Bruce MacEwen, President of Adam Smith, Esq., which provides management consulting services on the business and economics of law firms, spoke with Legal Executive Institute recently about what the coming year could hold for the legal industry.
LEI: We talk a lot about the fundamental changes going on in the legal industry, especially concerning technology and the manner in which legal services may be delivered. Do you think the pace of this change is increasing, and do you see that for the coming year?
MacEwen: Totally. We’re going to see more change in the next five or so years than we’ve seen in the last couple of decades, frankly. All kinds of things seem to be converging at once; probably the most important is clients taking control.
LEI: What is facilitating that kind of major shift in client behavior?
MacEwen: I think clients learned a lesson during the Great Recession that they can actually cut total legal spending without sacrificing quality. And I don’t think they’re going to forget that lesson anytime soon.
LEI: Are you seeing that trend affecting any particular legal area in the coming year?
MacEwen: Well, clients have figured out that a lot of litigation is actually somewhat discretionary, and certainly the scale and scope of litigation is discretionary. Particularly with the enormous costs of discovery, I think a lot of corporations are saying it’s not worth it.
Certainly a lot of AmLaw firms that are not marquee names and don’t do a lot of corporate deal-making—M&A, private equity, hedge funds and the like—are going to be impacted. Litigation is a pretty powerful locomotive for most non-elite law firms.
LEI: Has that reverberated yet in the financials of individual firms or in the overall industry?
MacEwen: Well, we haven’t seen any 2014 results yet, per se. But I keep hearing from managing partners and early reports from Peer Monitor that litigation is down and it’s transactional work that is driving the recovery, to the extent there is a recovery.
Even though the final reports aren’t out, there is certainly plenty of data and enough anecdotal stories that are showing this.
LEI: What about the hierarchy of the industry overall in 2015? Do you expect to see more consolidation of the business among top firms and the pulling away of this group from the rest of the industry?
MacEwen: This is a trend we began seeing at the very start of the recession in 2008-’09, but every year when the results are finally reported, it seems more marked that there really is an emerging elite and then everybody else. The divergence is really becoming insurmountable in many ways.
LEI: What is making the difference with the elite firms?
MacEwen: I think the legal market is evolving to look an awful lot like the rest of the economy. Clients either want something very prestigious and high-quality—and price is a secondary consideration—or they want a 5-lbs sack of potatoes. Not much in-between. And I think we’re seeing that emerge in the legal industry. Clients need an elite firm for some matters, but for a lot of other matters, they just need somebody competent to get it done.
So, the elites are doing well because clients are not price-sensitive for what they do, but on the other hand, if you’re one of the 9-out-of-10 firms not in that league, you are going to find it rough sledding. Because supplying something that is not extraordinary and not inexpensive… well, it makes clients scratch their heads.
LEI: What will the vast majority of law firms that aren’t in the elite group have to do to survive in the coming year?
MacEwen: I think the non-elite firms have two fundamental choices. Number one is to go middle-market, and stop pretending that you’re turning out Mercedes if you’re not. And train, recruit and price your lawyers accordingly.
Number two—and these are not mutually exclusive—is to begin targeting clients who are little less price-sensitive and frankly, a little less sophisticated. If you have a privately held company that is doing maybe $200 million a year, that’s a healthy business. Those clients are much more likely to appreciate what you could do for them at $450 an hour and be able and willing to pay $450 an hour.
LEI: How do you convince the majority of law firms that their interests would be better served by downscaling expectations?
MacEwen: You just hit the nail on the head—the problem is partner expectations. Even if managing partners, executive committees and of course incoming associates get that this has changed, the partner expectations have continued to go through the roof over the past several years. And why shouldn’t they? Every year has been better than the last—even if there is a hiccup or a recession and you’re flat for a year or two—the gravy train starts up again where it left off. But I don’t see that world returning, and it’s very difficult for partners to accept that.
LEI: Some of what we’ve discussed is more like rolling, longer term changes, but what do you think could be the biggest change we see happen this year?
MacEwen: I think it might have to do with career paths. Suppose we see a name-brand firm say we’re getting off the “going rate” treadmill and instead we’re going to provide a whole bunch of career paths, instead of just associate and partner. This would be similar to how banks, accounting firms or consulting firms structure their career paths. In fact, it has long struck me as bizarre that there are only two ways of being a lawyer, associate or partner.
I think if a big name law firm adopted a much more flexible, gradated career path—perhaps even hiring out of law school for “apprentices” who could take the bar exam but would clearly be in a training role—it would have an impact.
And I think clients would pay for an apprentice because they understand there is value there—because in many cases, that’s how they run their own businesses. That’s why I think it actually might happen.