Wednesday, January 31, 2007

Justice and Tesco Law

About this time last year, I started blogging about Tesco Law and what its implications for the legal profession would be. An anonymous commentator (AC) today raised some good questions on this score that I will try to answer. AC said

1. How do you explain the concept of justice to outside investors in Alternative Business Structures who are accountable to their shareholders for the profit they are making/not making. I realize that law firms are run for profit but a great many run in areas which produce very tight profits indeed which presumably outside investors would not be looking to support. Where will this leave legal aid for example when high street solicitors are forced to close? Will supermarkets take on this role?
2. If the outside investor invests in those areas where margins are tight, how will they make money? Cut overheads? What are the overheads? Largely qualified staff. Will this lead to more advice from unqualified staff? Is this in the consumer interest?
3.If this is such a great idea why are we the only country to consider this capitalist investment in the legal sector approach?
4. Will firms in other countries be willing to trust such a legal system? Will there own legal systems allow them to deal with us? International experts think not.

AC's points zero in to some of the major concerns about Tesco Law. But let's clear the air. The reason the government is pushing these reforms/deregulation is because of consumer interest. This lies at the heart of the matter. There have been too many complaints against lawyers, which the professions--solicitors and barristers--have not resolved quickly enough. The result is a huge backlog of complaints for which the legal ombudsman chides the professions each year. Each year the Law Society and Bar Council say their mea culpas and promise to do better, but don't.

Because any professional-client relationship is perceived to be asymmetrical, the power balance is considered to be in favour of the lawyer at the expense of the client. Students of the professions will know better. (The classic text, Terence Johnson, Professions and Power, Macmillan, 1972, shows how professional-client relationships really work.) Yet it's not the reality that counts here but rather perceptions. If then professionals are not to be trusted in their dealings with clients, it is only a small step to not trusting them in other areas as well. And legal aid is one crucial area where they've lost the trust of government who are refusing to fund over £2 billion of legal work a year when money on the NHS garners more votes than does legal aid.

For lawyers this means the loss of self-regulation and a move to external regulation. At which point it becomes harder to justify the range of "normal" professional privileges. And so the step is taken to deregulating the organization of the legal profession, moving from partnerships and enforced solo practice to any kind of business structure.

The simple answer to most of AC's questions is "yes". Legal aid will remain for certain areas of criminal law, children, and some immigration work. Elsewhere it will disappear. Supermarkets won't take over most of this work because they will want more standardized types of work, eg. leases, wills, contracts. The types of work one can place into routinized "diagnostic related groups", as the medical field calls them.

Any investor will cut overheads to increase profits. We can guess how that might happen: see my last post, "Psst, Wanna Buy a Law Firm?" Law firms are already committed to using more paralegals, in both individual and corporate spheres, and boosting that with the more sophisticated uses of technology, especially where this is linked to outsourcing. Remember the cost of common law trained lawyers in India is 10% of the UK. (This article in confirms the outsourcing trend for lawyers.)

Some of AC's questions apply mainly to the corporate sector. Issues of law firms in other countries trusting UK law firms will, I suspect, prove redundant. It depends who the investor is, but remember the largest law firm for a long time in mainland Europe was FIDAL, wholly owned by KPMG.

And whereas regulators and bar associations in other countries are going to complain mightily about what is happening here, they will eventually join in. The competitive stakes are too high to stay outside. If you need an example, read McKinsey's report on the state of New York City as a financial centre. Parlous is the appropriate descriptor and London is basking in its new found glory.

Finally, AC's most telling point: the concept of justice. Now there is a difficulty. I don't know how that will be maintained in the brave new world of Tesco law, alternative business structures, and consumer interest. I think it will suffer the fate of justice versus legal rationality in early law school. We start with high ideals but then the lure of the City calls and the Sirens always seem so attractive...

Friday, January 26, 2007

Pssst! Wanna Buy a Law Firm?

Bruce MacEwen has an insightful post on external investment into law firms, in which he puts the scale of the proposed Clementi reforms on a par with Big Bang in the 1980s. He's right.

Big Bang led to the disappearance of many British finance household names as the American banks came over and bought them up. Now the competition is a hotter because in addition to investment banks we've got private equity funds and hedge funds and various derivatives' specialists. MacEwen compares law firms to utilities, good, steady income streams.

Big Bank took everyone by surprise (it was only meant to be a minor change in the Stock Exchange rulebook). And the Brits weren't prepared for the onslaught. They are about to do it again.

Let's face it: law firms are populated by intelligent people but are they worldly-wise? No. Once they take the banks' shilling--and they will despite what they say--law firms are in for a big shock. Over time I see the prospect of the following happening:
  • the erosion of partnership. Banks are corporate entities, so what do they need with bureaucratically wasteful entities? Employee status looms
  • lockstep--what was that? Eat what you kill and hope to get your bonus just like any other banker
  • the ultimate abandonment of any pretense of maintaining any professional ideals. Add in the encroachment of tougher money-laundering rules and one can envisage the lawyer-client privilege disappearing like a teenager's last pimple before adulthood.
The question will be: What does it mean to be a lawyer? I don't know. And how are the American law firms going to deal with this? They will have to face it eventually. Very interesting times ahead.

Thursday, January 25, 2007

Highs and Lows

I have right now a dreadful cold or flu that's knocked me out--high temperature, joints aching, cough, and so on. It will go, but it can't wipe out the experience of skiing for the first time as I did last week. The cold is the low but the skiing is one of the most exhilarating highs I've ever known.

It all started when a group of friends talked about skiing, something which I have never wanted to do. I prefer to be in the warm and, if it involves equipment, scuba diving in the Caribbean. One of the group liked to ski and very casually suggested we should go one winter. The dinner had been long and the wine drunk. A sussuration of assents was heard.

At the beginning of December it started to become real. Possible locations were scouted, dates mooted, flights examined and it was no longer fantasy but real. We chose Andorra in the Pyrenees--mountains, snow, and duty free. Time now compresses and it's mid-January and five of us are in Soldeu girding our loins for our first skiing.

Of the five, two are experienced skiers. We three who are absolute beginners are wondering what we have let ourselves in for. Early in the morning we head to the ski rental shop for boots, skis and poles. I give my size and a pair of Robocop's shoes are thrust my way. I gaze in awe, but what exactly do I do with them? I poke in a toe and it's lost in the blackness. I can't get any more of my foot in; I must have the wrong size. Just as I call out, a stranger comes over and passes his hand magically over the boot and it opens for me and my foot disappears. The first hurdle is over.

I move to the skis. The attendant asks if I've skied before and I say never. His eyebrows rise, "never?" "Ever!" I reply. He sighs and adjusts the skis. I am equipped. Now I look like a skier, but I don't feel like one, except for my feet in their Robocop boots. My walk is almost as good as his. I'm clumping on air.

Next it's the gondola, which doesn't stop at all. I have to hurl my skis into a slot just wide enough to take them--this is harder than at the fair when shooting ducks--and leap on. Take that last phrase poetically. I never saw Robocop leap, nor did I. I scramble on. I scramble off and as we leave the gondola station before us is the harsh, white reality of lots and lots of snow.

We agreed we three would stick together with lessons just for us. We are assigned Mandy who is "great with beginners". For two hours a day she will lead us to the slopes. On the last day her husband, Elvis (he performs at the Aspen Bar on Wednesday nights and very good too) would take care of us.

Unfortunately, Mandy had been assigned to another slope so Dave was substituted at the last moment--a no-nonsense Yorkshireman. He took us up a slope, approximately 5 degrees off the flat, so almost flat, and told us to ski down with a right hand turn. Fear clenched my guts as I so slowly drifted down this hardly perceptible incline. I was a wimp. [More to come...]

Sunday, January 14, 2007

Categorizing Law Firms

I received an interesting comment on my last law firm post. Let me quote:
From ChinaLawBlog: "I had earlier that day received my first e-mail from the newly formed mega-firm of Kilpatrick Lockhart/Preston Gates. We all thought Preston had done the right thing in going mega. We felt it needed to do that to remain a "big firm." We all agreed with the oft-repeated view that there is not much reason for there to be mid-sized "do everything" firms. But then we started talking about how instead of dividing firms into large, medium, and boutique, maybe the better way to do it is international, regional, and local. We skipped national because most of the national firms (outside of maybe labor law) are also international.) There are many very good law firms in Seattle and Portland that have traditionally been considered large but probably no longer should be, at least in comparision with the Kilptricks of the world. At the same time, calling them medium consigns them to a category that also probably does not make sense. These firms, with 250+ lawyers are really regional firms and I think they can do just fine as that? We even talked about Wachtell, but saw it as somewhat of an anomoly due in large measure to its overwhelming quality and we viewed it as really being more of a very large boutique (ultra high end corporate) than as a big firm. So what do you think about categorizing firms as local, regional, and international? "

This fits with the research I have been doing with colleagues at the Institute for the Study of the Transformation of the State at Bremen University in Germany. Two of us, myself and Pablo Sosa, have been studying the work of law firms. My study has focussed on large law firms, but Pablo's was specifically on medium-sized firms. Both of us have gone to theoretical extremes to justify the differences between them. However, I don't think we achieved our goal. And ChinaLawBlog's comment is the reason. Large, medium and small don't really provide the analytical tools to discuss structures or types of work.

Pablo's study of "medium-sized" firms was based on an ethnography of a law firm in northern Germany. The firm had an interesting profile: it focussed to a large extent on German-Spanish cross-border trade. (Pablo was useful because he was a Spanish speaking, German qualified lawyer.) The firm had created a niche in which it was the leading expert. Yes, it needed a critical mass of lawyers, but not enormous numbers. It also did a range of work from transactions to dispute resolution. Indeed a few of its members were notable international arbitrators. This firm was extremely busy and had decided that it wanted to avoid becoming a megafirm preferring to maintain its particular international practice.

This fits with ChinaLawBlog's taxonomy because it means that size is not the main determinant of a law firm's status, but rather the way a law firm practices law. Is it focusing on domestic or international? We can cross-cut this with particular types of law, eg, labor, trade, intellectual property, tax, and so on. But I think there is one difference we must be aware of: namely, that some domestic markets are bigger than others. The most obvious comparison is between the US and the UK. In my 1996 article on Megalawyering, I argued that UK law firms had to take an international direction because the domestic market is quite small. Whereas in the US it's huge and so the impetus to internationalize/globalize has been attenuated in comparison to the UK. Of course events like the collapse of the Iron Curtain have inevitably drawn American law firms into the former communist bloc.

Let me take this a little further. Although we may argue that size shouldn't be the main determinant, it can't be ignored. Big law firms like Clifford Chance, Skadden, Freshfields are going to get business because they are the law firms they are--big and established. And size may be a critical factor in deciding if a particular transaction should go to such a firm or another. Their competitive advantage may seem unassailable but I believe it's not impregnable.

Big law firms have difficulty with the quality control of their product. What actually distinguishes them from others? These days everybody hires the "best lawyers" so there's not much to distinguish a Magic Circle firm from a second tier firm there. What makes if difficult for big law firms is their inability to retain good associates. These firms' churn rates are awful, somewhere around 30%. That's a lot of good talent to lose each year. Additionally, what makes their situation more parlous is their reluctance to promote lawyers to partnership. This is evidenced by the growing number of de-equitizations and burgeoning of multi-tier partnerships. The "tournament" is getting more and more remote.

So smaller law firms may develop an advantage in being able to offer high-quality services more attuned to clients' needs and more responsive as well. Recall Clifford Chance's faux pas when it announced that its clients should be stratified as international, regional, and national and dealt with accordingly. Many regional and national clients weren't very happy at being relegated to the second and third divisions. Clifford Chance soon dropped that, but it leaves a sour taste in the mouth.

Can we sum this up? Megafirms will continue to have an advantage, but that will accrue to those who already possess that status. For those trying to achieve it, it is going to be a big problem because there will be a suspicion about quality and professionalism. The big institutions, eg, investment banks, have already established their alliances and the barriers to entry for "new incomers" will be high. They will also have to deal with clients' propensity to be risk averse.

Yet law firms that have identified strong market segments that they can prove themselves in will thrive. And with imagination and determination they will be able to leverage themselves into other segments as they need--organic growth rather than forced. Add to this a perspective on the world that embraces globalization as something that is here to stay and that international business is the norm which law firms can't, or shouldn't, ignore. Their clients will lead them into the markets, but also, with an entrepreneurial eye, they will spot areas that should and could become valuable markets. Moreover, these firms will potentially be able to offer better career prospects to their junior lawyers. A megafirm may be good for the resume, but not for life.

This also fits with my critique of bad management. Another commentator, Wabisabi, quoted
"Office politics occurs where there is a lack of strong management, and people have to resort to political manouverings to get things done." This would characterize the two law firms I have worked at. The partners take no action in management as long as they could get away with it. I could cite you horrendous examples. Had there been someone whose entire responsibility is to improve workflow, reduce redundant or unnecessary work etc, the firm could have saved itself from a lot of trouble.
I agree with this and it seems this is more indicative of big law firms than the others I have been discussing. Of course, you can get these attitudes elsewhere, in other types of firms, but then I think the kinds of resource-allocation battles you get in law firms over associates and other key resources push lawyers into a more collaborative mode rather than a combative one because the returns are ultimately better. (See Emmanuel Lazega's excellent analysis, The Collegial Phenomenon: The Social Mechanisms of Cooperation Among Peers in a Corporate Law Partnership (Oxford), which I have reviewed here.)

Wednesday, January 03, 2007

What Are Ears and Eyes For?

Not a terribly difficult question you'd think. One answer is to read and to see. That's what I ask my research methods students to do. Everything is carefully laid out for them and in addition to the textbook I put up a web page for them also. On the web page is their assignment, which is due on 10 January. Not long now. I have covered research questions, literature reviews, various types of methods, etc. And I have said how the assignment itself carefully states in detail how they are to do it, what they have to do, and how many words it is. I even tell them the font size.

So why am I despairing when I receive an email several days before the deadline that says: "Thanks and appreciate for your help to get knowledge of this module. I would like to know what is literature review? the second question is how many words for this essay in total?"