The 2016 Georgetown Law-Peer Monitor Report on the State of the Legal Market begins with an unflattering comparison. It characterizes the position of law firms today as similar to the position of Kodak just prior to the sudden growth of digital photography. In the 1970s, Kodak had every reason to understand that digital photography was on its way — because its own technicians had developed the first successful test of a digital camera. For various reasons, including the obvious fact that digital photography would kill its lucrative film business, Kodak chose to ignore the threat until it was too late. After years of decline, the company eventually filed for bankruptcy.
That traditional law firms face the same fate has been the central thesis of a line of industry thinking that started to go mainstream with the publication of Richard Susskind’s book The Future of Law in 1996, and has gathered steam ever since. Enabled by new technologies, goes the argument, clients have the power to disaggregate legal matters, turn to alternative legal services providers, and retain more work in-house. This new report argues that, like Kodak, the law firm industry has made incremental adjustments but has chosen not to act in response to the threat. The incumbent players see the status quo as simply too good to risk radical transformation of the model.
That status quo is documented in the first major part of the report, which is based on Thomson Reuters’ Peer Monitor data and provides an interesting financial profile of the industry. One key metric — demand for law firm services — shows a flat growth curve getting flatter. After dropping from strong growth in 2007 to near-double-digit negative territory in the wake of the financial crisis in 2008, the growth curve has bounced along within a few percentage points north or south of 0% growth per year. Not exactly a dynamic market, but on the other hand, with profits per partner well into the millions of dollars for the largest firms, it’s not surprising that the motivation to rock this particular boat is largely missing.
What looks like a slow-growth industry that keeps chugging along as always, is actually something increasingly in peril — and not paying enough attention to the legal equivalent of the Kodak’s digital photography experts experimenting with the next big thing right under their noses.
Where is the dynamism? In two places, according to the report:
- In the non-firm share of the market. The report rattles off several indicators from other studies that show in-house clients reducing spend on law firms; increasing their spend on alternative service providers; and spending more on their own internal operations. These three targets of legal spend are all fueled by better technology and, more importantly, a willingness on the part of clients to make demands, re-think legal services, and generally move beyond the status quo in a way that law firms are not. The evidence shows that the legal services industry is growing; it’s just not growing for the traditional law firm sector.
- In the continued stratification of law firms. Even as overall industry growth is stagnant, there is an increasing differentiation between the haves and the have-nots. The 25 largest law firms now account for more than half of all profits at AmLaw firms. The winners are building stronger barriers to entry simply by virtue of their size in the largest New York-centric firms, or by virtue of specialization in the case of many of the smaller AmLaw Second 100 firms. Citing Altman Weil data, the report notes that there is a clear correlation between firms’ willingness to undertake strategic moves (such as new staffing models, more efficient delivery and changes to pricing models) and their revenue and profit growth.
From the macro perspective, the situation is challenging. Even those firms that are growing and doing well are doing so mostly by taking market share away from competing firms, not by tapping into new revenue streams. Meanwhile, that non-firm share of the market (in-house spend and alternative providers) is where the overall industry growth is happening. Traditional firms are not tapping into that growth, because their overall model remains the same.
The report comes inevitably back to Kodak. It concludes that some firms are indeed embracing a fundamental change in operating models, but most are not. What looks like a slow-growth industry that keeps chugging along as always, is actually something increasingly in peril — and not paying enough attention to the legal equivalent of the Kodak’s digital photography experts experimenting with the next big thing right under their noses. Individual firms will adapt (and are adapting), but it’s hard not to draw the conclusion that external pressures will continue, and that the industry as a whole will continue to face further restructuring.
As for Kodak? The company eventually emerged from bankruptcy, shedding almost all its previous core operations and announced its intent to focus exclusively on the digital imaging market.
Perhaps the legal industry can learn from its own Kodak moment.