point of assigning work to the least expensive, yet still sufficiently skilled, available provider. They make sure that people are doing work aligned with their level of skill and knowledge, not beneath it. This is rarely the case in traditional law firms, where partners do work that associates could do, associates do work that articling students could do, and so on down the line.
A streamlined law firm can be achieved in other ways, too. Does your firm really need expensive office space in the downtown core to provide good client service? Do you really need a 1-to-1 ratio of lawyers to secretaries, or could you group and train admin assistants by practice area? And do you really need far more associates than will ever realistically make partner? Modern firms rethink how their firm is structured, and why.
2. Virtual assistance
A traditional law firm’s lawyers and staff “come to work” by gathering in a centralized law office every day. Why? Because that’s the way they’ve always worked. A 21st-century firm, on the other hand, understands that the skills and talents you need don’t have to be in the same building — they don’t even need to be in the same area code.
In the emerging law firm model, administrative assistants, clerks and other support staff are invited to work from home over the internet. In many cases, so are lawyers. The benefits are obvious: talented workers with home responsibilities become available to firms willing and able to accommodate them; employees with flexibility are usually happier and more productive; and the firm requires fewer offices and cubicles on-site.
New firms also think beyond the “employee” model when figuring out the help they need. Virtual legal assistants, for instance, can freelance from home for several different lawyers on an “as-needed” basis. But the game-changer here is outsourced legal talent: retaining the services of lawyers and legal professionals who work from home or from other cities for specific projects or tasks, for less than an on-site lawyer would cost.
And yes, that includes places like India. Legal process outsourcing companies have made substantial inroads with corporate clients by delivering good legal work at very low prices. Traditional law firms display no interest; but emerging firms recognize that reliable talent can work from anywhere and are willing to let lawyers in Mumbai or Bangalore show what they can do. So far, the return far outweighs the risk.
3. Fixed fees
It’s the Holy Grail for clients, although for some lawyers, Unholy Grail might be a better term. They tell clients who ask for flat fees that the inherent unpredictability of legal work (especially litigation) makes it nearly impossible to set a price in advance. Modern law firms don’t believe that, and every day, they’re proving that most legal work is susceptible to fixed-fee pricing to one degree or another.
How are these firms doing it? They start by understanding and controlling how much it costs to deliver legal services: an alarming number of traditional firms can’t tell you how much they spend to do a given job. The new firms also break each assignment down to its component parts, assign those parts appropriately, and cost out each part to the fullest possible extent. That way, they never price a task below what it costs them to do it.
But the most important thing these firms do is engage the client and the marketplace in the discussion. They assess the client, the value of the work to the client, the present and future state of the client relationship, what the marketplace charges for similar work, what the firm brings to the work that no one else could, and a host of other factors. In short, they have open conversations about price, and while it’s very hard for lawyers to do this, it’s essential to successful fixed-fee arrangements.
Many options open up if you know your costs and can fix a price, as these firms are doing. You can offer “subscription pricing” for steady-stream work, or create risk-sharing arrangements for deals or trials (20% bonus if the client succeeds, 20% penalty for failure), or set a single price for all a client’s work in a certain time period. In each case, the firm takes on a degree of risk — but when you know your operations and you trust your client, that risk becomes much easier to take.
That key role of trust, in fact, illustrates how these new firms actually aren’t doing anything that new. These emerging models are essentially a throwback to a time when serving the client’s interests really was the cornerstone of a law firm.
To the extent traditional firms are now struggling, it’s because many of them have lost interest in running healthy, efficient, client-first businesses. Bloated, backwards, billable-hour firms serve lawyers first and clients second. The new wave of law firms is putting those priorities back in the right order, and that’s why they’re poised to succeed.
Jordan Furlong is a partner with Edge International who specializes in analyzing the extraordinary changes now underway in the legal profession worldwide. He is also a senior consultant with Stem Legal and head of its Media Strategy Service. He authors the award-winning blog Law21: Dispatches from a Legal Profession on the Brink (http://law21.ca) and can be reached at jordan@law21.ca.