Law Firms Are Responding to Market Pressure With Increased Efforts to Innovate

Law firms across the country are taking steps to innovate  the way they organize themselves and serve their clients.  This trend promises to be more than a passing fancy because it is driven by demands from corporate clients , as well as increasing competition from new entrants in the legal services market.

This development matters beyond the interests of the law firms.  In many ways, law firms, particularly the most prominent ones, set the standards for legal services.  They establish benchmarks for legal representation. And otherwise have an outsized impact on the pace of modernization in law. 

The pressure they feel, and the response they make, has the potential to accelerate the pace of modernization of legal services.   

Pressure from clients: more for less

The pressure emanates directly from corporate clients.  Companies all have mandates to produce more and spend less. As law has become more and more important, and more and more expensive, “legal” has become a bigger and bigger entry on the P&L, drawing greater scrutiny.  Clients are telling their law firms they want more for less. And they are acting on their demands.

They are inserting the  procurement departments into the process of law firm selection and setting the terms of engagements.  They are holding law department leaders and managers accountable for meeting budgets.

In what my be the most important step, they are creating new management positions in charge of “legal operations.”  Essentially this function seeks to optimize the way the company accesses legal service.  Among other things, this has led to greater examination of outside counsel pricing and business models.  

The legal operations trend has become so significant it has spawned a powerful new organization known as “CLOC,” the Corporate Legal Operations Consortium.  Incorporated in 2016, it now has more than 2,000 members, representing some of the largest companies in the world. 

Market data shows clients are paying less per unit of value delivered by outside counsel  And that they are moving work more frequently from incumbent firms, to another firm, to an ALSP, or in house.


New Competition Intensifies the Pressure

Law firms are also facing a new and growing source of competition from innovative companies focused on legal services, and operating in non-traditional ways.  These “new entrants” offer corporate clients innovative new tools and models to help meet their needs. Some offer new technology tools that can do portions of the work previously done by lawyers; some offer to take on large portions of work with innovative resources and methods; others provide flexible, qualified sources of talent to augment the in-house resources.  

In the aggregate this portion of the market is still small, but it is growing at an exponential rate.   Venture capital is increasingly focused on these companies, enhancing their capacity to compete.

The new entrants create a market-altering set of options for clients. Here are some examples:  Clients can choose to collaborate with new entrants to expand the ability of their in-house team. Clients can disaggregate engagements, sending parts to new entrants, and the remainder to outside counsel.   Clients can turn to law firms they would not formerly have selected to lead complex engagements, because they can now be supported by new entrant resources. 

The new entrants increase the pressure on traditional law firms to develop new approaches themselves.

Legal Service Readily Can Be Delivered Better, Faster, and Cheaper

The pressure from these two developments is also enhanced by an outlook embraced by both the clients and the new competitors:  legal service can be delivered less expensively, at no sacrifice to quality. Companies know this because they do it every day for their own account.  The new entrants believe this based on their experience in other settings and the power and capacity of technology and process design.

And they are right.  Not only because of the availability of new techniques, but also because the traditional law firm business model is manifestly inefficient. The way resources are assembled and deployed—from staffing models, to space management, to engagement management—create significant opportunities for positive change, even without new tools and methods.  


Law Firms Are Responding In a Constructive Way

Law firms are responding to this pressure.  While they continue to earn high incomes per partner, they know they need to change.  And they are taking action.

Firms are creating sincere innovation initiatives, headed by a Chief Innovation Officer, and supported by the firm’s senior leadership. In most cases firms are public about their innovation commitment, posting it on their website and advancing it as one of the firm’s strengths.

Each firm is proceeding in its own way, guided by its own circumstances. There are examples of progress across the country, which I expect will become more common over time.

Firms will undoubtedly find that innovation is challenging.  Very challenging. In part they will find that real progress will require more than changes around the edges.  There is no “magic bullet” they can install to innovate. It will require re-examining firm business models. Each significant change will have consequences that will lead to other changes.  And resistance will arise, which, in a partnership model, will require effective leadership to overcome.

But all that said, I believe that firms are taking a constructive approach.  And are sending an encouraging message to our legal ecosystem that they are on their way to embracing the modernization we need.

In future posts I will address particular innovations I think law firms should consider.