Law firms need all the help they can get

A recent Altman Weil study found that the #1 reason law firms weren’t doing more to change the way they deliver legal services is because clients weren’t asking them to do so. To not aim at improving client services is poor business strategy; but that is pretty rare. The problem of how to improve the delivery of legal services through increasing law firm productivity is more complicated than that. What incentives are clients giving for law firms to improve in this way?

From what I’ve read, in-house departments really are not doing much. The significant efforts of Microsoft‘s legal department to find solutions capture our attention in part because they are a rarity. Casey Flaherty, a well-known legal innovation expert, saw such a problem with legal departments not acting that he wrote an entire book coaxing and coaching them to do so. A lot has happened since that study, but here are some thoughts on persisting challenges.

What in-house legal departments could do

Ironically, while Canadian legal departments are looking to law firms to lead the way in terms of innovation, it is the buyers of legal services who have greater market power to drive change. As the industrialization of law continues, the growing market power of clients will make them even more influential. Furthermore, law firm clients – i.e. the buyers – are increasingly sandwiched between company management and procurement specialists. So legal departments can act as a conduit for the business interests of a company to influence the law firms with which they work.

Clients asking for discounts is a start. However, it’s worth noting the distinction between making an improvement in the delivery of legal services and merely providing a discount. Although law firms aim to please their clients, they aren’t built to keep legal costs down (and without a business reason to do so, nor should they be). Discounts are easy, but can only go so far. Improvements have the potential to do much more than keep costs down, but they require context to be appreciated. So it follows that buyers can get more improvements by clarifying for law firms what counts for them as a meaningful improvement beyond a mere discount.

Not an easy solution for anybody

Imagine a law firm created a “20-in-10 Box” that magically did 20 hours of legal work in 10 hours with no change in processes or reduction in quality. We know intuitively that such an increase in production capabilities would be a good thing. If you’re a buyer of legal services, how do you express an interest in it? Simply agreeing to pay someone less for the same amount of legal services would not incentivize them to create such a tool.

Bill Henderson uses the above thought experiment to illustrate how improving legal service delivery has to involve both the buyers and the sellers. The virtue of fee discounts and shadow billing is that they are simple and easy to use. But they do not reflect a buyer’s appreciation for a legal service provider making substantial improvements.

At some point in the near future we will hit what Henderson calls “the natural limits of what can be accomplished though simple cost-based solutions.” At that point (and Henderson believes we’re there already), buyers and sellers will need to have prolonged and sustained dialogue in order to figure out how to make productivity advancements mutually beneficial. Though legal work will become increasingly routinized and amenable to fixed fees, so long as there are complex and novel problems there will always be a need for billable hours. A lot of legal work will become increasingly routinized and amenable to fixed fees, which incentivize efficiency. But as long as there are complex and novel problems there will always be a need for billable hours. There’s no panacea.

Conclusion:

The benefits of figuring out how to incentivize improvements to the delivery of legal services extend well beyond the immediate relationship of a single buyer and seller relationship. Law firms that figure this out will have a competitive advantage in understanding how to help other clients align with their innovation efforts, but they can’t do it on their own. Buyers who develop a playbook on how to get maximum value out of the law firms they work with will look good to the rest of the company and will be more effective in selecting firms with the capacity to offer innovative solutions.

Still, for any of this to happen there needs to be some discussions with a long-term perspective. Given that law firms continue to lose their already diminishing amount of market power, larger clients such as in-house departments have an opportunity (if not a responsibility) to drive real improvements in the legal profession.