30 Apr 2018  | 
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The law firm of the future

By 2025, it is reasonable to assume that the digital tools emerging in legal practice will have advanced to the point where all legal services involving the standard application of legal knowledge will be delivered by technology. Vast swathes of work that have traditionally been done by lawyers, by hand, will be uneconomical to deliver in that way. Machines will be fundamentally better at doing that work. Many of the new ‘digitally native’ client legal needs that emerge will also be better delivered by machine than by lawyers, alone. In such a world, logic suggests that the only services that will require human lawyers will be: (a) developing, controlling and providing oversight to the technologies, and (b) premium legal services that require uniquely human skills, beyond the capabilities of the technologies. Excellence will not be so much a differentiator, as a prerequisite for survival. In such a world, it is difficult to imagine a place for mediocre lawyers – at least not in large law firms.

Moving into the future is a journey that unfolds in incremental steps. The purpose of this chapter is not to speculate about what the future might hold, but instead to examine a number of the key attributes that the successful law firms of 2025 – 2030 (and beyond) will likely have. With that in mind, today’s law firm leaders can think about what they need to do in order to evolve their firms in that direction.

The fundamental role of external legal counsel

The transformation of legal practice by digital technologies and the questioning of value by corporate clients will drive external legal advisors to fundamentally re-examine their roles. This will likely unfold hand-in-hand with similar introspection and evolution within in-house departments.

Ben W. Heineman, Jr., a former GC of General Electric, addresses this in his book ‘The Inside Counsel Revolution: Resolving the partner-guardian tension’ in which he argues that corporate lawyers should focus more on helping their clients achieve their performance goals, as well as ensure that the company acts with integrity.

Heineman defines that to mean compliance with the spirit as well as the letter of the laws of the jurisdictions in which the company does business, fostering constructive relations with stakeholders as well as maximizing share prices, and forming collaborations with other companies to promote public policies that mitigate the harmful externalities of corporate conduct.

In short, he calls for a return to the ‘lawyer-statesman’ role, where a corporate lawyer and by extension also the external legal counsel who advise him and her firm, act in equal measure as trusted business advisor and the agency responsible for risk mitigation, compliance and protection of the company’s legal interests.

An external legal advisory firm that delivers services in support of such an internal function would likely have a different mix of services and delivery channels, to the somewhat transactional suite of services that has characterised the past few decades. Heineman’s book suggests a future where the in-house team plays an important role in shaping company strategy, well beyond simply assessing its compliance with the law.

This requires the ability to very quickly and thoroughly assess legal implications of different strategic scenarios and options will enable companies to see the law to enhance competitive advantage. Not just comment on compliance or otherwise, or risk. The boundaries between legal advice and other forms of business advice will likely blur yet further in coming years. If that occurs then the law firms which thrive in that environment will need to be able to demonstrate value as deeply competent trusted advisors, if the pendulum is to swing back from the procurement driven ‘vendor’ approach that has emerged in recent years.

Digitally enabled

In their book ‘Human + machine: reimagining work in the age of AI’ Paul Daugherty and James Wilson (2018) define AI as “systems that extend human capability by sensing, comprehending, acting and learning.” The emphasis, again, is not so much on replacing humans as on augmenting their abilities. Why then would a law firm not seek to use sophisticated digital tools (AI and otherwise) as much as economically possible, to deliver legal services to clients?

Rather than slaving over document review and other mundane tasks, junior lawyers will earn their spurs by learning to use these tools, much in the same way as young architects and engineers routinely use CAD from their first day in practice (having learned to use these tools at university.) Besides the work for which humans are inherently better suited, a great deal of joint work between humans and machines is required, to get the most out of the machines.

 

 

Figure 29

 

Networked into a web of collaborators and suppliers

Figure 3 on page 7 shows a nearly 90% contraction in workforce between the three largest companies in Detroit in 1990, compared to the three largest companies in Silicon Valey in 2014. This data is slightly misleading, though. It ignores the vast ecosystem of contractors that surround today’s technology giants.

Large leading law firms in 2025 will likely have similar characteristics, namely a limited permanent workforce, focused on the firm’s core competencies and scaled to the firm’s normal ‘run-of-mill’ workload with an ecosystem of specialists to draw on when their specific expertise is required, together with many other service providers.

To a degree we are already seeing this trend unfold, with ‘on demand’ contract lawyers and outsourcing of non-core business activities. Also developing collaborative relationships with other firms to deliver legal services that are not core to strategy.

All these trends are likely to accelerate. It is in our opinion unlikely that leading law firms in the future will still position themselves as ‘full service.’

Partnerships, or ‘corporate’ governance structures?

Much debate exists as to whether the partnership business model has run its course and whether successful law firms in the future will adopt this business structure.

For instance, in his article titled‘What’s wrong with law firms? A corporate finance solution to law firm short-termism’ Prof Jonathan Molot of the Georgetown Law School writes that:

“The law firm partnership is a poor institutional choice for the delivery of legal services in today’s legal market. Its structure fails to serve virtually all of its stakeholders.”

Reasons proffered for why the partnership structure might be obsolete include the need in future to fund technology and other investments in ways that law firms in some jurisdictions currently cannot, and the notion that partners should be allowed less autonomy and that a greater separation should exist between the roles of shareholder and manager / leader and producer.

We believe that partnerships will not only remain viable for leading law firms in the future, but that a compelling argument can be made that they will remain the best governance model for premium law firms.

That argument relies on the assertion that groups of high-performance professionals do best when they have not only an equity stake in the businesses in which they practice, but also a significant amount of input into how the business is managed.

Mediocre professionals can thrive quite adequately in a more controlled corporate structure but we do not believe that such professionals will be able to compete, in the future that is emerging.

To expand the argument, let us consider what a partnership is.

A partnership is simply a form of business entity in which two or more co-owners engage in business for profit. Several variants exist such as general partnerships, limited partnerships and limited liability partnerships. Without going into the complexities and exceptions involved, the defining difference between partnerships and other kinds of business is in the way tax is handled. The profits of a partnership pass through to its owners, who report their share on their individual tax returns. Profits are therefore only taxed once. Most other kinds of business are taxed first at the corporate level and then again at the personal level when dividends are distributed to the shareholders.

In our opinion, nothing in the preceding paragraph would preclude a partnership structure from being applied in a law firm operating a digitally-leveraged business model.

One of the major criticisms levelled at contemporary law firms, and frequently laid at the door of such firms being partnerships, is, law firms placing too much emphasis on current revenue generation—the annual ‘profits-per-partner’ numbers— and not enough emphasis on building long-term value. At core, it is this short-term outlook that leads law firms to squander valuable opportunities to build long-term loyalty among their clients and lawyers.

Alex Berensen makes an almost identical argument against short-termism and in particular the focus on quarterly earnings instead of more sustainable indicators of economic growth, in his 2003 book ‘The Number:’

He writes: “On Wall Street, a place of little subtlety, earnings per share is known simply as ‘the number.’ Earnings per share is the number for which all the other numbers are sacrificed. It is the distilled truth of a company’s health. Earnings per share is the number that counts. Too bad it’s a lie.”

Just like profits per equity partner, as a measure of law firm health, is a lie. Both metrics show that business leaders (law firm partners and corporate executives) generally all sacrifice long-term value creation for short-term performance. A corporate structure with shares and possibly share options would create an opportunity to broaden the equity ownership but other options exist that would not reduce high-performance professionals to the level of mere employees.

The role ambiguities between shareholder, manager/leader and producer that plague partnerships also afflict other forms of business structure for professional service firms where significant equity is owned by members of the firm, and also other kinds of business that are closely held by the company’s employees.

Instead of debating the merits or otherwise of partnerships per se, a more constructive debate would be what partner behaviour needs to change, in order for partnerships to function more effectively as governance structures.

Scale

Scale, of itself, is largely discredited in the mainstream business literature as a source of competitive advantage, except where lack of scale causes problems attributable to insufficient critical mass in areas of core competence.

Many recent law firm mergers have pronounced ‘increased scale’ as being a key reason for the merger, but analysis of the underlying performance data often yields different explanations to those proffered. Across all industries, mergers have shown to occur typically in industries that are under pressure and where at least one of the merging firms is under pressure. Figure 31 shows the scale versus 2016/17 revenues of the largest thirty law firms in the world. By way of comparison with another profession that has already gone through radical digital transformation (although another wave might await them too) Figure 32 presents the same data for the top twenty global architectural practices.

What is interesting is how tightly clustered the results are for the architectural firms, versus the very wide variation in economic performance across the largest law firms. The variation is most pronounced across the firms with 1,000 – 3,000 lawyers, many of which especially in the lower half are the product of mergers.

The notion of a ‘full service law firm’ still being appealing to clients can be disproven simply by asking the clients to whom the notion is meant to be appealing, what they think.
In short, it seems that the leading law firms of the future will be as large as they need to be in order to deliver their core suite of services, but no larger. As a general rule, in a digitally-leveraged world where excellence is the defining requirement for all the humans in the business, quality will always trump scale.

 

Figure 30

 

Collaboration with other professionals

Visit the website of any of the ‘Big 4’ global advisory firms’ legal services and one sees the value proposition presented to clients that legal services are best bundled with other professional and technical services, into multi-disciplinary practices (MDPs.)

Whether or not one agrees with this, it is the views of clients that in a free market will ultimately prevail. If this means in the future that the domain of human lawyers practicing in law firms as we currently understand them will be restricted to legal work that:

a. cannot be better done by machines and
b. cannot be better done in multidisciplinary teams

then that will leave thin pickings for all but the most specialised of lawyers, who choose to practice law in isolation.

In that case, given the growth trajectory of the ‘Big 4’ in legal advisory work, it seems also that by 2025 a significant amount of work currently done by ‘conventional’ law firms will have migrated to their multi-disciplinary teams. Some law firms will likewise have been created that include lawyers, digital technologists and other professionals, practicing in those firms.

The question persists whether remaining work will be done by ‘pure’ law firms, or new forms of multi-disciplinary practices that are constructed around legal cores.

Ultimately, clients and society at large will decide.

 

Figure 31

Figure 32

 

Sources and references

Christensen, C., 1997. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business Review Press.

Daugherty P.R. and Wilson, 2018. H.J. Human + Machine: Reimagining work in the age of AI. Harvard Business School Press.

Heineman, B.W. Jr., 2016. The Inside Counsel Revolution: Resolving the Partner-guardian Tension. Ankerwycke.

Heineman, B.W. Jr., Lee, W.F. and Wilkins, D.B., 2014. Lawyers as Professionals and as Citizens: Key Roles and Responsibilities in the 21st Century. Harvard Law School Centre on the Legal Profession. Accessed at https://clp.law.harvard.edu/assets/Professionalism-Project-Essay_11.20.14.pdf.

Heywood S., Hillar R and Turnbull D., 2012. How do I Manage the Complexity in my Organization? McKinsey & Co ‘Insights into Organisation’ white paper

Løwendahl, B., 1997. Strategic Management of Professional Service Firms. Handelshøjskolens Forlag, Denmark.

Maister, D., 1993. Managing the Professional Service Firm. Free Press.

Mintzberg, H., 1994. The Rise and Fall of Strategic Planning. Simon & Schuster.

Molot J.T., 2015. What’s Wrong with Law Firms? A corporate finance solution to law firm short-termism. Southern California Law Review. Vol. 88:1.

Ruhl, J. B. (2012) Law’s Complexity: A Primer, Georgia State University Law Review: Vol. 24 : Iss. 4 , Article 9. Accessed at: https://readingroom.law.gsu.edu/gsulr/vol24/iss4/9

Ruhl, J. B. and Katz, D.M., 2015. Measuring, Monitoring, and Managing Legal Complexity. Iowa Law Review, Vol. 101:191; Vanderbilt Public Law Research

Wilkins D.B. and Esteban Ferrer, M., 2017. The Integration of Law into Global Business Solutions: The Rise, Transformation, and Potential Future of the Big Four Accountancy Networks in the Global Legal Services Market. Law and Social Inquiry, 2017. HLS Center on the Legal Profession Research Paper No. 2017-2 Paper No. 15-1. Accessed at SSRN: https://ssrn.com/abstract=2566535