Is Big Law in Big Trouble? The future of legal services

The accessibility of information in the internet era threatens to make the role of the lawyer as the keeper of trade secrets redundant. For centuries the source of the lawyer’s value was as the oracle of the mysteries of the law, both its substance and procedure (what is the law and how do we make it work for us?). In times when most people were semi or fully illiterate, and access to information was restricted, knowledge of substance and procedure was a source of great value to clients, and of great power and wealth to lawyers.[1] But today the global literacy rate stands at over 85% and online access in the developed world at 81% and nearly 50% in the developing world.[2]

Big Law and the Industrial Revolution

The legal profession as we know it today is the product of the Industrial Revolution. Europe’s population exploded in the XVII century after rationality dividends from the Renaissance began to bear fruit through decreased mortality rates and increased material wealth.[3] The economic system that arose was based on satisfying the increasing wants of an increasing number of people and the question of a natural limit to such exponential growth was too remote to enter the popular consciousness.[4] This population explosion in turn required increasing centralization by way of national laws and regulations and a bureaucracy to administer them: This was the political dimension of the new system. Information stocks and flows reflected the opportunities and limitations of the state of technology — The printing presses produced unimaginable volumes of information that needed to be rationalized and tamed, while legislatures, courts, and administrative bodies were busy producing new data. In the twin meccas of industrialization, the United States and Britain, the common law’s system of precedent provided the justification for maintaining and systemizing records at every level. Before the computer age, the human brain was the only means of processing that data. Until the mid-1990s, when this author graduated from law school, the first pillar of a legal education in the United States involved learning how to navigate thousands of Federal and State casebooks to find cases in point to the legal issue raised. And that yielded only court decisions: There were also millions of administrative decisions at every level of government, requiring skillful navigation. It was then experience and memory that produced the substantive knowledge in a lawyer that would enable her to swiftly provide answers to a client. Less experience meant less swiftness and hence the advantage of specialization. This led to the rise of Big Law: Industrial-size factories of specialists divided by departments.

Indeed, since the times of Adam Smith, specialization of human skills has been one of the main strategies for coping with increasing complexity and competition. It is a feedback loop: Specialization has made products and services more complicated and the complexity of products and services requires greater specialization. The logic of the industrial age is reflected in the structure of Big Law in other ways too. Both Adam Smith and Karl Marx, although sitting on opposite sides of the political spectrum, share the common conception that time is money, otherwise known as the Labor Theory of Value[5]. This is not surprising, as both Smith and Marx were writing during the Industrial Revolution, when the factory organization (specialization and division of labor) represented the latest technology in human organization. In the mega factories of law, as in consulting, where what is sold is a service, the unit of production has therefore been, unsurprisingly, the billable hour. The world of Big Law today is largely a reflection of industrial age models of organization. One of the most widely accepted principles in management theory today is that the unit of measurement dictates the structure and logic of the enterprise: It determines incentives. If the billable hour is what we care about, we can expect success in Big Law to be determined by two things: The number of billable hours produced by the firm and the average hourly rate. This incentivizes production workers to log as many possible hours as the daily time sheet will fit and to compete with each other for the honor of having the least time amount of leisure or family time. While many large law firms pay hommage to learning and the acquisition of new skills, the personal and organizational accumulation of billable hours as the determinant of success and pay betrays real intentions. It also divides law firm membership into three types: Relationship intermediaries, value creators, and production workers. The role of the intermediary is to control the client relationship; the role of workers to produce billable hours. What is not obvious is where the true value creator fits in this model: The lawyer who really cares about finding innovative solutions for the client. When the intermediary and the value creator are the same person, the conflict is resolved, but when they are not, the very existence of an intermediary is a systemic inefficiency. (Of course, value-add comes in many forms, and an intermediary who manages a team or counsels on strategy or introduces the client to important business partners is also providing value).

Naturally this logic has all kinds of implications for ecosystem participants.[6] A system that places the billable hour at the center of its production principles will have the (possibly) unintended yet highly unfortunate consequence that bright young people are sacrificing the best years of their lives to make money for somebody else in tasks that are neither necessary nor helpful.[7] Their opportunity costs isn’t only leisure time: These very often talented young people could be acquiring skills that would enable them to fully tap into their potential (an MBA or Masters in Management would be a good start). Clients should be (and many are) asking themselves whether their legal needs are best met by a system that is designed to incentivize work volume rather than quality and precision (relevance) and where the final invoice includes paying for non-value-add intermediaries.

So long as access to relevant legal knowledge was restricted, the only real choice by the end consumer of legal services was whether to get (expensive) legal advice or not. Invariably, wealth has been the largest factor in access to legal services.

The early beneficiaries of technological advances in information science have not been the clients themselves, but the techonology companies. Indeed, legal data retrieval systems such as Lexis-Nexis and Westlaw have been designed for lawyer use. Rather than a trip to the library, associates can find those relevant cases and decisions at their desk computers. The potential loss in billable hours is largely offset by what has been effectively a fee-sharing arrangement: The “costs” of online research are passed on to the clients when the final bill arrives. (General counsel’s office would do well to ask for and check the itemized extras on their bill). The real winner is the online research service companies: By the logic of Big Law, neither law firms nor their clients derive much benefit from these efficiency gains. The billable-hour system incentivizes associates to pad their research time or to find alternative reasons to be slow and stay longer at the office. But the utility of these pay-to-play research tools is now also being undermined by the proliferation of free information on the internet and the increasing effectiveness of the search engines — already far more powerful in data mining than the official legal databases.

Disruption: The Digital Revolution

The widespread availability of information enabled by the internet, combined with the rising competence of a digital generation, has largely unveiled the secrets of the trade, as many twenty-something entrepreneur has been forced to discover. Why spend time researching which law firm to approach when a simple google search can reveal the advantages and disadvantages of one type of business entity over another in Malaysia or Kathmandu? Moreover, with the growing ability of machines to retrieve relevant information and process it (machine learning), specialization by humans is becoming redundant. And the inefficiencies of the system are being exposed both within and without. In the mid-1990s, when I began my life as a young associate at one of the so-called “White Shoe”[8] law firms, a young associate’s work consisted of trivial yet tedious and nearly mindless tasks such as documentary due diligence review (with very little guidance on what to look for), the preparation of filings, and somewhat more intellectual work such as research and writing memoranda. Invariably, the work involved much document production and at the end of a capital markets transaction, the clients received, contemporaneous with their million-dollar invoice, an encyclopedia-like set of transaction documents, with their name imprinted in gold letters: The material embodiment of the thousands of billable hours that had been spent in legal work.[9]

As in many other areas affected by the Digital Revolution, the opportunity for the 21st lawyer is not to be a specialist, but to be a nimble generalist. She must focus on what humans can do better than machines. The proliferation of information means that now more than ever good judgement is required to evaluate data and to turn it into actionable advice. This involves not only being able to critically examine the sources but to integrate the information by weighing them in terms of relevance and credibility.

Let us take a recent example from actual experience: The CEO of a digital service provider approaches his counsel to ask whether the company should provide services to a major company operating in a country under US sanctions. In terms of the relevant law, this is readily available to anyone caring to run a google search on “US sanctions”. A Wikipedia entry will provide a general primer of the US sanctions regime and identify the relevant countries under such sanctions. There will likely be a link also to the website maintained by the US Treasury Department with a FAQ section. Several articles and memoranda by Big Law firms will be available on the topic, no doubt attempting to demonstrate their know-how and hoping that someone will require more in-depth advice that they will be willing to pay for by the hour (unlikely). No fancy, expensive law firm is required to get to the relevant data fairly quickly. But the relevant decision-making data will not be the substance, but the framing of the question.

The good lawyer, even if unacquainted to any great depth with the US sanctions regime, will be able to parse through all available information and consider:

· the biases of the US Treasury Department (e.g. what is the dominant political climate in the US? What are the likely current policy objectives of the USTD?)

· the biases and intentions of the various law firms who made their notes publicly available (e.g. are they US firms?),

· whether the client is a US company or has current or future US operations (e.g. can it make bona fide ethical judgments about the extra-territorial overreach of the US government)?

The question here isn’t only whether such a contract may expose the client to some risk of penalties by the USTD, but to be able to make a risk assessment in terms of probability and magnitude (which many lawyers instinctively refuse to do), and to weigh such probability-adjusted risk to the certain benefit of a contract with a paying customer, and an appreciation for parties’ non-US status and their commitment to freedom of contract.

This integrative approach is something that computers are not able to do. This is the unique value that a well-trained human, whether licensed or not, can provide. It requires a holistic education and training: In this case, an understanding of how to frame decisions in terms of expected values (probabilities and magnitudes) and cost/benefit analysis; the ability to source, weigh, and evaluate data; and the sensitivity to take into account the client’s strategic interests and ethical and cultural predispositions.

The New Lawyer: A business person specialized in legal challenges and opportunities

What then are the required skills of the 21st century lawyer and what is the structure of legal services that is best suited to our times?

I would suggest as follows:

1. To be a good listener: To understand a client’s preoccupations and to help them frame questions for an intelligent, multi-dimensional decision to be made.

2. To be able to be an effective researcher: To source data that is relevant for the decision to be made, to weigh it, and to integrate it into actionable advice.

3. To integrate rather than separate business and law: Law is one of many dimensions, acting as both a constraint and a facilitator, in which business operates. The 21st century business lawyer is a business person who specializes in using the strictures and opportunities that legal systems present. He is a team member working with other business people who specialize in other aspects of risk management (operational, financial). A business executive specialized in legal (my preferred terminology) views the legal system as a set of risk management tools (e.g. the limited liability of a corporation) and also as a field to find profitable opportunities (e.g. tax shields for debt, favourable investment schemes). A lawyer is not a compliance officer.

The Structure of Law in the 21st Century

So long as professional licensing requirements, cultural and linguistic differences, and perhaps most importantly, local unwritten practices continue to exist, there will be a need for lawyers who are specialized by area of law and locality.

In my own field of international law, cross-border investments will continue to take place. There will therefore continue to be a need for international collaboration by lawyers. While the machinery of government may be localized, the Digital Revolution will continue to foster the development of better and more efficient management practices and their dissemination and adoption throughout the globe. Lawyers have to abandon their insular self-regard as a distinct, privileged profession, and join business teams as members, learning to add domain value in an atmosphere of openness where ideas reign supreme.

The business of law is likely to mirror any other business. It will consist of formal or informal networks of competent practitioners, responsive and experienced, and capable of operating the official and unofficial levers of government for their clients. They will be business partners to their clients, making introductions to other local business partners for value co-creation opportunities.

The demand for efficiency does not bode well for all but the most prestigious of big law firms working for the largest institutional clients such as banks and large insurance companies who are largely insensitive (for now) to inefficiencies, in part because they too are able to pass legal costs to their customers (for now). Dinosaurs co-exist for a while with new, more vital forms of life. A species continues to survive with an ever-diminishing membership until one day the last member expires.

Younger generations (clients and young associates) demand meaningful work, not gilded cages. To the extent that office space is needed, this needs to be reflect the current era: Far from being the end of the open plan era, it is the era of the collaborative space. Business school-like whiteboard spaces where teams work together to find solutions is the new norm. Nobody believes in or tolerates the Patrician detachment of the pontificating lawyer. He must join the team as a co-creator.

In terms of compensation systems, the world of business, of which legal services is a part, is moving toward demonstrated value-add and value-sharing. Value-add and value-sharing systems, which are principles- rather than formula-based, are guided by the notion that value generated will be apportioned in fair proportion to those who have contributed to its creation. Trust is at their center and trust demands close relationships among contributors. This turns lawyers into real business partners in the enterprise. Project-based fees are agreed based on reasonable parameters and timelines. The hourly rate may well continue to be a feature of compensation, but because the logic of the system isn’t the billable hour, but results, it serves only as an estimation tool rather than as the system’s raison d’etre. If and when permitted by local licensing bodies, the future consulting firm will integrate all aspects of business, including legal, into a single project relationship. This will be a significant advance: The siloing of legal services is a disservice to business.

[1] As was the case in Ancient Rome after Emperor Claudius professionalized the legal profession by allowing the payment of fees for representation. Before then, it was truly a Noble profession: Clients were net recipients of a Nobleman’s disposition to help. The archetypal pre-Claudian lawyer was a Senator greatly skilled in oratory who would defend those who followed him. At most, they would bring his family personal gifts in gratitude for his assistance. The word “client” derives from the Latin “cliens”, denoting a plebeian under the protection of a Patrician. Cicero provides a great example of the Classical lawyer.

[2] Literacy data sourced from the UNESCO Institute for Statitics at http://uis.unesco.org and on internet access from the International Telecommunications Union at https://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx. (Both accessed on 22 October 2018).

[3] The population in Europe rose from an estimated 78 million in 1500 to an estimated 224 million in 1820. Angus Maddison, The World Economy: Historical Statistics, Statistical Appendix (2007, ggdc.net).

[4] It is only now beginning to enter the popular consciousness, which suggests we are now entering a new, post-Industrial Age era. One of the early precursors of sustainability was Donella Meadows of MIT. For a current version of one of her seminal book on sustainability, see Meadows, Donella, Jorgen Randers, and Dennis Meadows. 2004. Limits To Growth: The 30-Year Update. 1st ed. White River Junction, Vt: Chelsea Green Publishing Company.

[5] This is not to say that the respective theories of value of Marx and Smith correspond exactly to this simplistic maxim or to each other, but both reflect an interest and perhaps predominant emphasis on the quantity of labor as being a primary determinant of value, the others being capital and efficiency.

[6] Donatella Meadows, who was also one of the precursors of Systems Thinking, stated: “System purposes … are not necessarily those intended by any single actor within the system. In fact, one of the most frustrating aspects of systems is that the purposes of subunits may add up to an overall behavior that no one wants.” Meadows, Donella H, and Diana Wright. 2008. Thinking In Systems. 1st ed. White River Junction, VT: Chelsea Green Publisher

[7] As of the time of this writing, the estimated cost of Columbia Law School, arguable the main feeder of Big Law and this writer’s rather “Alma Mater” is about US$320,000, the annual cost of living after graduation about US$55,000, and the starting salary of a Big Law associate about US$190,000. It would take approximately six or seven years for an associate to pay off his law school debt and soon thereafter a partnership decision will be made. We will in the future have trouble distinguishing between this and indenture servitude.

[8] A term that suggested that we had finally made it into a special, upper class club of privilege when in fact we had just been inducted into a production factory designed to make a few partners extraordinarily wealthy. Advancement within such a system is possible, but at least by the 1990s, it was deliberately designed to be Darwinian. The system rewarded endurance; attrition was calculated and expected.

[9] I find it difficult to envisage the face of a client receiving such a wasteful and useless gift today embodying such an inefficient and misguided use of corporate resources.

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