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U.S. Legal Market is Shifting. Are You Shifting With It?

As I have been preparing to present Enemy in The Camp, a continuing legal education course, I have had an opportunity to talk with attorneys across the United States. Many of them have a concern that the legal market itself is shrinking. The feeling may be right. A recent study of the legal market found that legal demand is flat, supply is increasing and the market is being siphoned off by non-lawyer providers.1

The Legal Industry (For Lawyers) May Be Shrinking

A report by the Center for the Study of the Legal Profession at the Georgetown University Law Center found that the demand for legal services in 2015 was flat.2 When you consider that the number of attorneys in U.S. firms grew by 1.3 percent, the available legal market for existing practicing attorneys got smaller. When you further consider that non-lawyer services are performing legal services that used to belong exclusively to law firms, the available legal market for practicing attorneys got even smaller. This trend has been underway since the second quarter of 2014.

In response to the shrinking legal market (the billable hour per attorney demand) and pressures from non-lawyer vendors, law firms have raised their rates. In 2015, however, collected rates (as compared to billed rates) declined. 3 This increased fee response makes aggregate revenue reports more difficult to analyze which may have lulled traditional management into the common sense result that the fee increase was an adequate response to market trends. It was not.

The Report parallels the “story of the demise of Kodak [as] an important cautionary tale for law firms in the current market environment.” Kodak dominated the photograph market for over a century. With billions in sales, Kodak was the market. Kodak’s failure to act on a fundamental shift in the market resulted in it filing for bankruptcy protection in 2012. Kodak failed to embrace that customers, not Kodak, decided where to view pictures.

Is the Legal Market Headed the Way of Kodak?

The Am Law 100 bankrupt? Laughable right? Just as laughable as someone in 1976 thinking that Kodak might one day file bankruptcy. But it did. Digital photography (that is found in every smart phone today) was actually invented in a Kodak lab. Kodak dismissed the technology because it decided that its customers would never want to view their pictures on a screen.

Just like Kodak’s customers took ownership of where they wanted to see their photographs, law firm clients are taking ownership of their legal matters. In the past, clients brought a whole legal problem or a whole legal project to a law firm. A lawyer played a dominating role in decision making and often was empowered by his or her client to make all decisions within certain parameters.

Today, clients are doing their own legal project management. Clients are hiring lawyers for a only a piece of a legal project or problem. “They are more open than ever before to utilizing non-traditional service providers (including non-law firms) to provide a wide range of services previously obtained almost exclusively from law firms. And clients are far more likely today to retain work in-house, bringing their outside counsel in only where needed to supply specialized expertise or to handle matters on a discrete project-by-project basis.” 4 For the most part, law firms have reacted to this shift in a tug of war fashion. Like Kodak, when the client has pulled, law firms pull back, conceding only where it loses. The client is then motivated to seek another opportunity to tug again.

Traditional Law Firms are Flanked On All Sides

Since 2011, corporate law departments have consistently decreased their spend on outside law firms. Spending on non-traditional providers of legal and legal-related services is on the increase. Although Legal Zoom™ may be the most recognizable, it is only one of 44 distinct alternative legal service models that have been distinctly identified. 5 The alternative service providers are diverse. Cell Breaker gets paid a contingency fee to get consumers out of paying full early termination fees on cell phone contracts.6 Ticket Kick helps consumers fight their traffic tickets.7 Axiom Law signed a $73 million contract with a global bank to process the bank’s master trading agreements.8 Many countries, like the U.K. now allow non-lawyer ownership of law firms which puts equity partners with law degrees in direct competition with equity investors globally. Accounting firms are actively developing concepts to extend services into what has previously been exclusive legal territory and are potentially the biggest threat to the legal market.

Mustering a Response

To muster is to assemble troops in preparation for battle. The Report suggests that failing to muster a response to this legal market shift is the greatest risk facing law firms. The legal profession is aware of this market shift. Most lawyers have heard about Legal Zoom™. Many lawyers have heard that corporate clients are hiring offshore attorneys to draft documents. Some lawyers have heard about Cell Breaker or Ticket Kick. What, then, is the response? The Report suggests that the obstacle many firms are facing in effectively responding to this market shift is traditional leadership wielding a traditional business model.

Like Kodak, law firm leadership is in an understandable place: They have a working economic model that has been effective for over a hundred years. Why risk changing from a traditional model that has proven to work? To extend the Kodak parallel, Kodak might have avoided bankruptcy if it had shifted its focus to what its customers wanted and would soon demand. The photography market grew wildly as customers demanded digital images, what was lost was Kodak’s market share. Is Kodak’s story a cautionary tale for traditional law practice? Is the legal services market actually growing but turning more and more to non-lawyer service providers? Just as most customers now manage their own digital images, are clients managing more and more of their own legal service needs?

One Possible Solution

The Report does not suggest that there is not a response – or even many responses – to this shifting legal market. It even suggests that mustering a response might be more effective if done outside a law firm’s existing leadership structure.

Traditional law firm leadership may consider appointing a creative individual as a lieutenant to work outside of and report to the traditional leadership structure to survey client expectations and suggest ways to proactively engage in operations to meet those expectations. Once a operational objective is chosen, this lieutenant may be broadly empowered to muster internal and outside resources. During the implementation phase, traditional leadership may benefit by compensating the lieutenant (and his or her team) using metrics focused more on meeting client expectation than the billable hour metric.

Timely reporting to the traditional leadership structure may be valuable regardless of the success or failure of any one chosen operational objective. In fact, there may be a series of small failures before discovering a successful objective. If nothing else, a series of small failures is acceptable because it is a shift. Since the legal market is undeniably shifting, it is certain that refusing to move at all means that the law firm will, like Kodak, be left behind. With the right lieutenant empowered with the right resources and backed by the traditional leadership structure, the law firm may not just shift but shift in the right direction at the right time. The Kodak story is a cautionary tale that does not have to be repeated.

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Brandon Blankenship
  1. ©2015 Brandon L. Blankenship, Image Credit: The Muster 2005 David Goodman CC flickr 13MAY2005.
  2. 2016 Report on the State of the Legal Market, http://www.law.georgetown.edu/news/upload/2016_PM_GT_Final-Report.pdf, page 4.
  3. Report, page 6.
  4. Report, page 3.
  5. Report, page 10 (internal citations omitted).
  6. www.cellbreaker.com
  7. Www.ticketkick.com
  8. Legal-Services Firm’s $73 Million Deal Strips The Mystery From Derivatives Trading, February 12, 2015.