An overlooked factor in the changing legal market

[This article also appears in Legal Business World]

In this essay I want to explore what I think is perhaps the most influential factor changing the legal market: the number of lawyers in the marketplace. When a market supply increases faster than its demand, the market value of a product or service decreases. The supply of sophisticated lawyers is at an all-time high but demand for legal services remains relatively flat. Today’s lawyers possess more specialized expertise than their predecessors, yet we’re seeing unprecedented a quantitative and qualitative change in how lawyers are perceived by their actual and potential clients.

Taking into account the present overcapacity of legal specialists will improve a law firm’s strategic decision-making. A growing the number of participants in any market will increase competition; and increased competition has predictable effects. In fact, the Competition Bureau literally has a checklist of “price and output… quality, product choice, service, innovation and advertising” based on what it knows to happen when the number of participants in a market fluctuates. I don’t think it’s a coincidence that the Bureau’s checklist closely aligns the current hot topics in the legal market.

Of course, there are many factors in a changing legal industry. I suggest a lot of them follow from the supply-driven increase in competition. For example, the notion of process improvements is not new and not dependent on any technology – so why has it only recently received so much attention? The rise in in-house council is putting lots of pressure on firms to change, but we would not have such large in-house legal departments without there being a large enough supply of lawyers. Better understanding deeper changes like overcapacity will help show the higher-level, more noticeable changes in context.

 

Our journey to overcapacity

As crazy as it might seem today, one-hundred years ago there was a real lacking of sophisticated business lawyers. With the rise of corporate entities, it was necessary to create collective forms of law practice. But how do you bring lawyers together without feeling like you’re herding cats? Enter “the Cravath system,” whose innovations made training scalable while ensuring that the most remunerative place to ply those in-demand skills was as a partner at the Cravath firm.

For a long time, the partnership model was undeniably the best model for practicing law. If a more profitable way to cultivate and sell legal expertise had come along in the past hundred years then we would have a counter-example to the partnership model. But we don’t. During a period of sophisticated lawyer scarcity it probably would have been a poor business decision to do anything that wasn’t aimed at growing the number of sophisticated lawyers. Yet, as brilliant as it was, the sound logic of the using a partnership model becomes complicated as lawyer scarcity diminishes.

As one might expect, law schools continued to grow to fill the demand for more lawyers. For a while, more universities began creating their own (profitable) law schools:

If 54 new law schools isn’t impressive, the rise in law graduates during this period is truly remarkable. The US went from roughly 27,000 law grads in 1974 to roughly 47,000 in 2010. That 20,000 increase is enough to accommodate every new law school having a cohort of 200 grads and for the initial 147 schools to each grow their cohorts by 62 grads.

That is a lot of new lawyers! Even if the percentage of those law grads who become (or intend to become) sophisticated business lawyers doesn’t change, the number of such lawyers entering the market each year is still increasing.

 

How can the market absorb all these lawyers?

Older lawyers didn’t simply retire to make room for these new grads. So the number of lawyers in the market grew and grew. As the supply increased, it was inevitable that at some point the market value of lawyers would decrease if demand could not keep up. Eventually, the market value per-lawyer became such that it made economic sense for more corporations to hire more in-house lawyers. Amazingly, even during a period where the number of in-house lawyers tripled, law firms and government legal departments also grew.

For a while, the market value per-lawyer had a happy balance between being low enough to keep growing in-house yet high enough to also keep attracting new enrollment in law schools. However, in 2010 we see both (1) in-house lawyers begin a period of unmitigated growth, and (2) law school enrollment begin a period of unmitigated decline.

I suggest that 2010 represents the point when the perceived value of becoming a lawyer became too low to justify three years and significant debt. In addition, the lower market value can also explain also why companies are finding it increasingly easier to justify hiring in-house counsel – lawyers are just as smart and effective as ever, and companies can get them at better prices than ever.

 

Qualitative Changes

So far we’ve talked about numbers, but there is also a qualitative change. As Bill Henderson details, lawyers have gone from generalists, to specialists, to project managers and with it, our lexicon has shifted from “legal profession” to “legal industry”. Even if I can’t quantify the declining market value, I feel pretty certain that “project managers in an industry” does not connote the same prestige as “specialists in a profession.” Below are three examples of how the volume of lawyers being at an all-time high is causing problems for the profession’s sense of identity.

First, many lawyers quite understandably continue to prefer seeing themselves as specialists in a profession. But their insisting on it is creating problems for lawyers and clients alike. When clients feel prices are too high and lawyers feel they deserve to be paid a certain price, we end up in a weird situation where “a sizeable portion of the public struggles to find a lawyer and a sizeable portion of the bar struggles to find sufficient fee-paying client work”.[1]

Second, companies are hiring more in-house lawyers even though clients’ perceptions of law firm fees are slowly declining. I see two plausible explanations: the cost-per lawyer is going down; or more companies are finding benefit in sandwiching lawyers between other business units like they would with any other department. Both speak to the qualitative devaluation of lawyers from independent specialists to just another department.

Furthermore, the fact that clients perceive their fees going down and still push for more write-downs underscores the view that law is becoming far more transactional and valued purely on tangible benefits. This behavior implies seeing a “lawyer function” as opposed to experts who can add value.

Lastly, students are less willing to pay for legal education (see drop in enrollment above). I suggest that fewer students perceive being a lawyer as a valuable career than in the past. After four decades, law school growth seems to have hit a tipping point. Enrollment has plummeted and law schools are closing their doors. Ryerson’s law school efforts embody the tension of trying to embrace the qualitative change while contending with an already overcrowded market. Its focus on lawyers-as-entrepreneurs fits much more closely with project managers in an industry than with sophisticated experts in a profession.

 

Conclusion: A note on lawyer value

While tumbling law school enrollment appears to be a market correction, it will still take decades for the market to sort out what to do with the unprecedented volume of current lawyers. Changes precipitated by this lawyer-abundance – lawyers as project managers, increased fragmentation in legal markets, and the rising prominence of running law firms like corporations – will leave an indelible mark. Whether you are a lawyer, a “non-lawyer”, a “recovering” lawyer, or you just stumbled in off the web and somehow made it this far in my essay, it is worth considering what it means to be a lawyer.

Legal work will forever be tedious, involve ethical considerations beyond the scope any single transaction; and it will forever be viewed uncharitably by most clients. So while I agree that the law firms could improve price and output, quality, product choice, service, and innovation (the natural battlegrounds of increased competition); it is worth recognizing the stress that these factors put on law as a profession. While there’s no going back to a golden era of law, it’s worth asking how to reconcile increasingly powerful buyers pushing toward devolution of the legal profession with the notion that lawyers are meant to embody more than purely business interests.

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Notes:

[1] See Bill Henderson’s Report to the State Bar of California. Aside: this is a truly difficult issue when you consider the human dynamics involved.