No option for Law Firm

There is one piece of news this week that may have finally brought home to those in business how important social media is, the Joe McElderry v Rage Against the Machine story. It’s one that all lawyers and law firm marketing depts will hopefully be taking note of.

Before you stop reading let me say this isn’t going to be a blog post campaigning to get us all go web 2.0 and set up internal facebook systems. No, this is simply to raise awareness. As I’ve mentioned before Legal IT’ers need to be educating their lawyers (and perhaps some of their colleagues) about social media. It isn’t just generation Z posting pictures of themselves and their friends in uncompromising positions on open facebook accounts or posting about what you had for breakfast on twitter. No, this is about helping your firm and your clients to understand how social media could see their services or products destroyed in a tsunami of negative online comment!

It only took just two people and a facebook group to wreck Simon Cowell’s hold on the Christmas #1, a zero cost campaign against weeks of million viewer pulling X Factor “adverts”.

But still it’s amazing at how few businesses really “get” social media and prefer to just ignore it, rather than engage with it. Even in the IT industry! There are few Legal IT vendors that really ”get it”. But they all need to, it’s no longer about good press releases and a good website, it’s about comment, engaging with your customers through interactive online content.

So I’m going to sign off with a challenge to the Legal IT vendors. If you read blogs for comment on your firm, how about letting us know that you’re a step ahead of most IT companies and post a simple comment on this post? Go on, given the time of year ow about just a simple “Happy Christmas from xyz plc”!

I caught this article from the Times today about regional law firms (“Regional law firms take severe steps to cut costs”). The main angle of the article is nothing new to those in the legal world, another round of cost-cutting measures, shorter working weeks, sabbaticals, secondments, salary freezes etc. It focussed on regional firms or probably more specifically the mid sized UK firms (as someone pointed out in the comments Pinsents aren’t what you would call a non-London/regional firm).

I looked at this in context of an article I posted a link to on twitter yesterday “Overworked corporate counsel cut back on use of outside firms”.

Then thought to myself: Is there going to be enough legal work to go around?

I mean if the work has dried up to such an extent, are firms wise gambling that levels of work will pick up to pre 2008 levels?

What if the corporate counsel continues with the primary firms and never goes back to using larger numbers of firms? What if the general drive to keep costs low in business continues and puts pressure on law firms? And then it is highly likely we will have a change in government in the UK , one that will maybe reverse the current situation where the solution to all problems is more laws and legislation being introduced, easing the red tape on business.

The question then becomes: Will we simply have too many law firms for the work out there?

I’m guessing therefore that we will start to see a fair bit of consolidation in the legal industry in the coming years.

A series of mergers outside the top 20? Perhaps it wouldn’t interest the magic circle but maybe others in the Top 20 will refocus back on the UK and absorb some of the mid range players? I just can’t see there being the number of firms there are now around the £150m revenue mark and so I’m guessing 2010 will be a bumper year for mergers leading to a whole range on new brands in “The Lawyer UK 200 – 2010”.

I predicted Clarke and Haddin would go early on Monday this week and England would wrap up the Lord’s test early afternoon, will this be another case of a great prediction or will it be a Tony Meehan (Decca) moment? Time will tell.

I caught sight of this article “Free! Why $0.00 Is the Future of Business” in The Spectator. It suggests a new business model where the product is free, the consumer gets the product for nothing and the business makes its money elsewhere. This is especially prevalent online where the thought of paying for things you would in the “real world” are, well, crazy (would you pay to read your quality daily newspaper online? conversely would you expect the paper copy of your quality daily newspaper free?).

The Spectator points out that the business model isn’t necessarily that new, but what is new is it’s less a marketing trick to get your product out there but a new economy, in the words of the Wired article :

Once a marketing gimmick, free has emerged as a full-fledged economy. Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of zero. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Virtually everything Google does is free to consumers, from Gmail to Picasa to GOOG-411.

In the UK an ISP revolutionised the market in the early days of the internet boom. Traditionally (before broadband) you would pay a monthly fee for your ISP and then your phone calls on top of that. Freeserve came on the market and dispensed with the monthly charge, making its money from a proportion of the call charge. Within a year it had grown to 1.5m subscribers and changed the market forever.

So my question is can this business model be translated to legal work?

From a consumer point of view I remember buying my first house in 1995 and getting the conveyancing for nothing (thanks to the builder).

But could a law firm really offer services for nothing?

Could we every get to the point that the knowledge systems in law firms become so good that a simple search could trawl thousands of precedents and cases in a firms KM (Knowledge Management) and DM (Document Management) systems and bring you back the agreements that could be used with virtually no partner/associate billable time. Meaning very low costs that could be covered elsewhere (e.g. by adverts)?

I imagine the response now is “Don’t be stupid!” but then I’m sure if I stood in “Our Price” or “HMV” music stores 20 years ago and said “in the future you’ll be able to get every record and tape in this store in far better audio quality, for free!”

I’d had said the same thing back then “Don’t be stupid!”. And now we have Spotify!

@taxgirl on twitter “If I read one more piece about "demise of the billable hour," I’ll scream. BigLaw is reactionary, sure, but I don’t expect dramatic shift.”

That tweet the other day made me smile as I’ve been thinking of doing a post on “billable hour”, I mean it’s a written rule for a legal blog right? But I couldn’t quite get my thoughts straight on it, something didn’t quite fit. I mean are the clients of law firms really crying out for fixed fee’s or do they just want lower fees? Or are they even crying out at all? And if they aren’t then why would a business radically change a model that has generated it lots of money?

Also it’s not that new, some work has already shifted to fixed fee or pre-packaged work. Firms like Optima Legal have business models built like this. But will biglaw step into this arena in a big way or just leave it to the niche production line firms?

I’m going out on a limb and guessing nothings going to change anytime soon and the billable hour model is here to stay for the majority of medium and large firms.

I know this goes against a lot of legal bloggers, but it was an example I was trying to pull together for an argument for abolishing the billable hour that drew me to this opposing conclusion. Let me give you the example, I was thinking of when you service your car (or any garage visit).

Say you’ve a VW Passat standard model nothing fancy. There are thousands of this model on the road. It’s a 40,000 mile service and the garage you are taking it to has done this service hundreds of times, and if it’s a VW dealer then most likely on this very model. The cost is estimated at about £170. But it’ll depend on what needs doing.

At 5pm you pick up the car and get the bill:-

• 67GDHS67- Oil Filter x 1 – £40
• 888GH28 – Aero wiper blades – £10
• 89897DH – Duckhams Hypergrade – £35
• Replace oil filter (1hr) – £20
• Replace wiper blades (.5hr) – £5
• Oil replacement (2hr) – £40
• Check brake fluid – £20
• Check timing belt – £25
• Miscellaneous service labour (2hr) – £40
• Total service cost – £235

The next day someone else will take their Passat into the same garage and will get charged just £170 for the service as it didn’t need any extra work.

As a client of the garage do I want them to charge me a flat rate? Do I want to know exactly how much it will cost?

My immediate answer is yes of course, but then I think about it more and start to change my mind. In fact I conclude, no not really. I started to think that for the garage to charge a flat rate they’d have to manage the service a bit like a project, they’d break it down into components, estimate risks of extra work and add float for these possible risks. Basically if I was the guy who paid £170, I would probably pay a flat fee of £190 to ensure that everyone’s bill was also £190 (the garage moving some of the costs of the possible extra work around).

As the other guy, having had years of experiencing how the garage used to charge, I wouldn’t be too happy with this new model. In that I’d effectively paying for all the other people’s extra work.

There’s always the “project tensions” to consider when working to fixed price. When you try to bundle up a piece of work (or project) it requires you to manage the three tensions: Time, Cost and Quality. Time in most cases would be critical to ensure customer service and to manage the throughput of work in the garage, therefore if the flat fee is fixed and too low to cover the work then naturally your quality will drop. Customers aren’t going to be too happy about this.

So after some thought on this example, I thought “you know, if I was a law firm client I think I would want to see the full breakdown and I think I’d accept sometimes I’d pay that bit extra on difficult jobs to get my work on time and of a consistent high quality.”

So if the client isn’t too concerned about changing the model, what about from a lawyers perspective? The recent AmLaw 100 stats show that although the PPP (Profits per Partner) has dropped in this recession the average is still over $1m. So is the crunch so bad that radical changes will be in order? I don’t think so.

And that draws me to my conclusion stated earlier, the billable hour is here to stay!

BUT, what I do think will change is that law firms will look at the hours billed and see how internally they can gain more profit from each task on a case. Are there tasks that can be done more cheaply? Using junior members of the team, outsourcing some work, using technology better etc? Can they ensure that all the time is billed and not missed.

Also from a clients perspective. If I think back to the garage example, I too would be looking at the hours billed and thinking. Why can’t that be sourced cheaper, why is that dealer charging X for labour and this one charging Y. In the legal world the client relationship should mean the client can start to encourage better/cheaper ways.

But all this requires the visibility of a breakdown of the bill, not an overall flat fee!

Almost every day on twitter or in the legal press there are stories of law firms cutting lawyers and/or staff. As I write this post according to The Lawyer the total UK legal redundancies stand at 2727. In fact it may be easier to reel off a list of those firms that haven’t yet made layoffs (note I say yet, I would bet that layoffs are being considered across all firms)

So is this recession worse than 1980’s? Are companies really in bad shape?

I read an article recently on two types of recession:

• “boring recession” – troughs in the business cycle e.g. 1989-1992
• “dramatic recession” – big transformations in the economy. e.g. 1980-1982

The article above points out that the early eighties recession stripped out much outdated manufacturing, mining etc. The recession forcing the market to do exactly what markets do and correct itself.

So what category is this recession? Boring or Dramatic? I’m going to take a guess at dramatic, but this time it’s not blue collar industries that the market is correcting, but white collar ones!

This is the reason we’re seeing so many law firms shedding jobs. Though it’ll probably take more than this wave of layoffs to “correct the market”. I don’t think we’ll see another wave of redundancies, as I think a lot of firms will have stripped out the numbers they can afford to lose without compromising the organisations. What I do think though is that we’ll start to see radical changes in law firms; new billing models, exploitation of technology (to take a quote “no longer need clerks and pupils to search libraries, copy forms and wrap bundles in pink ribbon”), commoditisation of legal work etc.

But I think the biggest impact we’ll see though is in the upturn. This time there are many more well educated, ambitious, highly talented people that have been made redundant. Some of these will “rebel” against the old way of doing law, they’ll not go back to working for one of the old firms and they’ll start new firms. There was a wave of small business entrepreneurs that came out of the last dramatic recession, this time those entrepreneurs could end up completely reshaping delivery of legal services. (it may not take the upturn to bring this about, I saw an article today which shows this could be already starting to happen!)

It’ll be interesting to see how the current Lawyer UK 100 and AmLaw 100 keep up! Who’ll do a Microsoft and shift like they did when they turned 180 degree and embraced the internet and who will be the Lotus sitting back complaining that that upstart Microsoft didn’t do things their way and took their business away?