Law firm expenses problem in the new process era

Jordan Furlong has in the recent insightful and thought-provoking piece “Law firm profits in the process area” made a comprehensive review of the expenses problems most law firms are facing today. We all know that demand is soft and that law firms business in slacking, with every recent survey being made confirming that legal departments are insourcing more work and are pushing back on fees for the work they do send out. But recent reports also reveal that not only is profit weak, there also seems to be an expenses problem.

Hildebrandt Institute recently reported in the report “Weak Demand in Q2 Points to Challenging 2012 Outlook for Law Firms” that law firm profit is weak but, even more problematically, expenses have not declined, undercutting whatever revenue gains were to be had. Similarly Wells Fargo’s Legal Speciality Group reported in “Report: Law Firms Struggling to Keep Up with Rising Expenses” that although revenue rose 3% in the first half of 2012, profits fell 0.7% largely because of rising expenses.

The popular option for law firms to reduce costs has been to find cheaper alternatives to staffing arrangements. As Jordan points out: “The killer expense for most law firms is people, which is why reducing headcount is still a popular route to improved bottom line. But you can only fire so many people, and you can’t fire them over and over again. Law firms have run up against a wall when it comes to reducing expenses, and that wall is their business model. The traditional law firm business model is fundamentally people-intensive. People provide the vast majority of law firm’s products and services – but the market price of those products and services is falling below the baseline cost of their in-house providers and will eventually surpass the cost of the outsourced ones. Something has to give.”

The thing that has to change is not really who does the work and where, but how. Law firms have to change the way they work from people-intensive to process-intensive. Professor Richard Susskind has in a recent interview with Legal Futures, “Susskind: firms starting to embrace new ways of working as legal factories loom”, confirmed that leading law firms are now asking him how to go about changing the way they operate: “The clients are now interested not just in how you work today but where you think you’ll be as a law firm in three years’ time. The question now is How do we go about rethinking the way we deliver our services? How do we go about analyzing what we do, how do we go about managing it in a different way, how do we decide whether or not we should be doing this routine work internally or externally?”

The answer from Richard Susskind, is that new legal roles need to be developed, like legal process analysts, legal project managers and legal knowledge engineers, which are species of lawyers with extra non-legal skills. “It means that the traditional law firm pyramid has got to break up; law firms essentially have two branches, the specialist division and the process division.”

Also Jordan Furlong sees a changing business model as necessary: “There is only one door that leads through the wall, but firms are immensely reluctant to walk through it, because it leads to a radically new business model. Systems and technology must play a greater role in the creation of products and services – not least because systems and technology are less expensive, more easily scalable, and completely immune to lateral hiring offers. Lawyers must be reassigned from performing systems-level work to either overseeing that work or taking on higher-value tasks.”

Stephanie Kimbro provides some good examples of how law firms can use technology in “Technology to Unbundle Legal Services”, where she points out how new developments in technology have made it even more efficient for a law firm to offer unbundled legal services. “A law firm can employ different forms of Web-based applications that can be delivered over the Internet, depending on how much it wants to automate the unbundling process for greater efficiency in delivery. These tools may be used to generate legal work product or to provide decision-making tools to guide and assist a lawyer working with a client’s case. New innovations in the delivery of unbundled legal services are on the horizon as more attorneys realize the potential of this technology. Document-assembly and automation tools have been used by law firms for many years and probably are the first legal technology developed that greatly facilitated the unbundling of legal services.”

Tools like document automation are widely used by new service providers entering the market, especially when it comes to new online service providers. According to Jordan Furlong law firms are about to be bypassed by such new innovative providers, “which invest heavily in systems and reserve lawyers for those tasks  that truly require their intellectual heft and skilled judgment. The hard fact for lawyers to absorb is that those tasks are much fewer than our traditional law firm model supposed them to be.”

If you know Swedish, we can also recommend the analysis of the legal market by Erik Fors-Andrée in “Juristmarknaden 2012-2017: Öppet mål för nytänkande aktörer”, on how new players offering more innovative and efficient legal services have every possibility to take market shares over the next years. Please find here some more articles and discussions on this interesting topic: