Tuesday, April 9, 2013

A Perfect Storm for Reform, Part 1

Richard Susskind, in his new book, Tomorrow's Lawyers: An Introduction to Your Future (2013), describes the fundamental shift occurring in the legal field.  The 2008 economic downturn accelerated that shift.

His theme is simple: To respond to client needs when they seek more value for the money; when technology can perform routine tasks more cheaply, quickly, and accurately than attorneys; when well-trained lawyers live in Asia and can work globally; when most people still have no access to affordable legal services, the legal profession will "dispense with much of our current cottage industry and re-invent the way legal services are delivered."  He calls the situation a "perfect storm" for reform.  

He begins by discussing the business model based on hourly billing.  Typically, a firm uses a large number of associates per partner on an assigned project.  Those associates, in earlier times, worked months on document reviews for litigation and due diligence projects for acquisitions and mergers.  Susskind describes this work as "requir[ing] more process than judgment, procedure instead of strategy or creativity."  

As an associate at Skadden Arps in the mid-1980s,  I worked months on both types of projects.  Even in those ancient times, the firm billed my time at $200 per hour, as I recall.   Was my time worth that?  Let me say, I thought that billing rate astronomical then.  

Now, a tech-based company can do the same job using computer analytic tools to achieve more efficient, arguably more accurate, and certainly less costly e-discovery.  But, who works at those jobs now?  Companies fill them with leased or contract attorneys, who typically accept lower status, fewer benefits, and no path to promotion within the traditional law firm.  Even so, a new graduate can earn $52,000 per year or about $25/per hour in these positions. 

When I joined Skadden Arps in 1985, I made about $65,000 per year in salary.  To stay even with inflation, in 2012, I would need to make (as a three year associate) $136,506 per year.   These numbers alone should indicate the savings clients get from moving this type of routinized work to more cost-effective providers.  However, what the client gains in savings, the associate loses in salary and the firm loses in profit.   In addition, law firms arguably need fewer of these entry level associates. 

Increasingly, corporate clients are seeking and getting billing arrangements that jettison the hourly fee for a fixed-cost/project-based fee or a capped fee.  Law firms, in turn, hire financial experts who can prepare a fee responding to this client demand while ensuring the firm's profitability.  Based on my experience, you would need an expert to help you balance the tensions in that billing model.   

But clearly, a change in billing practices was long overdue.  The hourly billing model had built-in incentives to be less efficient in delivering legal services, not more efficient.   Projects expanded to fill the time available, and each new hour of time billed fattened an equity partner's purse.  

To trim fees to clients, law firms increasingly outsource back-office functions, like technology, marketing, and human resources. Alternatively, clients in similar industries are coming together in collaborative ways to get their legal needs met more efficiently and at lower cost.  He cites regulatory compliance in the banking industry as ripe for this approach to legal services.  Companies could also develop an online service, like one called Rulefinder, that helps clients discover and apply rules relating to international shareholder disclosure.   Similarly, a group of Virginia towns -- or small businesses, or individuals -- could come together and share the costs of common legal work.  

I'll discuss other shifts he predicts in future posts.  

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