Greetings, Law Firm Disrupted readers. After launching this briefing and delivering it for 18 months, last week was Roy Strom's final hurrah. I'm Dan Packel, a reporter covering the business of law for The American Lawyer and Law.com, and this is my first week at the controls. I'm excited to keep expanding this conversation about innovation and transformation in the legal industry, so please don't be afraid to get in touch. 

Surveying the Terrain

A year ago, when I started covering the business of big law firms and the legal industry full-time, American Lawyer editor-in-chief Gina Passarella had an assignment waiting for me. It had been a decade since the start of the last recession, and she asked me to evaluate whether law firms were prepared for the inevitable downturn.

I learned that most firms had a lot of work to do. And with the U.S. economy continuing to grow, the good times may be keeping firms from making changes that would serve their long term interests—as the consultancy Altman Weil concluded this week.

My story on the risks of recession was also an introduction to the increasing challenges facing the traditional law firm. Clients haven't abandoned the focus on cost-cutting that's led them to boost the amount of work they keep in-house, while also relying more on alternative legal service providers. The Big Four are expanding their share of the legal market around the globe while exploring strategies to gain traction domestically. (Deloitte found another law firm partner in the U.S. just this month.)

That recession hasn't yet arrived, and there's a robust debate among economists about whether we can expect to see it materialize in the second half of 2020.

But as law firms enjoy growing revenue and profits before the next crisis hits, the pressures that my predecessor identified when he launched this briefing are still building steam.

For example, while the Am Law 100 has demonstrated impressive growth over the last several years, with outcomes that were more equitable in 2018 than previous years, there is still growing stratification between the most profitable firms—those that have established themselves as must-hires for handling the most complex, high-end work—and everyone else, who will feel the impact of new entrants to the market more acutely.

Consequently, clients continue to have the upper hand as they demand greater efficiency in how law firms deliver services. Witness how a growing number of firms are following corporate firms in hiring operations directors, whose stated goal is to align the resources in the firm more closely with the needs of the client.

Or, look at the issue of partner compensation, which goes even beyond the tired “lockstep” versus “eat what you kill” debate. Take the growing recognition at firms that their traditional strategies for rewarding business generation with origination credit may be delivering outcomes that work against the clients' interests, a point I explored earlier this year.

And law firms are no closer to having solved the question of what technologies are worth their investment, in an environment where more and more players are evangelizing for the introduction of artificial intelligence—and Silicon Valley remains eager to deliver substitutes for lawyers. It often feels like new players and platforms are springing up constantly. The challenge—and one big aim of this briefing—is separating the game changers from the noise.

What am I missing? Send me an email at [email protected] and fill me in.

 

In The News

➤➤ Even a casual reader of the legal press can't have missed that law firms, as a whole, had a terrific 2018. But that outstanding financial performance might have some unintended consequences, according to the Altman Weil report noted above.

My colleague Dylan Jackson found that while clients still want firms to double down on improving work processes and lowering costs, their recent good fortunes have allowed them to get complacent. Only 54% of law firm leaders say that their firm's urgency to change is higher now than it was two years ago. And only 22% of firms made a serious effort to change work processes.

➤➤Pierce Bainbridge Beck Price & Hecht has grown aggressively since the litigation boutique launched in 2017, buoyed in part by litigation finance. A story late Wednesday from my colleague Jack Newsham revealed that one former partner thinks it was built on “smoke and mirrors.”

In a New York state court suit, Donald Lewis accused managing partner John Pierce of serious financial improprieties. Pierce Bainbridge, meanwhile, has a rival suit contending that Lewis tried to extort the firm out of $65 million after being dismissed for sexual misconduct.

What's the disruption angle? Litigation finance has been a crucial part of the Pierce Bainbridge story since Scottsdale, Arizona-based litigation financier Pravati Capital gave it a boost shortly after its founding. Now, Lewis asserts that these investments were built on deception, after the firm grossly inflated the value of its contingency case portfolio.

Pierce Bainbridge strongly contests Lewis' claims, and asserts that the firm has fully repaid the Pravati funds. But if Pravati ever were to wind up in court, it would be contributing to a growing trend of litigation funders becoming litigants themselves. As my colleague MP McQueen wrote earlier this week, most lawsuits involving the smaller players in the industry involve allegations that firms didn't properly pay back money they owed.

➤➤ I've already alluded to the potential threat the Big Four pose to traditional law firms. But we shouldn't lose track of the fact that these organizations face unique challenges of their own. Take the U.K., where regulators have raised alarms about whether they unfairly dominate the market and argued they need to break up their audit and consulting arms.

Cat Rutter Pooley had a story in the Financial Times today about KPMG's plans to overhaul its governance structure in Britain with a new audit executive committee responsible for managing the performance and risks of that part of the business. Evidently, the changes fall short of the full split sought by the Competition and Markets Authority.

 

That's it for this week! Thanks again for reading, and remember you can still sign up here to receive The Law Firm Disrupted as a weekly email.