A Framework for Success: The 21st Century Law Firm Business Model

Published for Thomson Reuters Legal Executive Institute November 24, 2015

The market will no longer tolerate the inefficiencies of the traditional law firm model. Persistently and progressively, clients are insisting that legal service be provided in ways that are more tailored to their precise needs and for fees that bear a more reasonable relationship to the value provided.

Until recently this insistence has shown up as pricing pressure — clients demanding discounts. It has now moved to a more significant stage: clients moving massive amounts of their legal work to other providers — in-house, alternative providers or more efficient law firms — that deliver what they need more cost effectively.

The game has changed. And the change will only accelerate. Law firms that want to flourish in the world ahead must adapt.

Last week I wrote about the ways that client purchasing behaviors have changed. This week I share my thoughts about how law firms can modify their business models to flourish in this changing marketplace.

Five Dimensions of Difference

I believe there are five interrelated dimensions of change law firms can pursue. Here they are:

Service Model

Changing the way firms approach client service is at the heart of the matter. The traditional model is too narrow, inadequately client-focused and too expensive.

The service model should be based on two client-centered considerations: What is at stake? and What are the client’s objectives? In turn, the model should identify the optimal way to achieve the client’s objectives, in light of the stakes involved. It should take all relevant factors into account, specifically, how to maximize efficiency and minimize costs. While maintaining the traditional commitment to quality, outcomes and ethics, the service model should be equally determined to achieve these objectives using the optimal set of resources and proceeding in the most cost-effective way.

Resource Model

To enable an optimized service model, law firms will need to diversify their resource model to include a different mix of people, more technology and more collaboration with third parties.

The model should consist of a smaller percentage of partner and on-track-to-partner-level lawyers, and an increased percentage of career associates, flex-time lawyers and “legal service professionals” (those who need not be licensed to practice law). The “legal service professionals” can perform elements of the engagement that are not themselves “the practice of law,” as well as managing critical planning, project management, technology and R&D functions.

The model should optimize the use of technology both to perform tasks embedded in legal service and to facilitate the efficiency of the delivery process. As data analytics, machine learning and artificial intelligence continue to progress, the already meaningful role of technology will expand dramatically.

The model should contemplate active collaboration with third parties who can provide resources and service at the requisite quality levels more efficiently than the firm can on its own. Examples include legal process outsourcers, staffing firms and data analytics providers.

Each of these changes to the resource model not only will promote efficiency and reduce cost, each also has the promise of improving quality and enhancing the job satisfaction of firm personnel.

Financial Model

To make the foregoing changes, firms will need to change their financial model as well.

The model can no longer be based on the billable hour, which incentivizes unnecessary cost, measures by inputs rather than outputs, and obscures the true financial elements of firm operations.

Instead, firms need to move to a financial model which is based on the value of the services provided, which incentivizes processes and norms that manage costs to their optimal level, and which manages revenue in a way that generates a sustainable level of profit.

Pricing Model

It follows then that firms will need to price their services based on the value delivered rather than on the lawyers’ billable hours. For one thing, as the service is progressively delivered by resources other than lawyers, the billable hour model will not work. More fundamentally, pricing based on how long it takes lawyers to do the work is inherently at odds with maximizing efficiency and constrains the ability of firms to achieve adequate profitability while reducing client fees.

The pricing model should base fees on outcomes, such as fixed fees for an entire engagement, for parts of an engagement, or for the achievement of designated milestones. The market obviously will welcome the predictability such a pricing model will offer.

Investment Model

Finally, firms must embrace the need to continually innovate in the way they deliver legal services by adopting a model of constant investment in research and development for the future. Firms should build into their financial model a sensible level of annual expenditure to fund new ideas, processes, technologies and resources.

Such a model not only will enable the firm to keep pace with the inevitable evolution of legal technology and process design, it will institutionalize the firm’s commitment to innovation. If the latter becomes a self-fulfilling prophecy, the firm will be stronger as a result.

Implementing a New Framework

Moving to implement these new model elements will be challenging, particularly for firms that continue to achieve positive short-term financial results. Those firms that make these changes earliest and best, however, will experience substantial competitive advantage in a market that’s now demanding more tailored and cost-effective service.