My Thoughts On 2018 Report On The State Of The Legal Market
Some things stay the same, and some things change
The annual Report on the State of the Legal Market was just released by the Center for the Study of the Legal Profession of Georgetown University Law Center, Thomson Reuters Legal Executive Institute, and Peer Monitor. Always an interesting read, this year’s report deserves a bit of analysis. This is my take on what I read.
The Big Picture Is Not Improving
The Report tells me three big picture things:
- The changes ongoing in the legal industry, as they affect the three major law firm groups covered (AmLaw 100, AmLaw 200, and Mid-Size) are established and point to the steady economic decline of the industry unchecked by a few bright points here and there. This is an industry that peaked and will not return to any semblance of former financial glory.
- Law firms still, for the reasons nicely catalogued in the report (p. 3, more on this in a bit) have trouble distinguishing year-to-year movement in metrics with underlying change in industry economics. The first happens, the second is not happening — the downward trend is firmly fixed.
- The battle for survival continues played out among the three groups. Cross-cutting the AmLaw 100, AmLaw 200 and Mid-Size categories is another grouping — those with a strategy successful in the short-term and those without. That is, each of the three categories has its winners and losers. This is significant, as the authors note at the end, because it means any firm on the list has the potential to do better — winning is not reserved to the upper echelon of the AmLaw 100.
For me, it evokes the image of these firms as tiny dots, spiraling around a black hole. The spiral continues year after year with some firms being pulled into the hole. a few pulling farther away, and the majority caught in slowly decaying orbits.
While a nice visual, what does it mean? It means it is easy to get fixed into complacency as you spiral seeing the same players next to you year after year. You don’t perceive things changing much even though seen from afar, change is clear.
The Big Lie
The Report also reinforces the naiveté of the legal industry. Lawyers are not known for their financial acumen. All the firms have financial staffs and CFOs, but you don’t win many points for exposing the partners to the big lie — the legal industry is much less profitable than has been told in the common tale.
Go back through years of profitability metrics for industries and one thing stands out. At the top of the heap sits the legal industry. Being a lawyer meant many things including, supposedly, being in the most profitable profession. Many have pointed out that even a glance at the numbers shows why this isn’t so, but no one wanted to listen. If lawyering was that profitable, then lawyers must be doing something right. In smackdown turns, “yeah, I hear you, I’m a lousy manager but since my profitability is about twice yours, back off!”
For some reason, 2017 became the year when the message broke through. The appearance of high lawyer profitability comes from a simple accounting quirk — equity partners pretend they don’t get any pay. Law firms don’t include a compensation expense for equity partners when calculating profitability and that hikes the profit percentage. Assume those lawyers do get paid and suddenly law firms are in the middle of the professional services pack. Not so smart after all.
In addition to attacking lawyers’ self-perception, the more accurate statistic confirms that there isn’t much wiggle room in the financial model when stressed. Going from top of the heap profits to somewhat lower profits is one thing, but going from middle of the pack into the bottom of the pack is another. This is not an industry built to take another hit.
The Doctor Will See Us
The Report takes a swipe at addressing the question that comes up over and over again — why isn’t change happening more quickly? It just seems so obvious. Go into a conference room filled with equity partners. Lay out the facts in the way the Report and countless other publications do each year. This highly analytical group should look at the facts and reach one inescapable conclusion: the firm must change to address what clients want and failure to do so leaves the firm with small odds for survival. The firm begins to change.
We all know that is not what happens — like ever! Instead, the firms stick to the spiral. Picking up on behavioral economics, the Report suggests six reasons why the logical and obvious path is not the path equity partners take. The authors ideas may be right. Certainly it would be interesting to conduct some serious studies to find out. At the end, we are left with more possible explanations for the real phenomena that the firms lie in the not changing to barely changing range of the scale and that shows no signs of changing.
This Is Won’t Not Can’t Land
Assume you could find a firm, the equity partners listened, and they went full tilt at changing the firm. Is it possible that the place they need to reach is too far, too hard to reach, or requires some herculean learning effort? Is it the changes themselves that present the barrier?
The Report seems to answer “no”. The things required as part of the change have been around for a very long time. Project management, process improvement, various technologies, good metrics, data, and even understanding management science. None of this is new outside the industry and today, none of it is new inside the industry. Pulling the pieces together in a firm would require a lot of work re-creating how it does its work. But, companies do this every day.
The barrier is not in what changes need to be done, how to do them, or how to manage the change process. The barrier is in the won’t, not the can’t.
But There Are Changes
This is where I hear from the Deans. They point to innovative programs, new courses, new degrees, new teaching directives, new … The law schools are changing, they say.
Yes, all of what they point to is happening. But the splash won’t put out the fire. Across the 200 or so law schools, very little of substance is changing and certainly nothing near the level necessary. For the handful of schools doing something, the total impact still is quite small. Any impact is better than none, but we need a movement.
Finally, there is the question of what is happening. Much of it is directed towards things that relate to jobs. We should expect that. Law schools should prepare students for the job market and so the changes they are making seem to tie with that idea.
Still, what gets a few lawyers jobs does not re-create the profession. We need to re-designing law schools with new goals in mind, diversifying them so we have more than one type of lawyer training. We need to create many multi-domain programs, and tackle other grass roots issues such as how knowledge is conveyed in and out of the classroom. Now is not the time to shy from radical re-invention.
Where This Leaves Us
The Report takes us to the same place for the industry many of us have argued we would get to without necessary changes. Lawyers are becoming irrelevant. Some might quibble and say it is law firms that are becoming irrelevant, but lawyers are as relevant as ever. I don’t think that is correct.
I do agree that law firms are becoming irrelevant. The fragility of the business model is on full display and it doesn’t take much to tap one from spiraling the black hole to falling in. If the story were as simple as one business model falling away and a new one replacing it, then lawyers would adjust and be safe.
I think lawyers have been busy painting the floor around them and are now in a corner with few ways out, yet they still paint. By focusing on the minutiae of lawyering and sacrificing broad leadership, understanding the big picture, fitting day-to-day problems into the broader context of what is going on in society, lawyers have traded relevancy for riches. You can make a lot of money crossing “T’s” and dotting “I’s” but eventually someone will find a way to do that work inexpensively. You sacrifice your future when you can’t talk the talk of senior executives and play a strategic role at the top and throughout an organization.
The emergence of new technologies — chief among them artificial intelligence — offers one opportunity for escape. It has raised some very interesting questions. Who and how shall humans be governed? Will it be by humans or by AI? Stuart Russell is the champion of the movement to build “beneficial values” into AI as we move toward artificial general intelligence (roughly, a computer as “intelligent” as a human).
I take issue with the need to create new value systems. I think we already have in place sophisticated value systems, including our legal systems. Lawyers should work with technologists and a range of other domain specialists to modernize our existing value systems so that AI can use them, not replace them. Given the type and magnitude of technologies driving these questions and that the questions go to the very core of rule of law within and among societies, there is plenty of “legal” work to be done.
But, that is not where the future is moving, in large part because lawyers are having trouble adapting. The technologists are not willing to wait and so the movement is passing lawyers by.
It will take collaboration among law schools, private practices, law departments, and the entire range of legal services providers not covered by the Report to pull this off. But for me, at least, the simple truth is that without it, the legal industry will continue to fade. It will become irrelevant, and that will be a bigger loss than any of us can fathom at this time.