Legal Business Blogs

Comment: The great distraction – The innovation bandwagon has hobbled law’s market forces

I used to believe the UK legal profession was more imaginative than it got credit for – now I find with an increasingly jaded eye what fresh thinking there is has become stretched ludicrously thin. The vast majority of technology and new models are deployed to make the existing law firm a little more efficient to defensively preserve partner profits.

On one level, you can salute the hard-headed focus on margin. On the another, there are increasingly ominous questions about what worship of margin above other considerations will do to the legal industry at a time of structural pressure. You do not have to be devotees of Peter Drucker or Clayton Christensen to believe that aspiring to run law firms on 50%-plus margins creates a huge amount of competitive space for new entrants to operate and forge potent beachheads. It seems highly debatable that the legal industry will over the next 10 to 20 years sustain large swathes of providers operating on such fat returns.

But ultimately such considerations speak to the oddity of the debate around innovation in the profession. Here is the fundamental: law firms are driven by two markets, the labour market and the client market. Ultimately, in most mid-level and all high-end institutional legal services, the labour market, being far more liquid and transparent, is the dominant force. Less so than ten years ago, but dominant still. Greed is not the primary driver for law firms to chase sky-high profits, for such firms partner profits are the institutional share price they feel (with some justification) they need to retain their top people.

But the industry has arrived here precisely because of the refusal to focus on what should rationally be centre stage for clients: price and quality. New ways of working have advanced slowly because they are used to deliver incremental cost savings. Cutting 10% or 20% is not going to move the needle for most clients, especially as law firms simply try to claw back savings on ‘strategic’ mandates.

And for all the touchy-feely pitch, most New Law providers operate a model of being slightly cheaper than very expensive law firms.

If legal services were being sold explicitly on price, the debate would move from the distraction of focusing on micro-tinkering-as-innovation or an end in itself to instead see some providers do radical things with the rack rate. Not knocking off 20%, 30%, even 50% of the cost – but 70%, 80%, 90%. Put the focus on price and that is where innovation leads for large chunks of legal services.

Yet we do not have the matter-pricing information that could drive that shift, even in the most sophisticated jurisdictions of the UK and US. Do not blame law firms – clients have been even more obstructive on the point than providers. A similarly pointless debate stems from general counsel who airily dismiss their own lack of pricing knowledge then get energised about partner profits. They should police their own interests (price) and worry less, if at all, about profits.

The unpalatable truth is that it is not in the interests of most lawyers – in-house or private practice – for there to be clear information on the reasonable spectrum of costs for the mainstream range of activities that occur. Until that changes, the dysfunctional undertow to the legal industry will remain.