The Global Age of More for Less

Volume 1 • Issue 1 • November 2014
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The Global Age of More for Less

Is the legal field currently witnessing a fundamental paradigm shift or temporary correction? It’s too soon to tell—but it may be both.

When storied law firm Weil Gotshal laid off 170 associates and support staff in mid-2013, executive partner Barry M. Wolf lamented in an email to staff that the layoffs were “very painful from a human perspective.” Yet, he said, the cuts were necessary to “retain historic profitability in the new normal.”

The firm also imposed pay cuts totaling in the hundreds of thousands of dollars on about 30 of the firm’s 300 partners. The move surprised many observers, since it took place well beyond the downturn of the 2008–2009 recession, which the firm had weathered better than most as a result of a strong bankruptcy practice.

By all accounts, Weil Gotshal remains in a position of strength—it carries no debt and its position among the highest-grossing law firms in the world is unassailed. Still, what are the implications when one of the world’s top law firms is forced to undergo significant layoffs to maintain profits, even in an apparently rebounding economy?

Business as usual or brave new world?

Is the legal profession undergoing a fundamental paradigm shift of radical transformation—or a temporary correction, albeit one somewhat more medium term? Given current market conditions, it is too early to tell. But the future of the market for legal services is unlikely to be either boom or bust. The financial downturn of 2008 exacerbated changes in the legal industry, but those changes were already beginning and simply got pushed along by the crisis. While these changes may not spell the end of Big Law, they do herald the key trend of our times: a global age of more for less.

The legal profession has experienced temporary crises before. During the US recession of 1991, the legal hiring market sank more steeply than it did during the global financial crisis of 2008 and 2009. But by 1993, the recession was all but forgotten, and the law took off for one of the longest boom times it has ever seen. After a dip during the dot-com crash of 2001, the economy again quickly recovered, charging off for another decade of record growth.

 

 

Since the global financial crisis of 2008, however, conditions in the legal services market have changed. Demand is down, discounts and alternative pricing agreements are rampant, and realization rates—which measure how much of fees are ultimately collected—are dropping. 2013 also marked a record year for law firm mergers, which some see as an attempt to keep profits high in the midst of soft demand. 2014 continued at a similar clip, including some high-profile mergers, such as Squire Sanders with Patton Boggs. Some proclaim legal services should “keep calm and carry on,” arguing that the boom times are sure to return, but lawyers who take this stance may well be burying their heads in the sand.

What is clear: in the aftermath of the 2008 global financial crisis, we are seeing the accentuation of macroeconomic forces that began before the crash—changes that are fundamentally reshaping the entire global economic and political system. Such forces will in turn reshape the market for legal services, even as the economy rebounds.

The 2008 financial crisis revealed fundamental problems facing the legal profession and the traditional legal services model—and lawyers will have to adapt and respond. Below, we review some of these forces and their effects as we see them.

The Takeaway

It is too early to tell whether the legal profession is undergoing a radical transformation or temporary correction—but fundamental changes in the worldwide delivery of legal services in the wake of globalization and technology are inevitable, and they’ve already begun.

Law in the information age

Three global structural shifts are having a profound impact on the practice and profession of law: the rise of information technology, the globalization of economic activity, and the blurring together of traditional categories of knowledge and organization.

Technology, long a disruptor in other fields, is inexorably changing law practice too. Innovations such as electronic discovery and data-driven forms of legal research are being built to leverage technology, while email, cloud computing, and electronic access to information are changing the way law is practiced (see “Lean Efficiencies and Innovative Thinking“). In addition, clients are using data to crunch numbers both about their own experience and lawyers’ work, creating new ways of measuring the quality of legal services.

Three global structural shifts are having a profound impact on the practice and profession of law: the rise of information technology, the globalization of economic activity, and the blurring together of traditional categories of knowledge and organization.

Meanwhile, broad global trends toward the democratization of information have led to the breakdown of traditional silos of knowledge, dramatically improving the sophistication of buyers and reducing information asymmetry between buyers and sellers. As a result, services are being unbundled and repackaged in everything from software to music—as well as, increasingly, legal services.

For lawyers, this means sophisticated clients have more access to information about legal services and what they need from those services. They’re demanding more transparency, asking firms to take things that used to come all packaged together—such as “litigation” or “deal work”—and unbundle and array those services across increasingly global supply chains. Such market forces are accelerating a move toward efficiency and what is euphemistically called “value” billing, in which work is priced not by input, but by the value of a firm’s output to clients. Vague, inexact measures of quality are no longer enough.

In addition, competition is moving away from reputation or credentials to value as measured by metrics, and from firms to networks. In The Wealth of Networks: How Social Production Transforms Markets and Freedom (Yale University Press, 2007), Harvard Law School professor and Co-director of the Berkman Center for Internet and Society Yochai Benkler describes how the power of individuals can combine in crowdsourcing, or what Benkler calls “social production,” to create value via networks in an information economy rather than remaining concentrated inside individual organizations.

Vague, inexact measures of quality are no longer enough.

Law firms are witnessing this rise in increasingly networked practices within their own firms, as well as in a shift toward more collaborative work. Legal analyst Richard Susskind suggests banks, in-house legal departments, and municipalities set up shared service centers to dramatically reduce the costs of routine, noncompetitive work. UK law firm Allen & Overy, for example, has collaborated with six major banks to produce Rulefinder, a system that offers guidance in navigating the rules of international shareholder regulation.

These pressures combine within the legal services industry to produce new competitors, from legal process outsourcers to professional service firms offering integrated services at the intersection of law, finance, strategy, and project management. The legal contracting firm Axiom, process-outsourcing groups Pangea3 and Integreon, and legal-process consulting group Elevate—all represent new models of legal services, from outsourcing to contract lawyering. These new entrants to legal services put pressure on traditional law firm business models, professional practices, legal regulation, and historic organizational structures.

Institutionalization goes global

In the midst of all this, the globalization of economic activity has seen a shift from the global North and West to the South and East. According to some projections, the global GDP shared by the West—the United States and Western Europe—will decrease by half in the coming decades, plummeting from 41 percent in 2010 to 18 percent in 2050. By comparison, Africa’s share will rise from 4 percent in 2010 to 12 percent by 2050. Combined with the Middle East, the two regions would encompass 17 percent of world GDP by 2050.

If these projections are right, it means Africa and the Middle East combined will account for nearly as much of the world’s GDP as everything we consider the developed world today. Combined with developing Asia, projected to rise from 27 percent to 49 percent, Africa and the Middle East would constitute 66 percent of global GDP. Even if they’re wrong about such structural changes by a large factor, a meaningful shift in global economic activity remains inevitable, and isn’t far off.

The growth of large law firms is one example. Worldwide, most lawyers continue to practice alone or in very small firms. But mega-firms are not confined to the global West. In India, Amarchand Mangaldas has revenues topping $100 million. In Brazil, Pinheiro Neto Advogados rode a domestic mergers and acquisitions wave to advise more than $14 billion in deals in 2011 alone. And a firm in China recently made history by being the first to merge with two UK and Australian firms: King and Wood grew to 1,000 lawyers in China, then in 2012 joined forces with Mallesons Stephen Jacques, one of Australia’s top law firms, to become King and Wood Mallesons. It may be poised for yet further mergers with firms in the United Kingdom, the United States, even South Africa. If those deals go through, it is likely become the largest law firm in the world.

If these projections are right, it means Africa and the Middle East combined will account for nearly as much of the world’s GDP as everything we consider the developed world today.

Meanwhile, growth and sophistication are increasing among in-house lawyers and in the public regulatory sphere. The Tata Group, a multinational conglomerate, now has 400 in-house lawyers. Expanding public legal departments and large governmental agencies are staffed by lawyers worldwide, particularly in regulatory fields. And even in the individual sphere, new organizations are forming. Slater and Gordon, the world’s first publicly traded law firm, has created a network of affordable, consumer-oriented law firms in the United Kingdom. Legal clinics and prepaid and online legal services are multiplying in other Western markets as well.

“Glocalization,” not globalization

These tectonic shifts in the global economy are having far-reaching effects on the practice of law. One such effect is found in complex and multiplying global regulatory schemes. Another is in the increasingly blurred boundary between law as a profession and as a business. Lawyers once largely controlled regulation, deciding how law could be practiced and establishing boundaries between the profession and the market. Today, lawyers still have a say, thanks to organizations like the American Bar Association, but so do many other constituents.

The biggest changes are being driven by the state. Reforms liberalizing legal services in the United Kingdom, which passed Parliament in 2007 and went into effect in 2011, did not come from the bar but from the government. The UK’s Legal Services Board is run by a competition specialist: a non-lawyer, the recently appointed Richard Moriarty comes from a regulation background.

The balance of power is shifting. Clients and even regulatory bodies are now saying they will decide the boundary between the craft of law and efficient processes, and will increasingly enforce that boundary as they grow more knowledgeable. Meanwhile, international legal services are wrapped up in a much larger debate about trade, since international and regional agreements regulate trade in services.

All of this is happening at the global and the local levels together. Traditionally, law has been bounded by language, culture, geography, and personal service. Today, all of those factors are losing ground and becoming less constraining. Nevertheless, there is no single global law, let alone language or culture. English is not a universal language, and while technology allows distant contact, relationships continue to matter. The result is a mix of the local and the global—or “glocal,” as Carol Silver of the Northwestern University School of Law calls it—and a complex system of both global imperatives and local control.

The paradox of professional distinctiveness

In an age of more for less, lawyers are being pressed from multiple directions. They’re pressured vertically by increasingly sophisticated and price-conscious clients. They’re crowded horizontally by global firms competing on quality and geographic reach for high-end business, while new providers compete on price and efficiency for the low end (and to hollow out the high end). And they’re squeezed internally by ongoing lateral hiring wars for talented lawyers and other professionals.

Certainly, legal professionals around the world must respond to these changes in the global marketplace. But if they’re only seen as responding to pressure, what will remain of what’s important to being a professional? The question gives rise to what Harvard Law School professor and director of the Center on the Legal Profession David B. Wilkins has described as the “paradox of professional distinctiveness”: the more market forces are seen as driving legal practice and education, the more questions will be raised about the profession’s autonomy and distinctiveness. Norms of independence, craft, public service, and commitment to the rule of law have been central to attracting new entrants to the profession and to the identity, prestige, power, and appeal of legal careers in many countries. The loss of these threatens the best and most noble aspects of the profession, from recruitment to regulation.

Our final word: all of these changes are making the world not more simple, but more complex. And that complexity will demand more lawyering, not less. Clients, policymakers, and the public—indeed, society as a whole—need lawyers capable of navigating an increasingly complex world more than ever.

The Bottom Line

Professionals are more likely to be successful at adapting to global shifts in legal services if they’re observant and proactive about the future of law. Here are four points to consider for your practice now:

  • Be adaptable. Be willing to change even when change is difficult or disrupts long-standing processes and traditions.
  • Disaggregate tasks. Assign routine work to more efficient or lower-cost vendors when possible, saving staff associates for more complex analysis, and consider sharing cost savings with clients.
  • Streamline project workflows. If everyday projects crowd out time for careful process analysis, assign a senior staffer with legal project management experience to the task. Over time, the resulting cost savings and increased client satisfaction are likely to more than compensate for the role.
  • Implement targeted technological solutions. Would a networked project management tool reduce or eliminate needless back-and-forth between associates and support staff? Could office space or travel costs be reduced by shifting to a video conferencing system? Consider appointing a chief information officer for your firm to research and implement such systems.
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The Global Age of More for Less Volume 1 • Issue 1 • November 2014

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