The legal profession continues to contend with everything from a supposed excess supply of lawyers to fee pressures and collections. Both large law firms and small law firms are experiencing change. Will they survive as we see them today?
There are many challenges facing lawyers today. In the Big Law environment, succession planning is certainly uppermost in the minds of many current managing partners. Also, a shrinking pie versus the misallocation between supply and demand of lawyers has to be of concern. While the legal market is huge, a big portion of that marketplace is being served by nontraditional suppliers of legal services. Just look at LegalZoom and its ilk.
Richard Susskind, in his book “The End of Lawyers?,” suggests that the way we currently practice law may be coming to an end. Technology, I believe, is the factor that will cause the change. One example of this change involves document review. In many cases, there is the need to review numerous documents in order to piece together the client’s story for the trier of fact. In large cases, this has in the past required hundreds of lawyers to go through the documents.
But now e-discovery software can analyze documents required for litigation discovery in a fraction of the time for a fraction of the cost when compared to using lawyers for the task. Some programs that search electronic files not only find documents with relevant terms at high speed, they extract relevant concepts and deduce patterns that would have eluded lawyers examining paper copies. Inescapably, many lawyers who used to conduct document review will no longer be billable. Profitability for the firm will come from the ability to swiftly analyze the millions of equivalent paper pages that electronic documents represent. And document review lawyers will be out of a job.
During the last few years, we’ve seen some significant changes in Big Law firms:
• Significant reduction in overhead; larger law firms today are being run as lean as possible, with little additional “fat” or overhead to trim.
• Contraction in head count.
• Stagnation or reduction in partner income.
• Increase in client purchasing power, shifting the power equation about fees more toward the side of the buyer.
Personal earnings are declining. Fifty percent of the lawyers in the profession earn less than $100,000, and half of this group earn less than $50,000 per year.
• Declining interest in entering the profession. More significantly, applications to enter the country’s 200-plus law schools fell to the lowest level in a decade. For the first time in recent history, applicants to law schools are asking themselves the return-on-investment question: Is it economically worthwhile for me to go to law school, or will I be better off going to another professional school or go into business and climb the corporate ladder? If I go to law school, incur substantial loans and forgo economic opportunities, will I be able to get a job, earn enough money to counter the debt and lost opportunities, and earn a reasonable compensation? Increasingly, the answer seems to be “no.”
Yes, the old saying that “the only thing that is constant is change” applies in these circumstances. And it is exciting and energizing to live in times of change. And with technology changing our world so quickly, all business, including the legal profession (normally a laggard in change), will change. The only questions are what will those changes be and who will be leading those changes?
What does this mean for the average lawyer, the ones that serve the “99 percent” of our society? The possibility to thrive is right in front of us!
Why do I believe this? I’m old enough to remember more than one cycle in our economy. Remember the 1950s and 1960s when we were on the verge of economic fascism in this country, a centralization of economic wealth in four companies: AT&T, IT&T, GM and GE.
None of these companies is with us today in the same form. AT&T was broken up by the government as a monopoly; IT&T is no longer to be seen. General Motors went into bankruptcy and General Electric is not the same company it was.
These companies faltered. They became too large to operate. They had to break up; the survivors had to develop new customer bases in order to start growing again.
Let’s look at the legal community. It will suffer similar consequences, I believe.
Big Law will falter. It may serve the 1 percent of the corporate world, but there will be a large group of customers underserved, a juicy target for other lawyers. As technology is accepted, solo practitioners and small breakaway groups from Big Law will cater to the 99 percent, mostly consumer-oriented clients, but also smaller companies that don’t fit the culture of Big Law. There is a lot of work available for those who are flexible enough in their cost structures and use of technology to be competitive.
New laws need interpretation; legislators have to justify their existence and continue to write new laws, providing work for lawyers to interpret these laws and advise their clients on how to stay out of trouble and enjoy the benefits offered by such laws
Clients still look to lawyers, not law firms.
Globalization is providing more work locally. The phrase “think global, act local” has become a common refrain of the globalization movement.
The common thread is that lawyers will need to pay close attention to the needs and wants of their clients. Large firms didn’t grow without being attentive to client needs at first, and all lawyers will need to be more attentive in the future if they expect to attain and then retain the loyalty of their clients. And technology will be more of a differentiator in the future. The firm that adopts technology to reduce the costs of its operation, and then passes those savings onto the client, will be more successful.
What we are seeing is the development of two separate worlds of law. There are the Big Law firms, most of which are representing global clients, and then there are the rest. These other firms may have global clients and global issues, but their real focus is on small to midsize businesses and individual issues.
Planning for the future is the underlying principle of business success. Now is the time to begin planning for the law firm world of the future. Toward that end, here are three fundamental strategies:
1) Focus on a target market and become the recognized thought leader in that market or industry.
For example, if you are charged with a criminal offense, get a lawyer; or, if you are charged with a criminal offense, get a criminal defense lawyer; or, better, if you are charged with a criminal offense, get the specific lawyer you have seen on local television news or read as the author of a column in the newspapers or a blog on the Internet. In this example, we’ve gone from knowing that we need a lawyer all the way to knowing that we need the thought leader and top performer in the field, by name.
Thought leaders are ones who have evidenced their capabilities, their knowledge of the industry involved and the leading stature of their expertise. Becoming a thought leader is a process. Write articles for local and national publications in your field; write a commercially published book; speak at conferences; create teleseminars; create a video; do podcasts; refine and improve your website; send out an electronic newsletter. The channel of idea distribution is not magic; you must be all over because you never know from whence that phone call to engage you will come.
2) Use technology, including applications such as KM (knowledge management), CRM (client relations management) and other software applications too numerous to mention here. Use this technology to become more efficient. Improve the delivery of your legal service, while at the same time lowering the legal costs to your clients. It is the overall legal cost, not the hourly rate, that the client cares about. And only technology can help you reduce the cost of operations and thereby allow you to pass on to the client some or all of those savings.
The question becomes, then, are clients ready for the kind of billing arrangements that would allow the lawyer to make more money while being more efficient? Undeniably, there is somewhat of a trend among clients to view certain legal services as a commodity, and to apply standardized rates or flat fees where appropriate. However, most clients recognize the importance of and are willing to pay a fair fee for value. What they do not want is to pay too much for inefficiencies, duplications or unnecessary services. And this is where the leverage from technology is the lawyer’s advantage.
3) Pay attention to your realization rate. Collections, or lack thereof, remains the No. 1 problem for most lawyers. Failure to have a 95 percent realization rate means that you are holding a sieve and the sand (cash; accounts receivable) is flowing through. This means that you are not earning the 100 cents on the dollar that you are billing. While you pay expenses at 100 cents on the dollar, you are not earning the equivalent.
Too many lawyers equate financial success with work done, measured in billable hours. A lawyer’s inventory is not billable hours; it is the amount of cash that is realized from the billable hours outstanding. Realization is simply the percentage of what is billed that is actually collected. The greater your billings, the more effort you should devote to getting cash into the firm. When you bill clients, you are extending them credit. The road to disaster is continuing to do work with the same clients, extending credit rather than collecting fees in the hope that these clients will give you more work. Strive to get paid quickly for the work that has already been done.
These three strategies define what I call the 3-D Lawyer. These are the three dimensions to apply for success! Get the work; do the work; get paid for the work. In other words, market for new clients, produce the work and reap the profits. In business schools, they use the terms marketing, production and finance. These are common themes in every business, and they lead to your success when done right.
Law is an honorable, giving and caring profession and it is the only profession and/or employment mentioned in the U.S. Constitution. But law must be practiced in a businesslike manner. Running a law firm that way improves professionalism. The purpose is not simply to get more money for the lawyer; it also benefits the client. A profitable law practice is much more likely to avoid such ethical problems that arise in a firm under financial distress. Moreover, a law firm run as a business will also approach client service more efficiently, returning phone calls promptly, creating and adhering to a budget, providing sufficient details on clients’ invoices, and so on. You can’t truly be a professional service business that succeeds in the “new normal” until you understand “The Business of Law.”•