12. February 2019

Building the Law Firm of the Future – The Shape of Things to Come

Dr Michael Smets is Associate Professor of Management and Organization Studies at the Saïd Business School and a Fellow of Green Templeton College at the University of Oxford, where he also obtained his doctorate. For the past 15 years he has specialized in studying and advising professional service firms. He especially focuses on internationalization, innovation and partner development. He serves on the editorial board of the Journal of Professions and Organization, on the advisory board of Business Law Magazine, and on the expert panel for the German Legal Innovation Award.
Michael’s research has appeared in leading management journals and practitioner publications; it has also been covered by the Financial Times, Forbes, Bloomberg, CNN, CNBC, the Guardian and the Economist. Thinkers50 consider Michael “the up and coming voice of leadership” and have included him in their “Radar” list of 30 emerging scholars to watch in 2019.

Michael, in December you spoke at a conference of the International Bar Association that explored the law firm of the future. With some distance, what are your reflections?

 

Michael Smets
Michael Smets

It was a fascinating event that looked at the future of law firms in all their dimensions. That really brought home how many of the features of law firms that we take for granted are coming under increasing pressure to change; anything from the nature of expertise to new career preferences of associates to the billable hour and professional ethics.

Having said that, it was also inspiring to feature alongside people who are taking big strides to bring the opportunities of the digital future into the present, such as Brian Kuhn of the Watson Legal Practice at IBM, Peter Lee of Wavelength law or Shruti Ajitsaria who heads up Fuse, Allen & Overy’s LegalTech incubator. They all reminded me of William Gibson’s lovely quote: “the future is already here, it’s just not very evenly distributed.”

 

That sounds as if the legal sector has a pretty good handle on its own future?

Maybe, maybe not. It was refreshing to see lots of efforts to involve clients in shaping the future and to learn from other professional services, such as consulting. Yet, while it was good to see more inter-disciplinary connection, I’m not sure people are connecting all the dots yet for a fuller picture.

 

Ok, you’ll have to explain that. What are the dots and why aren’t they connected?

As I said, law firms are facing disruption and opportunities of many kinds: technological disruption of AI and blockchain, social disruption in terms of work-life balance and other career preferences, market disruptions such as the ”more-for-less” challenge and the market entry of new rivals, to name but a few. Make no mistake, each one of those poses complex challenges that deserve their own conversation. But the much bigger challenge is that these dynamics interact in an even more complex constellation that affects how law firms change – or not. So I would argue that unless we pay more attention to these connections and convene a bigger conversation, we will continue to struggle with the future.

 

So are you saying that “not changing” is an option?

Not really, but it’s a possibility! I think we are currently too easily tempted to blame the wrong culprits for the inertia we see. I often hear talk of people’s fear of change, the risk aversion of lawyers, the lack of a “burning platform” that makes change inevitable. They are all relevant, no doubt; but they distract us from the systemic inertia that is built into the very structures that have sustained law firm success in the past.

 

How does something that used to be a strength suddenly turn into a weakness?

Inconsistency! Or, more accurately – misalignment. Organizations change as their environment changes to stay aligned. However, as they do so, they often do so very selectively. As a result, if law firms fail to connect the dots and continue to change selectively, they undermine their original strengths as elements become misaligned, and this misalignment creates friction and inertia.

 

So how do you suggest law firms should think about change more holistically?

Traditionally, three control mechanisms have aligned to sustain law firms: their strategic, operating and financial control. In a recent editorial,[1] some colleagues and I started to imagine that law firms are sitting on a clockface, starting with strategic control at noon, operating control at four o’clock and financial control at eight o’clock. Let’s fill in the gaps!

Strategic control has been notoriously difficult, because the quality of professional services is hard to assess. So a lot of “control” is exerted through collegiality, reputation, and routines that reassure clients they are getting the best possible services. Beyond that, however, professionals enjoy a lot of autonomy and professional discretion to serve their clients to the best of their ability.

In terms of operating control, this has been unproblematic, as lawyers have enjoyed relatively homogeneous training and are bound by strong ethical commitments. Given this personal autonomy and ethical commitment, operating control has largely relied on incentives, such as contingent performance and rewards – especially in the form of billable hours and the up-or-out tournament for limited partnership slots.

Which of course brings us to financial control, which used to be quite simple because pure-play partnerships have no outside owners, don’t need to protect outside investors and can therefore focus on partnership governance and an ethos of collegiality in their strategic control. Which brings us full circle.

Together, this configuration deals with three traditional issues: handling “quality opacity”, a professional workforce, and the – traditionally – low capital requirements of law firms.

Even though some of these elements have come under pressure in the recent past, I think how they sustain each other is intuitive. Therefore trying to change one element only runs into resistance from other structural elements. That said: changing one element inevitably creates pressure on the others! So when pressure becomes strong enough, there may be a domino effect!

 

Can you give us an example?

Let’s take the much-discussed technology disruption. Anything from artificial intelligence to data analytics. We now hear a lot of clients actually asking their legal service providers to demonstrate their capability before their services are formally commissioned. Quality opacity gives way to transparency! Reputation and routines may become less important, as long as technology is used in a transparent way. Professional autonomy may be increasingly curbed by technology protocols. The question arises as to what extent law firms will still be dominated by a professional workforce in the traditional sense. What part of law firms will still be committed to legal professional ethics? As professional means of control get weaker, so do traditional incentive systems. Billable hours become more meaningless, partnership tournaments become less meaningless as fewer young lawyers aspire to partnership and the route to partnership may not be open (yet) to technology specialists. Simultaneously, I heard a lot of representatives – especially from smaller and medium-sized law firms – complain that many tech solutions are simply not affordable for them. So raising outside capital becomes a real option, which would require investor protection and put pressure on collegial decision-making among partners. Broadly speaking, every element that has traditionally been neatly aligned to sustain law firm success would be pushed out of line. But that doesn’t seem to be getting a lot of attention at the moment.

 

So what does that mean for how law firms can manage this transition into the “new normal”?

We can imagine change coming about in one of three ways: first, we can imagine these increasing misalignments like tectonic shifts. Despite superficial stability – or inertia – a lot of tension builds up. When that tension is eventually released, change will be transformational – like an earthquake. Alternatively, a more holistic approach would manage those tensions as several of the elements around our imagined clock-face change in sync and quickly settle into a new self-sustaining constellation. That, however, takes a carefully orchestrated change programme.

Finally, let’s apply our “clockface” imagery to new entrants, let’s say a tech-based law company. While traditional law firms move “clockwise” and regularly run into the inertial forces of their own structures, new entrants move “anti-clockwise” – with the grain, if you like. They don’t set up as partnerships, don’t raise outside investment to finance their technological capital. As a consequence, they don’t have legacy systems like partnership tournaments and billable hours to contend with, but develop incentive schemes that work for legal and technology specialists alike. As you can see, the dominoes fall one by one! This structural advantage still needs a bit more attention!

 

That sounds a bit like doom and gloom!

Sorry, it wasn’t meant to, but hopefully it shows how different the picture looks, once you connect the dots and think about current changes more holistically and systematically. That will make all the difference!

 

[1]     Smets, M., Morris, T., von Nordenflycht, A., & Brock, D. (2017). “25 years since ‘P2’: Taking stock and charting the future of professional firms.” Journal of Professions and Organization 4(2): 91-111.

 

Picture by John Barkiple on Unsplash

About the author
Sabrina Weiss Sabrina Weiss has been a research assistant at the Executive School of Management, Technology and Law (ES-HSG) since April 2017. In her function, she is responsible for establishing the Competence Center Law & Management and supports various projects of Prof. Dr. Leo Staub and Prof. Dr. Bruno Mascello.