Susskind: lawyers have to provide more for less
Lawyers around the world are watching to see how alternative business structures (ABS) work, giving UK law firms a possible competitive advantage if they can meet “unprecedented” client demand for value, Professor Richard Susskind told the Legal Futures Conference.
In a fast-paced and wide-ranging keynote address covering the gamut of pressures and opportunities facing lawyers, Professor Susskind said it was “unimaginable” that investors and entrepreneurs would ignore the opportunities presented by legal market.
He predicted that only lawyers who could deliver better and more accessible legal services at a lower cost – “more for less” – would flourish in future.
The global demand for value for money is growing, he said. “I am speaking to general counsel, in-house lawyers… who are under pressure to take 50% off their legal spend with external law firms. This is pressure of an unprecedented sort,” he said.
He said it was a misconception that law firm process changes already underway – in which work is broken down, complex matters separated from routine processes, and each handled wherever it can be done most efficiently – do not apply to the “high end of the market”. The view is “fundamentally mistaken”, he said. Even the largest deals and disputes in the world can be broken down and have elements susceptible to standardisation.
Professor Susskind, who has law professorships in Glasgow and London and is IT adviser to the Lord Chief Justice, reported that he frequently travels to jurisdictions where the legal services market is restricted. He has found the lawyers there acutely aware of developments in this country, but are hampered by laws preventing them from innovating themselves. “We’ve actually got a competitive advantage, potentially, for a short period of time to build a legal industry that’s more competitive than others,” he said. Last week, the American Bar Association started down the road to seeing ABSs in the US.
He doubted the market would be transformed “overnight” after ABSs become lawful in October and predicted that medium-sized firms would merge to survive. Traditional general practitioners will be hardest hit, he warned, “because so many of them are doing routine and repetitive work that will be alternatively sourced”.
How ABSs will pan out is unclear and it is “terribly early days”, but one thing is certain, he said: “We can be absolutely confident… that this multi-billion pound sector will attract external investment… The idea that there’s that much value in the market and that entrepreneurs and capital is going to ignore it is unimaginable.”
Law firms hold few attractions to private equity investors because there is no obvious exit route and little profit, he said, predicting that external investment will be made exclusively in new forms of legal business: “These are the businesses that are growing; doubling, tripling, quadrupling every year. Of course they’re going to attract investment.” Professor Susskind is a consultant to Lyceum Capital, the private equity business that has been most open about its interest in the legal market.
The mindset of some lawyers that the profession is unique among industries and so cannot change is a “distraction”, he said. So are “turf wars between regulators and professional bodies”, attempts to “ring-fence traditional lawyering” and a reluctance among lawyers to embrace information technology.
Another mindset flaw is the belief that lawyers are somehow capable of mastering unfamiliar disciplines with minimal training, such as project management. This amounts to a “collective arrogance”, he said. Lawyers have to consider becoming skilled “hybrids”, he suggested, for instance legal process analysts who are expert in breaking down legal work, or legal project managers, or legal risk managers who focus on helping clients avoid problems rather than resolve them.
As Professor Suuskind pints out, the proceeds of capital infusions by outside investors in large law firms will likely be applied to technology and most particularly knowledge management systems, all with a view of lowering costs to consumers of legal services. The result would be increased commoditization and reduced revenues per lawyer. Thus, the consequence of such investments may well be that unless one creates a Goldman Sachs-type leverage ratio at a law firm, quite an unlikely result for any law firm, the investor will simply not, I believe, get the anticipated return.
The practices which yield the highest return still remain in the plaintiffs’ class action bar and in big stakes high end plaintiffs’ contingency cases. Massive class actions and other high end cases chew up enormous amounts of capital. Law firms which have been active in this world have already amassed substantial capital and have the internal resources to fund these cases. Some still utilize traditional institutional lending from banks at favorable rates. Others utilize litigation funding companies which do tend to charge exorbitant interest rates; but, then again, these funding companies accept all of the risk in making non-recourse loans and at the end of the day, they do not remain partners of the law firm.
Others have noted that outside investors in a firms would exert some degree of control within a law firm and the danger he highlights is that such investors will impair the independence of the lawyers’ judgments in directing that efficiency, rather than the clients’ best interests will be a driver in handling a client engagement, all in violation of Rule 1.1 of the Model Rules of Professional Conduct applicable in the Unites States. The UK’s newly proposed outcome determinative standards may yield a different result.
But an added impediment is the preservation of client secrets and confidences. Non lawyer investor participation in law firm management necessarily makes non-lawyers privy to such secrets and confidences, with no mechanism to police the maintenance of such confidentiality by these non-lawyers.
As Yogi Berra said, predictions are hard, particularly about the future, my own humble prediction is that these models won’t work for traditional Big Law. That’s what I said six months ago at http://kowalskiandassociatesblog.com/2010/10/05/will-permitting-equity-investments-in-law-firms-by-non-lawyers-or-allowing-law-firms-to-go-public-have-a-significant-impact-on-corporate-law-firms/ and nothing has yet surfaced to dissuade me.