Differentiation in the New Legal Marketplace and Why It Matters
The legal industry is transitioning from guild to marketplace. Differentiation is becoming critically important in a field long known for the homogeneity of its providers and the acquiescence of its buyers. When legal delivery was exclusively about lawyers and firms, there was little need for them to differentiate. The profession operated from a self-regulated cocoon of ‘lawyers and non-lawyers.’ This spawned several industry myths: lawyer exceptionalism; all ‘legal’ work—as defined by lawyers-- must be performed exclusively by them; legal work is ‘bespoke’; every case is unique; and lawyers are uniquely qualified not only to deliver legal services but also to procure them.
These myths remained largely unchallenged for decades because lawyers controlled all facets of the legal ecosystem-- regulation, education, licensure, delivery, and buy-sell in the corporate segment. Absent competition, and with little grousing from consumers, the legal ecosystem remained monolithic and static--albeit with internal, pedigree-related stratification. Law was an insular world characterized by conformity, adherence to precedent, labor-intensity, leverage, and preservation of the status quo. Law firms had similar business structures, economic models, reward systems, and yardsticks for success—profit-per-partner (PPP). Except for a handful of specialized and/or brand-differentiated elites like Cravath and Wachtell, most firms became undifferentiated big box stores offering the same practice capability at similar pricing delivered from an identical economic model and objective—maximization of PPP.
Law firms focused on input—hours and origination-- and applied a brute force, labor-intense approach to all tasks and matters regardless of client value. ‘Budget’ was a foreign term, and law firms rationalized their ‘scorched-earth’ approach by conflating it with ‘practice excellence.’ Firms sold legal expertise, and they were the dominant providers because they cornered the market on legal talent. Corporate counsel—many of whom were alums of firms with whom they retained ‘relationships’—were largely relegated to overseeing work sourced to firms.
In recent years, a significant volume of work has migrated from law firms to corporate legal departments. The 2017 Georgetown Report cites, ‘erosion of the traditional law firm franchise,’ a euphemism for ‘clients no longer need large law firms to handle many legal tasks. ’ There are many reasons for the migration of work in-house—cost; knowledge of the client’s business, objectives, and risk tolerance; the dual role of in-house counsel as enterprise defender and business partner, etc. Still, there are more similarities than differences between corporate legal departments and firms. Disruptive change—new delivery models, more pervasive, efficient utilization of technology and process, enhanced use of big data, artificial intelligence, and the move to digitization has been incremental in law compared to other industries. Why?
Change Will Accelerate When Lawyers Don’t Control the Buy-Sell Process
Change in the legal marketplace will accelerate when lawyers no longer control both sides of legal buy-sell. While some regard the ascent of in-house departments as a bellwether of disruption, partners and senior corporate counsel—whatever their differences-- are both lawyers and were indoctrinated with the aforementioned legal myths. Casey Flaherty, an astute industry observer with experience on both the buy and sell sides recently wrote a thoughtful article making this point. Bill Henderson, a noted law professor with his hand squarely on the legal industry’s pulse, put an even finer gloss on Casey’s thesis: “’The lawyer theory of value’ — solving legal problems one at a time with smart lawyers — is an unstated and unexamined preference of lawyers, not a viable long-term solution for the clients they serve.”
That’s changed. Legal consumers—not ‘smart lawyers’--are now calling the shots. Technology, the global financial crisis, and globalization have produced a new buy-sell dynamic for goods and services—law included. Consumers demand more choice, transparency, competition, price predictability, and direct access to providers. The corporate C-Suite has mandated General Counsel ‘do more with less,’ and to comply with that edict GC’s are necessarily more receptive to traditional law firm alternatives than they were even a few years ago. CFO’s and procurement are also commonly involved in buying legal services, and they have applied business discipline to buying legal services.
Law has become a three-legged stool supported by legal, business, and technological expertise. Lawyers and legal delivery are no longer synonymous; legal services are delivered by lawyers, other professionals, paraprofessionals, and/or technology. Legal ‘service’ is substituting products for services, automation for labor-intensive repetition, and data instead of speculation. Law is not solely about lawyers anymore, and that is putting enormous pressure on the traditional law firm structure and economic model. Consumers—not lawyers-- determine what is ‘legal,’ whose expertise is required, when it is needed, from what structure/business model it is delivered, and at what price point it is valued. Practice expertise was long the dominant element in the legal mosaic. Now, it is one piece in a legal mosaic where technology and process have recast delivery, reframed customer expectations, and redefined ‘legal expertise’ and when it is required.
A Functional Definition of ‘Differentiation’ in Law
I recently had a conversation with Steve Immelt, CEO of Hogan Lovells, a powerhouse global law firm. I asked Steve about challenges confronting firms, and he quickly cited the need to differentiate. He divided differentiation into three parts: (1) practice—differentiated expertise, skills, and judgment; (2) delivery capability- the effective deployment of legal expertise, technology, and process to solve client challenges; and (3) customer satisfaction—achieving results and providing an excellent consumer experience that promotes trust. Steve noted that practice differentiation is shrinking and largely confined to ‘bet the company’ matters. That means a firm’s unsupported claims of ‘elite legal talent and top-notch legal work’—without more—will no longer cut it. For firms to be competitive, they must also possess—or collaborate with-- legal operations teams that provide transparent, efficient, real-time accessible, cost-effective, price-predictable, expert legal delivery capability. There are three options: build, buy, or rent (collaborate). For most firms, collaboration is the best option. The remarkable growth of CLOC and ACC Legal Operations and well-capitalized, tech and process-savvy law companies—like Elevate, UnitedLex, and Axiom—evidence the industry's newfound focus on legal operations and ‘the business of law.’ This helps to explain why demand for law firm service is waning at a time of increased demand for legal services.
Steve also stressed the importance of customer service and measurable results. This is another area where most law firms are faltering. Old-fashioned customer service and measurable results are key elements of differentiation not only for firms but equally for in-house departments and law companies. Law firm reliance on ‘practice excellence,’ pedigree, and reputation—without more—is no longer sufficient to be competitive or sustainable. Clients demand expertise, service, value, and results that integrate delivery and practice excellence.
The Legal Pyramid is Turned on its Head
Law firms constructed a pyramidal business model where partners leveraged the time and expertise of other lawyers to service clients and maximize PPP. They prospered with this model for decades. That structure is no longer sustainable because: (1) much of the ‘leveraged’ work is now performed outside law firms (disaggregated); (2) at the lower rungs, machines, paraprofessionals, and/or lawyers operating in lower-cost structures and/or markets are now performing the work; (3) many ‘legal’ tasks have been transformed from ‘services’ to ‘products’; (4) law companies that are well-capitalized, tech and process savvy, and with customer-centric models aligning provider to consumer economically and culturally have migrated up the complexity chain. They handle a growing portion of the ‘fat middle,’ matters sandwiched between ‘grunt’ work and ‘bet the company’ matters; (5) the practice of law and the instances when differentiated practice competency is required has been teased out from the delivery of legal services; (6) few law firms can compete successfully for bet the company work, and the competition for everything else requires that legal expertise is paired with delivery capability and a customer-centric approach to access, pricing, transparency, efficiency, and cost; and (7) that means that firms must collaborate with others in the legal supply chain to be competitive in today’s market and limit their practice to those areas where they truly excel. Law, like medicine, is becoming more specialized. In sum, the traditional law firm pyramid has been turned on its head.
The implications of the pyramidal inversion are profound. The skills, players, delivery models, pricing, structures, performance and reward standards, and training for the new legal marketplace are different than they were even a decade ago. Law is not simply about knowing—or selling—legal knowledge. Practice expertise must be leveraged by technology and process to provide consumers ‘faster, better, cheaper’ and quantifiable results on a predictable, transparent, real-time accessible, and customer-centric basis. And if this sounds different than the traditional law firm modus operandi, it is.
The distinctions the legal industry draws between ‘law firms,’ ‘corporate legal departments,’ ‘legal service providers,’ ‘diversified professional service companies’ (think: Accenture and the Big Four) are becoming functionally meaningless. What is important is that the appropriate resources—human and/or machine— and expertise are integrated to produce results that achieve consumer objectives efficiently, risk-appropriately, and cost-effectively. Providers that can consistently deliver legal services this way—whether utilizing internal resources or collaborating with others in the supply chain—will be dominant players in the new legal mosaic.
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