The Law Factory Debate: Another Perspective

Ron Friedmann and Toby Brown, smart folks both of them, have a semi-debate going in print about the concept of law firms v. law factories. (I call it a semi-debate because they’re not entirely on opposite sides of the issue.) The premise for the debate is this:

Ron and I started discussing this question in follow-up to an ILTA session last August where Ron was a co-panelist. The panel suggested that in the future, law firms would need to choose one of two strategies: bet the farm or law factory. This oversimplifies but helps air important issues. The panel struggled to answer whether the two models can co-exist in one firm.

Ron and Toby address the question of how law firms will be most profitable in an environment where clients will continue to apply cost consciousness to their purchasing decisions. Perhaps there will be less cost pressure in “bet the company” work, but as Toby notes, this work is a small and declining percentage of overall legal spend.

Ron and Toby suggest in different ways that there will be a certain amount of low-leverage work (“nuisance” work, in Toby’s parlance) that will be handled by “law factories,” firms that produce relatively high volumes of work at commodity pricing.

Here’s where I come in. Let me weigh in from the dreaded “meta” perspective.

Market Change: Internal v. Extrinsic

My experience in multiple decades of leading businesses is that market change occurs because of either internal or extrinsic reasons, and that when the change is internal, it generally occurs “from the bottom.”

An extrinsic reason for a change is something that happens outside the normal workings of the industry. For example, the recent elimination of  traditional analog over-the-air broadcasts in the US TV market is a change that has been affecting the design of TV sets, but it was extrinsic in relation to the TV manufacturing industry. In law, such an extrinsic event might be the possible move in the US toward an outside-ownership/for-profit “corporate” model of law firms akin to what’s being explored in the UK.

However, most change is totally or mostly internal (or intrinsic).  By “mostly” I mean that the precipitating external events are well removed from the day-to-day workings of change. For example, the legal world is still figuring out to some extent how to react to the recession-that-may-or-may-not-have-ended, but the direct economic pressure is no longer a direct and dramatic force for change. It’s certainly having an effect, but it really falls under the general label of “client cost consciousness,” which has been going on for long enough to be treated as an ongoing part of the landscape rather than a specific event.

I think the question Ron and Toby address is largely an internal issue, based on general cost consciousness rather than a particular precipitating event.

Market Shifts From Internal Pressures/Change

In the early 1990s, PageMaker owned the market for graphical layout programs, called at the time desktop publishing. PageMaker was very powerful, very expensive, and had a significant learning curve. Microsoft brought out Publisher at maybe 20% of the price, and with an easier interface besides. (They both had — and still have — what I consider rather quirky interfaces, but Publisher’s was less unconventional.) It didn’t take long before Publisher ate PageMaker’s lunch in terms of market share. Was PageMaker technically superior? Probably; it certain had some capabilities that Publisher lacked. However, most purchasers didn’t need those features, and I suspect most didn’t understand them either. (Quick, what’d the difference between RGB and CMYK color models?) PageMaker (and Frame, Quark, and InterLeaf) still had appeal for high-end graphic designers; indeed, my wife, a web designer, still uses PageMaker. But for most users, Publisher was fine.

Think of PageMaker in the mid-90s as bet-the-company work.

In the late 1990s, the business-critical database market was largely divided among IBM’s db2, Oracle, and Sybase2. Microsoft’s entry, Microsoft SQL Server, was considered something between a toy (a comment a customer made to me) and usable only for not-that-important departmental data.

But it was also inexpensive and “easy” (that’s a relative term, as in still-hard-but-easier-than-Oracle) to implement and maintain. It wasn’t long before it was “creeping up through the floorboards” in corporations and being used for more and more business-critical systems. Of course, it kept getting better, too.

Think of Oracle around the turn-of-the-millennium as bet-the-company work.

In the 1990s, Sony was seen as making the best consumer-grade TVs. But they cost considerably more than Panasonics, which cost considerably more than Motorolas, which cost considerably more than various “off-brands” such as (at the time) Sanyo. Sony couldn’t hold market share because most consumers didn’t see the value in a maybe-better TV for 30%-50% more.1

Think of Sony in 1990 as bet-the-company work.

Today, Microsoft SQL Server is the biggest-selling database, and if you add in the open-source MySQL, the market is dominated in terms of penetration by lower-cost products.

Today, Publisher is the biggest-selling layout program, and if you add in the amount of layout work done in Word, PowerPoint, and Google Docs, high-end tools such as PageMaker are barely visible on a graph of market penetration.

Today, the TV market is highly fragmented, and Sony holds but a small piece of it; the market is dominated by lower-cost players.

What do they all have in common?

Commonality: Growing From the Bottom

Each started as a low-end, low-cost alternative and grew to dominate the market in their space.

That’s not to say Oracle and Sony aren’t profitable (PageMaker was sold long ago and folded into Adobe’s product line). They’re profitable, respected, and limited.

What does this mean for law firms?

Let’s say a low-cost “law factory” named Smith & Wollensky starts taking on significant “nuisance” or commodity work. Maybe they offshore it to Bangalore, or to Bozeman MT (which isn’t near the shore of anything larger than the one-mile-long Hyalite Reservoir). However they do it, they perform the work credibly, consistently, and cheaply.

Now they come to one of their clients and say, “We can also take on some of the work that’s just a step above commodity. We’re doing nuisance lawsuits for you; what about letting us handle your day-to-day slip-and-falls and wrongful-termination matters?” There’s no reason they wouldn’t be able to do a good job. After a while, they’re doing all of that, drawing up contracts, prosecuting patents, and handling smaller acquisitions. Sure, they’re not going to handle AT&T-acquires-T-Mobile, either the M&A work itself or the likely DOJ nosing around,  but there’s an awful lot of work that doesn’t rise to that level of complexity and risk.

In other words, they’ve moved from being able to handle 15% of the work to being able to handle 80%.

Just like Publisher. Just like Microsoft SQL Server. Just like the off-brand TVs.

Microsoft claims with some justification that SQL Server can indeed handle everything. Dynex claims with some justification that their TVs can handle all consumer needs. (Publisher has remained an everything-but-the-absolute-most-critical application.)

Why won’t Smith & Wollensky be able to claim, with some justification, that they can handle most everything the client needs?

Up from the bottom. Up through the floorboards.

To me, that’s the “meta” aspect to the law-factory debate.

I’m not speculating on whether this will happen, or even whether it’s a good idea. Rather, I’m noting that the way markets work, this kind of change often does happen.

An Exception

Now there is one consistent exception to this process. But I’ve written enough for today, so it’ll have to wait. [Find it here.]

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1Sybase’s product was actually called SQL Server — the same as Microsoft’s product. In fact, they were for a short time the same product. Microsoft and Sybase co-developed the product for a time before going their separate ways 1993/1994. Since most people think of “SQL Server” as the Microsoft product, I’ll call the other product “Sybase” here. This article isn’t about database systems in any case.

2For a variety of reasons, Sony’s prices are nowadays not that much higher than other “name brands,” but you can still buy “off-brand” TVs for about 30% less.

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