Eight Tracks and Cassettes

It’s difficult to pick up any periodical dealing with the practice of law these days without reading about some new trend that is going to revolutionize the relationship of law firms and their clients.   Whether talking about legal project management, outsourcing, alternative fees or corporate legal departments recruiting directly out of law schools, there are a host of pundits coming out of the woodwork telling us what the future of the practice of law will look like.  Personally, I have no idea where this is all going to end up, except, in all likelihood, any prognostications about something being “the wave of the future” are probably wrong.

There is a natural tendency to believe that whatever is the latest and greatest represents the final result of an evolutionary process.  In fact, apparent advancements that are the topic of articles and blogs invariably represent some form of transitional stage in development and they fall into three pretty easily identifiable categories.  First, there is the fad.  These are easy to spot because they don’t make much sense to start with.  Typically, fads have something to do with a way to save costs or some new way to raise revenue.  Recent fads include the bundling and unbundling of law firms’ costs into disbursements, starting ancillary businesses and boosting PPEP by de-equitizing partners.

The second category are cyclical trends that reappear every ten years or so in a sufficiently revised incarnation so they seem new.  A recent Wall Street Journal article about corporate GC’s recruiting at law schools and competing with law firms for graduates is a recent example. It reminded me of how, in the 1970’s, some of the largest assembly of practicing lawyers in America were the in-house legal departments of major corporations.  Then the corporate cost cutters got concerned about headcounts and legal departments fired their staff and hired outside counsel.  Now, for what has to be the third or fourth iteration, we appear to be starting all over again.

The third category includes things that represent real transitional advancements – changes that are game changers and, while they may not be the ultimate advancement, they move the practice of law down what could well turn out to be an irreversible path.

So, with that framework, let’s look at three of the “hottest” trends in the practice of law at the moment and see which of these categories they fall into.  In my mind, those topics are Legal Process Outsourcing (LPO), Alternative Fee Arrangements (AFA) and Legal Project Management (LPM).

Legal Process Outsourcing. In my judgment, LPO falls in the category of a fad.  In the 1950’s, management theorist Peter Drucker advised businesses to “stick to their knitting” and that has been the mantra for the outsourcing companies ever since.  Certainly it may be cost effective for corporate general counsel to outsource certain document management types of legal services to specialized companies rather than having the work performed by their law firm, but that is just a function of segmenting work among vendors.  On its face, it makes sense for law firms to outsource portions of a business that are not in its core.  Law firms are in the business of solving legal problems, not making photocopies.  Therefore, on that basis, everybody should turn over their photocopy operations to Kinkos or Pitney Bowes and their billing operations to PWC.

But there are some significant flaws in the argument for the outsourcing of operating functions.  The most immediate is that it is hard to figure out the rationale under which outsourcing works out to be less expensive than performing a service in-house.  Outsourcing companies generally price their services at cost plus 15 percent.  So, to break even with a law firm’s internal cost, the outsource vendor must operate at a cost that is at least 15 percent below the law firm.  Sometimes this happens through some creative cost accounting in the outsourcing vendor’s proposal, but typically the basis for showing an immediate savings is that the outsourcing company is creating the service from scratch with new employees who start at lower wages and with less expensive benefits than the incumbents currently working for the law firm.  So, unless there is some long term basis for a cost savings (operating in a country that pays extremely low wages or somehow creating a large economy of scale) outsourcing savings are often attached to the transition and have a way of disappearing quickly.  If savings is the goal, it would make sense for a law firm to outsource everything it is doing in-house and take in-house everything currently being outsourced.  Then, every three years, switch.

There are also issues of control.  Law firms work with an urgency that it is hard for vendors from other industries to understand.  When things go wrong and a client is breathing down a partner’s neck, and the partner is breathing down an administrator’s neck, any savings achieved through outsourcing quickly disappears.

There are, of course, completely valid reasons to outsource some functions.  Large e-discovery projects where there is not an ongoing volume of work is an example.  The same is true for IT support in a small branch office where a full time staff person can’t be justified.  But, on balance, true outsourcing doesn’t hit me as being a long term real world solution.

Alternative Fee Arrangements. I keep a storage locker where I put things that I promised my wife I was going to throw away or give to the Salvation Army.  It is mainly filled with electronic stuff that I can’t bring myself to part with.  It’s where I keep my CB radio, old slide projector, super 8 movies, and a once ground breaking Compac portable computer.  I recently hired the son of a neighbor to help me make room for my video recorder and VHS tapes.  He was amazed by my extensive collection of eight tracks and cassettes and commented, “This place is like a museum of transitional technologies.”   Yeah, he said that…and he isn’t even old enough to drive yet.

I know it is politically incorrect to say it, but I can’t help but think that Alternative Fees are really transitional technologies.  Prior to the 1970’s the concept of charging for legal services by the hour was virtually unheard of in the legal profession.  Clients were typically charged a monthly retainer or, at the end of an engagement, the lawyer would skim the file and figure out what represented a reasonable fee.  But the billable hour was introduced as a more objective, fair way of charging clients.  Conveniently, billing by the hour also produced more revenue and was, therefore, embraced by law firms.  Most clients, of course, had no way of judging the reasonableness of the time recorded or the competitiveness of the hourly rate, so, from their perspective, the process was an equally mysterious way of producing the fee amount.  In the late 1980’s the ABA produced the book Beyond the Billable Hour which predicted the imminent demise of billing by the hour.  Since then, every ten years or so there has been a new prediction of the elimination of billable hours.

Now, let’s face it.  Selling legal services by the hour, the pound or any other quantitative method doesn’t make a lot of sense and has sustained itself long past its natural life.  But creating an alternative fee that is simply an extension of billable hours into some bulked up price that provides nothing new but predictability is … well, I suspect it’s a transitional technology to something better.

Legal Project Management. Of the three current trends that most law firms are looking at, I think that legal project management (the efficient organization, supervision and management of the process through which legal services are rendered) is the real deal.  This is the way most every other business in the world manages itself and will most likely be what facilitates whatever legal pricing evolves into for law firms.  Project management is the manner in which firms match their workforce to the processes involved in legal services so that the people who have the right capabilities and are paid appropriate compensation are fully utilized in performing clients’ work.  Profitability comes not from raising rates or charging more hours, but from productivity and processes designed around the needs of a client engagement.

If you are looking for the “game changer” that will be “the wave of the future” and drive the evolution of the fads and the transitional technologies, I’d put my money on LPM.  In any case, I’d get used to it.  I suspect it will be a major influence on how firms will be practicing law from now on.