From Georgetown Law: Emerging Trends in Legal Services (with video interviews)

Part of our coverage of “Law Firm Evolution:  Brave New World or Business As Usual?”, a conference held March 21-23, 2010 by the Georgetown Center for the Study of the Legal Profession.  For all our posts on the conference click here.  

Reported by: Gregory P Bufithis, Esq.    Founder,  ThePosseList.com and ProjectCounsel.com

The panel was composed of Paul Smith (Partner, Eversheds) and Leah Cooper (Director of Strategy, CPA Global), with presentations by Michele DeStefano Beardslee (Associate Professor of Law, University of Miami Law School) and Mari Sako (Professor of Management Studies, Novack Center for Professional Service Firms, Said Business School, University of Oxford).

The moderator of the session was Montgomery Kosma (Vice President, Legal Services Outsourcing, CPA Global).

The panel’s focus was on the evolving relationships in today’s corporate legal market between clients and service providers, and why.  There was a full discussion of the purchase of legal services by large companies and the overall  ways that ongoing changes in the legal market are affecting the choices large companies make in managing law firm relationships and the extent of variation in those choices.

Michele DeStefano Beardslee presented a paper titled “Hiring Teams from Rivals: Theory and Evidence on the Evolving Relationships in the Corporate Legal Market” (click here), a paper she co-authored with David B. Wilkins, John C. Coates, and Ashish Nanda and the Program on the Legal Profession at Harvard Law School.  She discussed how her research was focused on the relationship between large corporations and law firms, her key findings being that relationships are still important in making buying decisions … and they are sticky.   Is is an interesting study and part of a larger investigation of the purchase of legal services by large companies. The overall project assesses the ways that ongoing changes in the legal market are affecting the choices large companies make in managing law firm relationships and the extent of variation in those choices.  Based in part on interview and survey data from 166 chief legal officers (CLOs) of S&P 500 companies from 2006-2007, this and related papers extend theory from economics, management science, and sociology relevant to the purchase of corporate legal services.

As Michele pointed out, research on the legal profession has not focused frequently on the interactions of large companies and law firms.  Legal scholars analyze the law of lawyers.  Economists abstract from legal services to analyze firms and expert services.  Management scholars that treat professional service firms (PSFs) as distinct from other businesses focus on non-legal services such as consulting, accounting, and investment banking.  Historians and sociologists study the entirety of the legal profession, including services provided to individuals as well as those provided to companies, despite the long-standing and growing stratification of the legal profession.  Or, they study organizations (companies or law firms) rather than relationships among organizations.

And as other panelists (and the audience) exclaimed commercial exchanges such as the purchase of legal services by large companies are shaped not only by market forces acting through arm‘s-length ties but also by embedded ties … the old boy network, i.e., social attachments and affiliations, which generate trust and shared norms.  These can be embedded ties that include repeat dealings as well as board memberships, etc.  But these relationships (as we have seen) can encourage a sharing of “soft” (non-verifiable) private information.   And “trusting relationships” may facilitate fraud, generate discrimination and inefficient reliance on prejudice-based social ties, with inefficient emotional backlash in the event of breach of trust, or strategic behavior.  Result?  long-term relationships have no clear efficiency implications overall.

For Michele’s slidedeck of her presentation click here.

Michele discussed the most common reasons for law firm termination, as well as the CLO movement and management, elaborating her thoughts on the future of CLOs, law firms and educators in our video interview:

There was also much discussion on the Eversheds report which was published during the weekend of the conference and its look at the how the “perfect storm” will affect the legal profession.   The report (based on a survey of 130 general counsel and 80 law firm partners) concludes that “the revolution has now arrived”.  As pointed out by Ron Friedman, interestingly the Evershed’s research finds that the recession was not so much the driver of change as the catalyst for it.  For the full report click here and for Ron’s analysis click here.

Paul Smith discussed it an length during the panel, pointing out that “the biggest firms need to reduce headcount and leverage, the hourly rate is almost dead in the UK, and that the balance of power has shifted to clients”.  Of more intriguing interest was his point that “strategic resourcing through outsourcing and technology has dramatically increased” which goes to the heart of what many in the audience expressed (and many commentators have called out):  a focus on efficiency will be good for legal technology.  Attitudes have changed.   Paul expounded on many of these points in our interview with him:

Professor Mari Sako drew on business parallels to portray possible futures for international law firms.  Her full presentation Make or Buy Decisions: Theory and Evidence in Legal Services can be read by clicking here.  She also provided a supplemental paper titled Run with the Gazelles, Eat with the Lions (click here).

She mentioned that “over the past two decades lawyers and law firms have boomed as never before. But legal services, faced with the challenges of globalization, regulatory changes and the financial crisis, are at a crossroads.”  This means that economic downturns create opportunities for innovation, which is all about discontinuous, unexpected change. Business history is littered with examples of leading firms being swept aside by new entrants in waves of ‘creative destruction’.  She used the computer industry as an illustration of the dynamics involved in successfully surfing the waves of discontinuity.

Innovation in legal services is also all about discontinuous changes. What the economist Joseph Schumpeter wrote a century ago is still relevant today: discontinuous change happens as a result of five things: the introduction of a new product or process, the opening of a new market or source of supply of intermediate goods, or a new organization design. For law firms discontinuous change is happening as a result of his last two factors – new sources of supply and new organizational design.

The value chain for law firms is disintegrating.  This possibility had existed for some time, with new ICT technology. Much of legal knowledge can be standardized, systematized, and packaged for delivery using self-service and smart systems. Moreover, the billable hour, which developed as a common way of charging clients, has come under severe attack, as the notion of professional autonomy and self-regulation came into conflict with the notion of business efficiency and consumer interest. Combined with the availability of new locations as sources of supply of talent, ICT has pushed global corporations in the direction of offshoring.

Global corporations currently have a choice of possible offshoring strategies but one popular step seems to be bypassing a law firm altogether, and outsource and offshore using a legal services firm, as Rio Tinto has done with CPA Global.

And speaking of CPA Global and Rio Tinto …. panelist Leah Cooper, having recently transtioned from her position as Managing Attorney at Rio Tinto to Strategy Director of Legal Services Outsourcing for CPA Global, spoke about about the legal services market being wide open and the need for collaboration being critical for success in the new legal market.  And she said “we need to playing nice in the sandbox, and exhibit trust”.  For more here is our interview with her:

Note: for a good interview of Leah by Richard Susskind discussing the results of the Rio Tinto outsourcing six months on click here (from LegalWeek.com).

Some of the best comments and analysis on all of these emerging trends in legal services came from attendees.  We caught up with colleague Ron Friedmann,  Senior Vice President of Marketing for Integreon, who we profiled earlier this year (click here) and he spoke about the big conference “takeaway” for him:  the “new normal” won’t be the same as the “old normal”.  He shared his thoughts on private equity investment in law firms and Integreon’s middle office outsourcing offering and controlling costs using shared library services:

Also at the conference was Josh Kubicki of the Legal Transformation Study (click here).   Among the experts involved with the Study are conference participants Jeffrey Carr of FMC Technologies, Marc Chandler of Cisco, Paul Lippe of Legal OnRamp, and Paul Smith of Eversheds.   The Study is designed to: challenge current legal service models; answer key strategic questions; and enable corporate and law firm counsel to effect a 20/20 strategic vision with foresight, not hindsight. 

Right now Josh is updating the study, taking it to the 2.0 level (white papers and blogs) and looking at globalization. Josh believes innovation will come outside the traditional legal realm, whether its LPO or litigation funding.  Here is our interview: