Information Is Changing Law Firm Models

In much the same way, the legal industry is entering its third iteration. The first was the traditional partnership model and the second was the pyramid-shaped (and later, to some degree, diamond-shaped) model of Am Law 100 and 200 firms.

What will the third model look like? In interviews with law firm leaders, consultants, and general counsel, there's no clear consensus yet, only that the law firm models are changing and the one-size-fits-all approach can't continue.

Marcie Borgal Shunk, a consultant with LawVision Group, says new firm models will feature three things: 1) smaller partnership classes; 2) more specialization; and 3) new compensation structures.

This article examines what is happening ' and why.

Change Is Here

While there was no clear vision about what the next law firm model will look like, nobody is disputing that the legal industry is being forced to change.

“Law firms are in a zero-growth, low-margin business,” says Dilworth Paxson CEO Ajay Raju. “You see consolidation. Smaller firms will have a harder time.”

“Different people are encroaching on law firms,” he adds, including in-house departments and legal outsource providers.

“Larger firms are reaching down [for work] and smaller firms are reaching up,” Raju says.

“I wouldn't describe it as a seismic shift,” Shunk says, “but it is a shift for sure.”

Law firms, legal industry observers say, tend to follow the leader and wait to see what everyone else does.

“That model isn't viable when you're talking about” a monumental shift in behavior, Shunk says.

“I definitely see the model changing,” says Kim Desmarais, a client consultant with Thomson Reuters' Peer Monitor.

Given that law firms are facing increased competition, pressure from clients and a slow-to-no-growth market, there is a need to change, she says.

“I can't describe what the [new] model is [yet],” Desmarais says. “But it's morphing.”

However, Aric Press, the former longtime editor of Accounting and Financial Planning for Law Firms ALM sibling The American Lawyer and now a consultant with Bernero & Press, cautions against broad pronouncements of changes to the law firm model.

“I believe there are significant changes going on in the law firm world,” Press says, but it's going to be “in an evolving way, rather than a revolutionary way.”

No More Secrets

While some may point to the Great Recession and what continues to be a buyer's market as being the cause of these shifts, the driving force is far more simple, consultants and law firm leaders believe.

“One of the things really driving this is access to information,” Shunk says.

For years, firms could get away with being vague about billing rates, she says. But e-billing and technology management systems have changed that, along with information from providers like Serengeti Law and TyMetrix. There are no longer secrets or mysteries about what firms do.

That access to information gives general counsel greater control over the cost of matters and makes it harder for firms to play with or increase billing rates or hours.

Now GCs have a portfolio of matters and they can see, for instance, with a typical IP matter out of Atlanta how long it's going to take, how many partners are needed, and what it should cost, according to Shunk.

She says law firms are starting to do the same. It's taking them longer, but law firms are starting to access the same information and use it to deliver better services and value. “It's creating an environment where strategy trumps everything. In a growth market, you don't need strategy,” Shunk says.

Smart firms, consultants say, are using data to strengthen what they do best, and can be seen in the way some firms specialize in certain industries and markets.

“Whenever you have better information as a consumer, it tends to make price more of a factor,” according to Fox Rothschild managing partner Mark Silow.

Another factor driving the change is that, in addition to using data to control costs and get a grip on the work of outside counsel, in-house lawyers are demanding more than just legal advice.

In private meetings and conversations with in-house counsel over the last 18 months with A&FP 's ALM sibling, The Legal Intelligencer, there has been a consistent theme from general counsel.

“Don't just give me the legal answer, give me the business answer,” a number of GCs have said. “Give me the business advice to help me run my business.”

“General counsel are saying: 'We want you to understand our pressures, our problems, and our business,'” Desmarais says. “Realize it's not about [just] the work.”

Not Everyone Can Be High-End

Another factor driving the structural changes? The realization that not every firm can go after and get the most coveted high-end work. In the big growth days of the early 2000s, many firms started shedding lower-rate work in favor of chasing more high-rate work.

By 2015, it's become apparent that while some firms have been successful with that approach, many more have struggled. For example, Post & Schell and Nelson Brown Hamilton & Krekstein, two firms that typically did a great deal of insurance work, made no secret of their desire to get more high-end work. And both have faced adversity and a number of lawyer defections in the past year.

And even the second half of the Am Law 100 are increasingly seeing distance between themselves and the Am Law 50 above them. The lure of becoming an Am Law 25 firm is real, but something that may prove only to be a distraction for firms that could better tailor their strategies.

“There's only so much high-end work to go around,” Shunk says.

But some firms are adapting, she says, using technology and project management to go after commodity work. “They're saying: 'We can do that commodity work. We can deliver those services and make it work.'”

Law firms need to get over the ego factor, she says.

Silow says his firm is proud to say it focuses on middle-market work. And he says more clients, even Fortune 50 companies, are realizing they are middle-market clients when it comes to a good chunk of their legal work. A lot of firms, Silow says, are really struggling with that concept when it comes to setting rates and a cost structure that fits with those client needs.

There is always going to be a place in the world for firms charging premium rates for premium engagements, such as the Skadden, Arps, Slate, Meagher & Flom and Wachtell, Lipton, Rosen & Katzes of the world, Silow says.

“I think there are a lot of firms that want to be pretenders in that space that are going to struggle.”

Legal consultant Kent Zimmermann of the Zeughauser Group says firms need to double down on what they want to be and realize that not everyone can be the Am Law 10 or even 50.

“It's dangerous to try to be all things to all people,” Zimmermann says. “The ultimate strategy is choosing what you are not going to do.”

General counsel increasingly will look to the firm that is the best in a field, and that doesn't always mean the most expensive, Zimmermann says. As one general counsel told him, while Neiman Marcus can sell him everything, it's all at higher prices and some of that stuff he wants to get for cheaper off of Amazon.

Firms have to find a niche where they can have a credible strategy and build the breadth and depth they need to be the best in that niche. Strategies could be focused on geographies, client type, practice or industry sector, Zimmermann says. “The high-performing firms have made hard choices about what they want to be known for.”

In an era where firms look to get revenue wherever they can find it, that discipline is hard to come by. But Zimmermann takes issue with the concept that all revenue is good revenue. He says profitability matters.

Increased Competition

Yet another factor causing change is the increased competition law firms face. Most consultants and law firm leaders identified three primary competitors: 1) in-house counsel departments; 2) legal outsource providers; and 3) boutiques.

However, not everyone is sold on the idea of in-house departments getting bigger and taking work away from law firms.

“That's a lot of head count,” Desmarais says, pointing out that companies are constantly looking at ways to reduce the number of employees they have.

Legal outsource providers are certainly shaping up to compete with a number of firms, consultants say. Several spoke admiringly of Axiom, a 1,200-person firm that provides secondees, outsourcing assistance and large-project management.

“It's a strong model,” Shunk says.

And given that partner classes are much smaller now than they were in 1990 and the allure of becoming a partner at a large firm isn't what it once was, there are more upstarts popping up, with lawyers breaking away from large firms to set up smaller shops that are more lean and nimble in their structure and better able to handle sophisticated matters at a lower rate than large law firms.

More big firm lawyers, dissatisfied with large firm structures, are saying: “I'm going to do this on my own,” Shunk reports. You're seeing “a smaller boutique handling significant matters that you would have seen historically handled by a” larger firm.

“It's almost like the industrial revolution is coming to legal 200 years late,” Zimmermann says of what he predicts is a permanent shift away from firms handling major pieces of litigation and rather ceding much of the commodity piece of that litigation to clients or LPOs.

The competition in places like e-discovery has “taken a huge bite out of the money” law firms used to make. The highest performing firms, Zimmermann says, are those who accept that this is where things are going. “High-performing firms are saying: 'We want to be known for doing brain surgery, for stuff the others can't do.'”

That model requires less leverage, he says.

Timeframe and Mindset

While the change in the law firm model was seen by some as subtle, most agreed the timeframe for firms to change was short.

“For some firms, [the need to change] is immediate,” Shunk says.

Firms need to have a real strategy and stick to it, legal industry observers say.

“Strategic discipline is difficult,” according to Shunk.

Firms need to be more business-savvy and innovative, consultants and law firm leaders believe. But law firms typically aren't innovative.

The legal industry is “the only industry that discourages innovation,” Raju says. He says it goes deeper than just the firms: It starts with the lawyers.

“I'm in the business of being a counselor,” not a lawyer, Raju comments, explaining that a counselor provides a wealth of advice and services beyond just legal advice for the matter at hand.

Lawyers and firms need to think more like innovators, he says.

For example, Dell makes computers, while Apple makes innovation. “I think lawyers should think like Steve Jobs and Elon Musk.”

According to Raju, disruptive innovators focus on the “why” of what they do, rather than the “how” or the “what.”

Hank Grezlak is the Associate Editor of The Legal Intelligencer, the Philadelphia-based ALM sibling of Accounting and Financial Planning for Law Firms. He can be reached at [email protected]. Follow him on Twitter @HGrezlakTLI. Gina Passarella is a Senior Staff Reporter for the Legal. She can be reached at at [email protected]. Follow her on Twitter @GPassarellaTLI.

The standard law firm model that has been in effect for the better part of the last 20 years is becoming less viable, and the way law firms are run is undergoing a subtle, yet significant change, driven largely by information.

The wealth of information that general counsel have access to, along with a zero-growth market for many firms, aging leadership, and increased competition from things like legal outsource providers, is creating an environment where many law firms will have to dramatically change if they want to survive.

When futurist Alvin Toffler published his bestseller, The Third Wave, in 1980, he theorized that much of the turmoil of the late 1970s was the result of a major societal shift. In Toffler's view, there had been two previous major “waves,” or changes to society. The first wave was the transition from a hunting and gathering society to an agrarian one, and the second wave was the transition from an agrarian society to an industrial society. The third wave, he predicted, was a post-industrial society ' the information age.

In much the same way, the legal industry is entering its third iteration. The first was the traditional partnership model and the second was the pyramid-shaped (and later, to some degree, diamond-shaped) model of Am Law 100 and 200 firms.

What will the third model look like? In interviews with law firm leaders, consultants, and general counsel, there's no clear consensus yet, only that the law firm models are changing and the one-size-fits-all approach can't continue.

Marcie Borgal Shunk, a consultant with LawVision Group, says new firm models will feature three things: 1) smaller partnership classes; 2) more specialization; and 3) new compensation structures.

This article examines what is happening ' and why.

Change Is Here

While there was no clear vision about what the next law firm model will look like, nobody is disputing that the legal industry is being forced to change.

“Law firms are in a zero-growth, low-margin business,” says Dilworth Paxson CEO Ajay Raju. “You see consolidation. Smaller firms will have a harder time.”

“Different people are encroaching on law firms,” he adds, including in-house departments and legal outsource providers.

“Larger firms are reaching down [for work] and smaller firms are reaching up,” Raju says.

“I wouldn't describe it as a seismic shift,” Shunk says, “but it is a shift for sure.”

Law firms, legal industry observers say, tend to follow the leader and wait to see what everyone else does.

“That model isn't viable when you're talking about” a monumental shift in behavior, Shunk says.

“I definitely see the model changing,” says Kim Desmarais, a client consultant with Thomson Reuters' Peer Monitor.

Given that law firms are facing increased competition, pressure from clients and a slow-to-no-growth market, there is a need to change, she says.

“I can't describe what the [new] model is [yet],” Desmarais says. “But it's morphing.”

However, Aric Press, the former longtime editor of Accounting and Financial Planning for Law Firms ALM sibling The American Lawyer and now a consultant with Bernero & Press, cautions against broad pronouncements of changes to the law firm model.

“I believe there are significant changes going on in the law firm world,” Press says, but it's going to be “in an evolving way, rather than a revolutionary way.”

No More Secrets

While some may point to the Great Recession and what continues to be a buyer's market as being the cause of these shifts, the driving force is far more simple, consultants and law firm leaders believe.

“One of the things really driving this is access to information,” Shunk says.

For years, firms could get away with being vague about billing rates, she says. But e-billing and technology management systems have changed that, along with information from providers like Serengeti Law and TyMetrix. There are no longer secrets or mysteries about what firms do.

That access to information gives general counsel greater control over the cost of matters and makes it harder for firms to play with or increase billing rates or hours.

Now GCs have a portfolio of matters and they can see, for instance, with a typical IP matter out of Atlanta how long it's going to take, how many partners are needed, and what it should cost, according to Shunk.

She says law firms are starting to do the same. It's taking them longer, but law firms are starting to access the same information and use it to deliver better services and value. “It's creating an environment where strategy trumps everything. In a growth market, you don't need strategy,” Shunk says.

Smart firms, consultants say, are using data to strengthen what they do best, and can be seen in the way some firms specialize in certain industries and markets.

“Whenever you have better information as a consumer, it tends to make price more of a factor,” according to Fox Rothschild managing partner Mark Silow.

Another factor driving the change is that, in addition to using data to control costs and get a grip on the work of outside counsel, in-house lawyers are demanding more than just legal advice.

In private meetings and conversations with in-house counsel over the last 18 months with A&FP 's ALM sibling, The Legal Intelligencer, there has been a consistent theme from general counsel.

“Don't just give me the legal answer, give me the business answer,” a number of GCs have said. “Give me the business advice to help me run my business.”

“General counsel are saying: 'We want you to understand our pressures, our problems, and our business,'” Desmarais says. “Realize it's not about [just] the work.”

Not Everyone Can Be High-End

Another factor driving the structural changes? The realization that not every firm can go after and get the most coveted high-end work. In the big growth days of the early 2000s, many firms started shedding lower-rate work in favor of chasing more high-rate work.

By 2015, it's become apparent that while some firms have been successful with that approach, many more have struggled. For example, Post & Schell and Nelson Brown Hamilton & Krekstein, two firms that typically did a great deal of insurance work, made no secret of their desire to get more high-end work. And both have faced adversity and a number of lawyer defections in the past year.

And even the second half of the Am Law 100 are increasingly seeing distance between themselves and the Am Law 50 above them. The lure of becoming an Am Law 25 firm is real, but something that may prove only to be a distraction for firms that could better tailor their strategies.

“There's only so much high-end work to go around,” Shunk says.

But some firms are adapting, she says, using technology and project management to go after commodity work. “They're saying: 'We can do that commodity work. We can deliver those services and make it work.'”

Law firms need to get over the ego factor, she says.

Silow says his firm is proud to say it focuses on middle-market work. And he says more clients, even Fortune 50 companies, are realizing they are middle-market clients when it comes to a good chunk of their legal work. A lot of firms, Silow says, are really struggling with that concept when it comes to setting rates and a cost structure that fits with those client needs.

There is always going to be a place in the world for firms charging premium rates for premium engagements, such as the Skadden, Arps, Slate, Meagher & Flom and Wachtell, Lipton, Rosen & Katzes of the world, Silow says.

“I think there are a lot of firms that want to be pretenders in that space that are going to struggle.”

Legal consultant Kent Zimmermann of the Zeughauser Group says firms need to double down on what they want to be and realize that not everyone can be the Am Law 10 or even 50.

“It's dangerous to try to be all things to all people,” Zimmermann says. “The ultimate strategy is choosing what you are not going to do.”

General counsel increasingly will look to the firm that is the best in a field, and that doesn't always mean the most expensive, Zimmermann says. As one general counsel told him, while Neiman Marcus can sell him everything, it's all at higher prices and some of that stuff he wants to get for cheaper off of Amazon.

Firms have to find a niche where they can have a credible strategy and build the breadth and depth they need to be the best in that niche. Strategies could be focused on geographies, client type, practice or industry sector, Zimmermann says. “The high-performing firms have made hard choices about what they want to be known for.”

In an era where firms look to get revenue wherever they can find it, that discipline is hard to come by. But Zimmermann takes issue with the concept that all revenue is good revenue. He says profitability matters.

Increased Competition

Yet another factor causing change is the increased competition law firms face. Most consultants and law firm leaders identified three primary competitors: 1) in-house counsel departments; 2) legal outsource providers; and 3) boutiques.

However, not everyone is sold on the idea of in-house departments getting bigger and taking work away from law firms.

“That's a lot of head count,” Desmarais says, pointing out that companies are constantly looking at ways to reduce the number of employees they have.

Legal outsource providers are certainly shaping up to compete with a number of firms, consultants say. Several spoke admiringly of Axiom, a 1,200-person firm that provides secondees, outsourcing assistance and large-project management.

“It's a strong model,” Shunk says.

And given that partner classes are much smaller now than they were in 1990 and the allure of becoming a partner at a large firm isn't what it once was, there are more upstarts popping up, with lawyers breaking away from large firms to set up smaller shops that are more lean and nimble in their structure and better able to handle sophisticated matters at a lower rate than large law firms.

More big firm lawyers, dissatisfied with large firm structures, are saying: “I'm going to do this on my own,” Shunk reports. You're seeing “a smaller boutique handling significant matters that you would have seen historically handled by a” larger firm.

“It's almost like the industrial revolution is coming to legal 200 years late,” Zimmermann says of what he predicts is a permanent shift away from firms handling major pieces of litigation and rather ceding much of the commodity piece of that litigation to clients or LPOs.

The competition in places like e-discovery has “taken a huge bite out of the money” law firms used to make. The highest performing firms, Zimmermann says, are those who accept that this is where things are going. “High-performing firms are saying: 'We want to be known for doing brain surgery, for stuff the others can't do.'”

That model requires less leverage, he says.

Timeframe and Mindset

While the change in the law firm model was seen by some as subtle, most agreed the timeframe for firms to change was short.

“For some firms, [the need to change] is immediate,” Shunk says.

Firms need to have a real strategy and stick to it, legal industry observers say.

“Strategic discipline is difficult,” according to Shunk.

Firms need to be more business-savvy and innovative, consultants and law firm leaders believe. But law firms typically aren't innovative.

The legal industry is “the only industry that discourages innovation,” Raju says. He says it goes deeper than just the firms: It starts with the lawyers.

“I'm in the business of being a counselor,” not a lawyer, Raju comments, explaining that a counselor provides a wealth of advice and services beyond just legal advice for the matter at hand.

Lawyers and firms need to think more like innovators, he says.

For example, Dell makes computers, while Apple makes innovation. “I think lawyers should think like Steve Jobs and Elon Musk.”

According to Raju, disruptive innovators focus on the “why” of what they do, rather than the “how” or the “what.”

Hank Grezlak is the Associate Editor of The Legal Intelligencer, the Philadelphia-based ALM sibling of Accounting and Financial Planning for Law Firms. He can be reached at [email protected]. Follow him on Twitter @HGrezlakTLI. Gina Passarella is a Senior Staff Reporter for the Legal. She can be reached at at [email protected]. Follow her on Twitter @GPassarellaTLI.