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Post by Stephen Embry, author of TechLaw Crossroads

Steve Kovalan and Nicholas Bruch both of ALM gave an interesting opening presentation today at LegalWeek18 on the state of the legal market. They started by debunking the notions that traditional law firms are doomed by the irresistible forces of technology and innovation or, on the other hand, that traditional law firms will respond and are responding to these market forces and will always be strong.

Instead, they argued a point I have been making for some time: the law firm market is segregating into have and have nots. The theory is that there will always be room in the market for the law firms doing “bet the company: work that is so important or involves such exposure that price and efficiency don’t really matter that much.

On the other hand, the specialty, boutique firms will always be in demand. These firm are typically but not always small but are quite focused in the kind of work they do. I would throw into this category those locally oriented firms whose business model is to serve as local counsel for the bigger firms handling the bet the company matters. There will always be value, for example, for a lawyer who knows the judge handling a bet the company case well.

But these leaves, say Steve and Nick, the global full-service firms. These firms are at risk and subject to increased competition from themselves, the alternative legal service providers, the big 4 accounting firms and large law departments. These competitors are fierce and can do things in ways these big law firms can’t, be it through price or, in the case of the big 4, by offering a full menu of business services.  

I think Steve and Nick make a great point but would perhaps refine it just a bit. It’s a little simplistic to lump all global full-service law firms into the same boat. Many of the global firms perform a wide variety of bet the company work and a smorgasbord of specialty practices. These facts, together with the brand recognition should power the really big global firms into the future. Indeed, we are already seeking the global firms search out and acquire specialty practices in much the way that tech companies like Google and Apple find and buy startups for certain products. The big firms offer money and security to the boutiques in exchange for getting a profitable specialty practice.

No doubt these full service firms will face stiff competition but they also seem to be ones who are seeking out innovation to respond to the threats. They are evolving what the concept of full service means, aligning their offerings of service to competitive reality and profitability. These firms also have huge data banks on all sorts of issues they can massage and analyze. They are also learning how to collaborate data silos to compete more effectively. These firms, I predict, will survive and continue to be profitable although with maybe with fewer lawyers and different style and delivery models.

But that leaves a big middle. These are the relatively large full service firms that are not global, do not have significant national practices, are not players in large urban markets like New York, Chicago or Los Angeles. By and large these firms fall in the AmLaw 101-200 range.

These firms face the competitive threats identified by Steve and Nick but also from other places as well. From boutique practices for example. They face more competition from the really big global and national firms since office location is becoming less and less relevant in our increasing mobile society. They face extreme rate pressure from insurance and non-insurance companies who have discovered that the value added by these  firms is often not worth the cost.

High end work increasingly goes to the AmLaw 100 firms, lower end work increasingly goes to smaller and less costly firms or even to alternative service providers. These firms also  face declining work due to tort reform and other governmental programs. They face competition from firms using automation and technology to make much of the commodity document work related work much less costly. And increasingly AmLasw100 is recognizing this and making automation changes that let them use machines to do work more efficiently. And finally, the middle firms oftern don’t have the quantity of data of their larger competitors and often don’t know how to use what they had.

The other side of the coin is that the firms facing the biggest threatsthe middleare the least able or willing to do anything about it. Squeezed by profit pressure, they ruthlessly cut costs which means they are less likely to investigate and use automation and innovative tools. And because those tools in the sort run reduce billable hours in a declining market, these firms are even less likely to adopt them. They are less likely to hire professionals to manage knowledge and process for costs reasons and, sadly, because of traditional lawyer arrogance.

These middle firms also expanded rapidly in the boom years, making good profits often without using analytics to look at profitability and their human capitol long term needs. The result: they have too many partners and not enough work. And some of the work that sustained them is not terribly profitable. These firms also were slow to recognize the business realities and as a result, making hard decisions about long term partners and other personnel was hard for them. And while the global national firms aren’t the perfect models in dealing with these kinds of issues, they do have enough foresight and capacity to take more steps to deal with the future.

Put all this together and you have a perfect storm.  Are all middle firms like this? Clearly no. Some realize that they can with innovation, technology and mangement meet the competitive threats and take advantage of their cost structure. But too many of the middle firms are like the proverbial deer headlights syndrome. They don’t innovate because that could be expensive and result in short term profit reduction. They don’t reduce prune partner ranks. They stand still. And standing still in today’s market place is not a good business plan.

About Stephen

I am a member of Frost Brown Todd LLC and the Firm’s class action, privacy and mass tort groups. I’m a national litigator and advisor experienced in developing solutions to complex litigation and corporate problems.  I am also a member of fbtTECH, my firm’s technology industry group that focuses on the future and anticipating the ways in which technology will impact the legal system and the issues facing clients. I write frequently on the impact of technology on the practice of law. I am currently Vice-Chair of the American Bar Association Law Technology Resource Center, an Editor of Law Practice Today Webzine and a member of the ABA’s Law Practice Futures Initiative. I am also Chair of the Data Breach, Privacy and Cyber Insurance Section of the Federation of Defense and Corporate Counsel. You can find me on LinkedInTwitterFacebookInstagram and Google+. I am also a frequent speaker and writer. In addition to practicing law and tech, my passions include education, and officiating swimming on national and local levels. I am a husband and proud father. And, finally, I bleed blue: I am unabashedly and unapologetically a huge University of Kentucky basketball fan.