Non-Lawyer Investment Will Happen: Follow-up
Some recent posts highlight why it is inevitable that the ethical rule barring non-lawyers from investing in and managing US law firms will be lifted. See our 6/11 post.
Bruce MacEwen, in Adam Smith, Esq., characterizes as “managerial malpractice” the failure by lawyers to analyze data on such things as client spending patterns, and warns (“En garde,” he says) that "competitors will undoubtedly" be trying to exploit the ability to deliver legal services from a distributed platform (“cloud computing”).
Jordan Furlong, in Law21, says that law firms are in the “cross-hairs of numerous entities outside of the legal profession” who intend to kill law firms and take some or all of their market by exploiting, among other things, the “virtually zero” effort to develop real competitive intelligence on what it costs to deliver specific services, how much rivals charge and why, what knowledge people and systems collectively possess, and how to apply that knowledge in a systematic way.
The common thread running through these and many posts like them is that law firms’ survival, let alone competitive success, hinge on investing in and effectively employing new management techniques, processes and tactics.
This costs money, lots more money than law firms currently have available to invest, particularly in a market with shrinking gross revenues. Even assuming firms have money available to invest, the high likelihood is that they do not have the institutional incentive to direct the money to longer-term investments and away from the current payments to rainmakers or other senior lawyers who want their share of the pie now (and certainly don’t want the firm to make greater risk investments that might reduce the value of their current ownership interest in the firm).
Even assuming the firm has money and is farsighted enough to want to make long-term and uncertain investments for the good of the enterprise, the new legal services paradigm requires non-legal management expertise, services and systems that are beyond the ken of the great majority of the lawyers who currently manage their firms. As explained by the CFO of a major law firm surveyed by Jim Hassett (LegalBiz Development):
A large number of lawyers do not know how to manage. [In the past], the more hours that got charged, the more money [they] made, and so they’ve never really had to manage [costs].
The solution is outside capital, which not only would provide the money required to fund innovations to the legal delivery model, but also would force firms to bring in the global, nimble, multi-faceted and risk-taking managers without whom it would be impossible to achieve the desired innovations.
The impediment is US ethical rules that bar non-lawyers from owning, investing in or managing a law firm. However, as demonstrated by the above posts, the forces compelling the lifting of the bar grow ever stronger and the calls for this change are increasing. Anthony Davis, in A New Approach to Law Firm Regulation, calls for replacement of the state-based professional regulatory system with a national, uniform set of regulations that “provid[es] the seamless, efficient and cost-effective service for which clients of every size and level of sophistication are crying out,” by allowing, among other things, lawyers to access outside capital and non-lawyer management expertise.
The groundswell of support for non-lawyer investment and other regulatory changes hopefully will be reflected in the report of the ABA’s Ethics 20/20 Commission, which was appointed in 2009 and given the mandate of investigating ways to enable US practitioners to compete with legal providers in other countries while continuing to protect the public and core values of the profession. The report is expected sometime in 2011.
In the meantime, we and others continue to press for change.
Earlier this week, I was asked whether I had considered approaching venture capital firms to take a stake in my business [Confluence Law Partners (