Estimates place the US legal services industry at about $275 billion. Worldwide, it is somewhere around $800 billion. Even the portion attributed to medium- and large-sized enterprise legal services is substantial, coming in for the US around $138 billion. To give you a comparison, the total US footwear market is around $48 billion and the global market is around $220 billion. Lawyers may argue about whether law is or should be a business, but there is no denying that the legal services business is big business.
Trands from Disruption
The legal industry, law firms in particular, requires low capital investment in the traditional sense. Law firms don’t invest in manufacturing equipment, stores, etc. The biggest expenses typically fall into leased capital (real estate), leased information technology infrastructure (servers, laptops, etc.), and labor buckets. Of course, if we consider people “human capital” then law firms are rich in capital. They also have some other types of capital, namely intellectual property and some modest brand value. If the legal industry had married its reliance on human capital with technology, it would be at the forefront of industries. Instead, it is at the back of the industries because of its abstinence from technology.
Traditional Capital to Human Capital
Strangely enough, the legal industry’s heavy reliance on human capital puts law firms partly in sync with where companies are moving in the 21st century. The top performing companies are human-capital enterprises. Many of these companies have huge market valuations, but their investment in traditional capital assets is low compared to top performing companies in the past. Think of the companies that provide alternative services to taxis and hotels. They provide the service, but others own the cars and rooms. Even some of the largest tech companies provide services, but they don’t own the servers the lease them from other businesses. Instead of investing in traditional capital, these 21st-century top performers rely on human capital. This trend marks a significant shift from 20th-century practices.
Reductions in Value
A second major trend for the 21st century is the reduction in value that occurs as disrupters take over business from traditional providers. When Skype moved to Microsoft, it added $2 billion USD to Microsoft, but it took $37 billion away from traditional telecommunications companies. When Airbnb entered the Austin, Texas market hotel revenue dropped 8% to 10%, but not all of that revenue transferred to Airbnb.
We see the same thing in the legal industry. New service providers such as Kira Systems, replace traditional service providers (law firms), but Kira’s revenue is not simply a shift of dollars from law firms to Kira (that is the point, isn’t it?).
Value means what the consumer is willing to pay for the service. Legal service providers still stuck in the “pay for effort” model will find this trend challenging. As disruptive services enter the market, consumers find they can get equivalent or better services for a total cost far below the cost charged by those using the effort model. But, if the provider billing by the hour (effort) isn’t reducing the cost to provide its services, it will quickly find itself priced out of the market. This is, in part, the reason that large law firms have seen companies pull $8 billion of legal services from them over the past three years.
As low-friction models take over from traditional models, the disruption doesn’t result in a one-to-one revenue transfer. The disrupters replace the traditional providers, but at a fraction of the cost to the buyers. In the legal services industry, this should result in a similar or greater volume of services to consumers of legal services but at a lower total cost. This message also should serve as a warning bell to law firms and law departments. As disruptive services improve, the amount corporate clients will pay for legal services (in house or outside) will drop – substantially.
Friction-Free Labor
Another major trend in the 21st century is the increasing role of friction-free labor. By 2020, approximately half the labor force in the U.S. will work as freelancers. Millennials already don’t trust corporations and corporations are nervous about over-hiring. Individuals who might experience the boom and bust of a company hiring today and reducing its force tomorrow can avoid the cycling by working independently. Being responsible for generating one’s workflow can be an easy tradeoff when the alternative is the dislocation caused by gyrations in companies unrelated to your performance.
Lawyers are nervous about low-friction labor. For many reasons (a few valid), lawyers want to build relationships with clients. Labor that comes and goes on a project basis isn’t relationship oriented, it is transactional. Under the current legal services model, transactional structures are bad for firms and bad for corporate law departments. But, since they are cost effective, lawyers will have to find business models that provide the benefits of transactional services and relationships.
What These Trends Mean for the Legal
Industry
While the traditional law firm will live on for some time (killing anything off in the legal industry isn’t easy), the need for that model and the advantages it provides will dwindle over time. Similarly, the need for and advantages of the large corporate law department will dwindle. When your model is labor-centric, having lots of labor around makes sense. When your model shifts to information-centric, inventorying labor makes no sense.
“The 21st-century corporation will increasingly be an idea-based business, operating not just in infotech but also in media, finance, pharmaceuticals, and other industries that consume lots of brainpower.” – Geoff Colvin
As courts eliminate in-person hearings, litigation becomes more settlement than discovery, and we close deals anywhere, anytime, with electronic signature documents, and contracts move from paper to code, the justification for dedicated teams of individuals hoping work will come in decreases. Instead, we can move — as those in manufacturing and other industries have moved — to just-in-time lawyering.
Several law firms in the UK and a few in the US have started to move in that direction. Many other firms have moved to virtual arrangements, a step in between the traditional law firm and just-in-time lawyering. Outside of law, at least one company uses transparency of its business structure as a selling point. (Imagine a law firm posting a breakdown of how it spends its money as it announces it is giving up its office for a virtual arrangement.)
It is hard to overstate the impact these trends will have on the legal industry and, at the same time, the degree to which lawyers don’t understand them.
These trends will demand new ways of training lawyers, flexible ideas about staffing, and liberalization of licensing requirements. At the same time, they will open career opportunities well beyond what lawyers sitting in traditional law firm offices have imagined.
Will law become part of the Gig Economy? Yes, because all occupations will play in the Gig Economy, but law will not be among the early deep adopters. In truth, though, we already are part of the Gig Economy (contract lawyers, document review teams, staffing companies).
When I get together with industry colleagues we bemoan the massive resistance to change in the industry. We often talk about lawyers belonging to one of three groups.
The first group is made up of lawyers looking at retirement in the next 10 years. These are the “don’t care and don’t want to hear it” lawyers. Change may be here, but they pray they can ride out their careers without adapting. The second group is made up of lawyers just starting out. These are the “I have no idea what to do” lawyers. Change is here, but they are having trouble finding leaders and role models to guide them. The third group is made up of lawyers in the middle. They are the “I don’t want to leave what has made me successful, and I’m terrified it won’t keep me successful” lawyers. Change is here, but adapting means taking risks something this group has been bred to avoid.
As an industry, one major problem is that the first group still holds the power and refuses to change.
The lawyers in the first group are the senior partners in law firms and, to a degree, general counsel in larger companies. They are, in traditional change parlance, the blockers. Right now, they are doing a superb job.
Lawyers just entering the profession will learn and adapt. They don’t have built up bad habits and will get their feet under them.
That leaves lawyers in the third group, what I call the “middling lawyers.” For these lawyers, going through transformative change could be a rough ride. It is with these middling lawyers that I and others have the most frustration. These lawyers have learned the craft, they are skilled, and they know the substance of their field. They should be grabbing hold of the reins, reinventing compensation models, rejiggering business models, and leading their organizations into the future. But they aren’t, preferring instead to hope that salvation will arrive from somewhere, somehow.
By 2025, millennials will comprise 75% of the global workforce. It is those millennials, starting out as lawyers today, who will have ideas very different than those of their predecessors about how legal services should and can be delivered. By 2025, the middling lawyers will be dependent on those millennials as customers. Do middling lawyers really think consumers raised in a low-friction labor, freelance, human capital world will want traditional law firms that deliver legal services the mid-1800s way representing them?
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