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ANALYSIS: Law Firms in 2020–Innovative is the New Prestigious

Nov. 4, 2019, 12:16 PM

American law firms used to strive to be the most prestigious, with the best clients, highest-end work, and expensive rates to match. In the new legal landscape, firms vie for a new superlative: most innovative.

In-house legal departments haven’t recovered their spendthrift ways post-recession, and predictions are that they never will. So law firms are trying to show value to these clients in new ways.

New Law Firm Models

Firms are moving beyond legal services offerings, opening legal tech and consulting subsidiaries that can both automate work and stem client runoff to alternative service providers and legal process outsourcers.

There are nearly too many law firm consulting subsidiaries to list. Just among those that launched in 2019 are Bryan Cave Leighton Paisner’s BCLP Cubed, providing high-volume work and legal operations consulting; Wilson Sonsini’s legal automation platform SixFifty; Eversheds Sutherland’s legal consulting and staffing firm Konexo; and Greenberg Traurig’s “shared solutions platform” Recurve. These new entities join established subsidiaries like Clifford Chance’s Applied Solutions and Reed Smith’s GravityStack, among others.

Dentons has five NextLaw-branded consulting subsidiaries, providing everything from tech to venture capital to public affairs solutions. And law firms that may not have separate subsidiaries, like Baker Donelson and Orrick, are piloting their efficiency initiatives in-house.

Law firms are also employing new types of professionals and touting their use of multidisciplinary teams. They are getting away from lawyer/non-lawyer distinctions and promising clients collaborative, business-oriented solutions.

To meet client demand for billing predictability, more law firms are offering clients AFAs, or alternative fee arrangements, like flat fees or portfolio pricing, instead of the hours-times-rates billing formula. As of mid-2019, 74 percent of the AmLaw 100 said they offer AFAs—but the bulk of legal work is still being charged by the hour.

Big Four Competition

Law firms are doing all this in the shadow cast by the Big Four accounting firms’ march into legal services.

So far, the ethics rules around U.S. legal practice have provided a modicum of protection from Big Four competition. But 2019 saw movement on this front, with states like California considering ethics rules reforms to allow non-attorney-owned entities to practice law.

These changes would bolster not only the growing legal tech startup market—which topped $1 billion in investment in 2019—but would also green-light the large accounting firms to enter U.S. legal practice in new ways. In 2020, expect states to further examine their attorney ethics regulations, potentially making over the legal services landscape.

IPO Aspirations?

A quick gaze across the pond to the U.K. reveals that, despite the developments and dollars in alt-law, the U.S. is relatively mired in old models.

The “shared real estate” arrangement of U.S. law firms can be a barrier to the type of unified culture and aligned incentives needed for significant innovation. Getting a group of partners to sign off on sacrificing profits for innovation projects or investing in tech that optimizes only a few practice areas is still new and likely uncomfortable—though some firms are getting there.

If the U.S. attorney regulatory environment shifted enough to allow law firm IPOs, like those occurring in the U.K., the structure would allow law firms readier access to cash and a structure that promotes investment in technology. A public company model also might facilitate more fluid marketing of adjacent services, with more incentives to play nice and cross-sell.

But would U.S. law firms be willing to trade organizational opacity and profits-per-partner for shareholder disclosures and salary-and-dividend packages? These are questions that will continue far beyond 2020.

Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.

With assistance from Diane Holt.