Business law firms in a time of paradigm shift | In Principle

An ability to predict is probably one of the oldest human desires. Many people make predictions, but few are right. And if they are, they can rarely explain why they are right. If a prediction proves right, it is usually by coincidence. What does work is diligent observation of the surroundings, taking into account all relevant dimensions, and an ability to spot symptoms of a new reality on the “event horizon” before others.

In the 1960s, Thomas Kuhn, an American physicist and philosopher, formulated the theory and notion of a “paradigm shift” in relation to the natural sciences. In essence, his theory says that a change in paradigm takes place when observed anomalies achieve a critical mass that contradicts the existing paradigm and allows for development of new theories explaining the observed evidence of anomalies. Kuhn’s theory gained popularity not only in the natural sciences, but is also extrapolated to the economic, social and political sciences.

It is obviously trivial to say that a law firm, in its form, the nature of the work it does, and the business model it follows, is a function of the society’s needs, and those needs are shaped by the desires of people and problems arising out of these desires, determined by the social culture and from culturally independent factors.

A law firm also operates as an element of a system shaped by politico-economic paradigms. “Paradigms generally encompass political/economic goals, analytical/theoretical frameworks for understanding the functioning of economies and societies, narratives which describe and justify the goals and analytical framework, as well as economic and social policies, based on the analytical framework, that seek to achieve specific goals.”^[1]

The politico-economic paradigm of which the contemporary law firm is a part is a function of the neo-liberalism developed in Western economies in the late 1970s and early 1980s. Neo-liberalism shaped the model of economies characterised by privatisation of economies and the unprecedented growth of the financial sector, resulting in the emergence of a plethora of private equity funds operating outside of publicly regulated markets. Law firms benefited enormously from this development, with growth never before experienced. They participated in the process of development of the economy, inventing solutions enabling growth of the value of assets of their clientele and thus contributing to the growth of global GDP.

As it turns out today, neo-liberalism is a system that has led to many negative effects in the life of societies and contributed to the growth of inequalities. In reality, neo-liberalism in its current form is accused of all negative effects of consumerism, which in turn is provoking deterioration of the political system. There are voices accusing the legal profession and creative business law firms of enabling abuse of neo-liberalism. It is not our intention to look for the guilty party, but certainly we have to observe what events are occurring within the playing field of the civil society, what kinds of political ideas are gaining popularity, and what effects these ideas may have on the politico-economic paradigms and on the system of the rule of law as a whole. This is important because law firms, as protectors of the rule of law but at the same time service providers, will have to adapt accordingly, working for the benefit of the civil society and contributing to the harmony of socio-economic systems.

There are many signals today indicating that we are close to a shift in politico-economic paradigms. That will certainly have an influence on the needs of the society to which law firms will respond.

First of all, one can observe a growing popularity of extremist political parties benefitting from populist narratives and pursuing neo-fascist ideas. This is probably due to the frustration of those who are forced to limit the level of consumption they have been used to. That is confronted with the frustration of those who exist below a reasonable standard of living. It seems that members of these two groups have terminated the “social contract” characteristic of liberal democracy. When it comes to their political choices, they have become partisans of extreme political movements. Anti-system political parties emerging on the political stage are pushing out established mainstream parties.

On the international level, global challenges exist in relation to peace and security, public health, climate change and free trade. In every one of these realms, global society is confronted with disruption and dysfunction. Peace and security issues are sorted out by military force. Free trade is replaced with a system of sanctions, and there is little cooperation when it comes to handling environmental and global health problems. All this constitutes the context for the legal profession and business law firms. At the same time, a new technological era is accelerating, and digital technology, together with the new opportunities it offers, also bring with them unknown threats.

Traditionally, a lawyer practises a profession which pursues a mission. This mission is to defend the client’s rights, protecting the client from abuse of power by the state or abuse of rights by third parties. Originally, lawyers rendered assistance and helped their clients by themselves, either in solo practitioners’ offices or in law firms which were partnerships. Lawyers rarely subcontracted the work they did to salaried personnel, with the exception of course of technical activities such as typing, courier services, copying etc.

In former times, regulation of the profession in most jurisdictions prevented lawyers from employing other qualified lawyers. The practice model was usually based on an apprenticeship system, where the apprentice, after becoming qualified, either became a partner to the previous mentor or established his or her own practice. In many jurisdictions this model prevailed until some 40 to 50 years ago.

It was in the US and other common-law jurisdictions that the business model of a law firm evolved into a bigger organism employing lawyers and profiting from the sale of their work to clients. A key rule to observe was to contract lawyers’ work at a lower price than it was sold to the client. Most contemporary law firms developed under this model, and one of the most common benchmarks used to measure the business model of the firm was the “leverage rate,” which is the ratio of salaried associates to equity partners.

The nature of a law firm’s assistance rendered to a client is either to inform them of their rights or to deliver solutions aimed at realisation of legitimate goals. It can also be assistance aimed at protection of their rights. It is a service of a dual nature. On one hand, it has economic value, subject to the rules of the market, and on the other hand, this service holds a special place defined by the system of the rule of law, because it aims at implementation of rights and due process. As a service, legal assistance is either custom-made, or it is assistance based on structured solutions elaborated through previous iterations. It can also be a combination of these.

The so-called “production process” in a law firm was and still is subject to the following mechanism:

• Elaboration of expertise (a custom-made solution that becomes part of the law firm’s knowhow)
• Sale of this expertise via salaried associates with the competence to implement the knowhow (throughout this period, law firms have generated profits, as the cost of salaries allowed them to realise a profit margin)
• Once this expertise (knowhow) becomes widespread knowledge, and is recognised as a “commodity,” the profit margin drops greatly.

The whole cycle, starting from custom-made expertise through commoditisation, grows much shorter nowadays because of the rapid dissemination of information via communication technology. The largest international firms invest a lot of money in legal tech solutions with the hope that they will be able to make a profit on commoditised work, using technology rather than skilled associates. But it is highly uncertain whether they will succeed in this new model. It may not work because even larger players are increasingly investing in digital solutions that are not supporting the work of lawyers and law firms but are circumventing them and delivering products directly to customers, capable of solving their problems. In any case, it seems that the majority of mid-size firms will be squeezed from the market of providing commoditised work, either by the largest law firms or by tech firms. Consequently, it may be expected that most law firms will have to move into high-profile, custom-made work.

A law firm rendering custom-made work has to rely on partners and associates of high competence, imagination and ability to extrapolate from previous experience to new legal challenges. Such professionals are not easy to find. Recruitment processes and training programmes will be an important, vital and high-cost component of every law firm.

As mentioned, qualified associates displaying high competence will expect either to become equity partners of the law firm of their mentors, or to open their own practices.

The pressure on salaries in the case of salaried associates will eat away at a law firm’s profits, whereas liability for the work performed will not be given in exchange.

An interesting question is what kind of leverage will be standard in most law firms in the near future?

Emergence of new areas of operation of law, especially when it comes to the development of the digital economy based on data processing, is a challenge for law firms and lawyers. Today a skill that is in short supply is the ability to transpose the operation of institutions of law, as they have existed unchanged for centuries, into new areas of economic life of a modern society. Such skills are not abundant in the legal community. What we can observe rather as a process is a tendency to regulate ab ovo every new area that emerges on lawmakers’ horizon. Regulating everything with new rules, replacing legal provisions with legal recipes, leaving no room for interpretation, is becoming a sign of the times. Legal positivism and literal interpretation of lex is coupled with disregard for jus. As a result, encroachments on the space for civil society and its freedom can be observed everywhere. Will law firms enjoy an appropriate level of independence to be able to oppose these trends?

Production of regulations is a fruitless attempt to give an impression to the society that the rule of law is being maintained. But it gives no comfort as to the fairness and stability of the legal system. It rather contributes to the erosion of trust and leads to ethics and good faith remaining almost the only basis for the civil society. Consequently, professional ethics in law firms are to play much more than before the role of a gyroscope and compass assuring their success.

Proper recruitment and training processes are therefore a big challenge facing law firms. It is not only the competence of recruited lawyers that is vital (and scarcer, as the increased use of technology limits the opportunities for junior associates to learn by doing low-end work such as review of documents etc), but also their personal integrity and courage not to apply easy solutions stemming from the letter of law, but rather to understand the internal dynamic, the economic and social purpose of regulations, and to challenge the lex whenever in contradicts the rule of reason.

A law firm dealing with business clientele renders a variety of services. Some of them are purely of a consulting nature. Given the challenge the new times pose to the rule of law and the need for strong professional integrity, professional principles become the basic DNA of a law firm. The question then arises how the work for business clientele and society in general will be divided between law firms and so-called multidisciplinary practices with a different set of principles. That issue becomes particularly pressing in light of the emergence we are witnessing of law firms being financed through financial markets and going public, as they pursue alternative business structures and may be forced to deliver an expected return on investment rather than serve the society by contributing to the progress of law and upholding the rule of law.

Can we expect a clear division between a traditional law firm and these new entities?

This text doesn’t aim at giving ready answers to emerging problems. Nor does it offer a full diagnosis of the challenges to come. It does aim to open the discussion of our think tank. I’m sure that regardless of our jurisdiction of origin, we all share the same feeling that something is changing in the way we practise law. And I’m sure that our shared gut feeling is that it is a major disruption that we have not experienced in decades, and that it might redefine the legal profession and law firms in particular. Lex Mundi and the group of professionals elected to our think tank, thanks to their geographical coverage and diversity of perspectives, are perfectly positioned to name the problems, explain them, and suggest how to address them, among other things by redefining the model of the modern law firm in a way that retains the law firm’s special characteristic as a guardian of the rule of law and maintains its profitability in the new economy. Needless to say, our job is to look forward. But we also need to look back and learn from our collective experience, because “history does not repeat itself, but it often rhymes.”^[2]

Tomasz Wardyński