ONE IF BY LAND, AND TWO IF BY SEA?

Every once in a while several independent events occur that illustrate a point.  That happened over the past 6 weeks when Bill Gratsch posted a blog entry at Blawg’s Blog entitled Law Firms:  Competition and Globalization; Bruce MacEwen posted a blog entry at Adam Smith, Esq. entitled Publicly Traded Law Firms in the US?  Georgetown Law Symposium; and, The Wall Street Journal’s Law Blog posted a blog entry entitled Thompson & Knight Drilling into a New Biz.  In his thought provoking piece, Bill Gratsch wrote about the affect of globalization upon competition for U.S. law firms.  Bruce MacEwen’s posting mentioned his prior writings on the “Clementi” reforms scheduled to take effect next year in the United Kingdom that, among other things, will permit diversified multidisciplinary firms.  And, the Law Blog posting mentioned Dallas-based Thompson & Knight’s formation of an energy consulting company - a subsidiary known as Thompson & Knight Global Energy Services, LLC – a development Thompson & Knight itself announced on March 1, 2007.  What do the separate events described in these 3 postings have in common?  Each is further evidence of the competitive pressures bearing on the U.S. legal industry to cast aside its business model and to develop a new one.

In 2 not too distant postings, Toward a Brave New Business Model and O Strategy, Where Art Thou?, I wrote about these pressures; and, in the latter, I also wrote about the information value chain and the risks to the legal industry’s current positioning as a knowledge-based industry in that value chain and asked:

What different activities can law firms perform, or in what different ways can law firms perform their activities, in order to be a more valuable player in and contributor to the economic value that can be created by the strategic integration of knowledge?

Bill Gratsch in his recent posting noted, “[O]ne growing reality of globalization is that whole industries are consolidating.”  In that regard, Bill also wrote:

Every time a U.S.-based company is acquired by a foreign entity, the U.S.-based law firm that did the bulk of that company's legal work faces a real competitive challenge. To compete for the work going forward, the U.S.-based attorneys may need to jump on a plane and head to Mexico, France, Germany, Australia, Japan, India or China to make their case. Not a simple matter.

Even more disconcerting, what if the Mexican, French, English, etcetera law firms and legal consultancies already serving these international corporations come to the U.S. and bid on work the acquired company is now re-bidding at the direction of its new parent? Not only do those foreign firms potentially have the same longstanding legal and personal relationships with the parent company executives that U.S.-based law firms have long enjoyed with the now-acquired local companies, but they may be able to leverage lower cost offshore legal resources than the U.S. firms. Most especially in transactional work.

Will that competitive pressure on U.S. firms from globalization do anything but increase if the Clementi reforms mentioned by Bruce MacEwen take hold?  Will multidiscipline firms be better at the strategic integration of knowledge and be better suited to provide support for improved client decision-making than U.S. law firms; and, will they then be able to leverage that advantage to gain a more competitive foothold and positioning within the information value chain?  And, what if those multidiscipline firms are backed by public capital?

To meet these pressures and to compete for the future, U.S. law firms simply will have to change their business model – of which, as I’ve noted before, Cisco’s general counsel Mark Chandler has said, “It looks like the last vestige of the medieval guild system to survive into the 21st century.”  Thompson & Knight’s formation of its energy services consulting subsidiary is a response to this pressure, whether intended or not.  Thompson & Knight’s managing partner, Pete Riley, was quoted as saying, “We are very pleased to establish this new business that reinforces our longstanding commitment to helping our clients with their strategic issues.”  Riley further noted, “We believe there is great interest among the firm's clients in leveraging complementary and integrated services, particularly given the growth perspectives of the energy industry.”

I know nothing about the factors that led to Thompson & Knight’s decision to create its consulting subsidiary, nor do I know any of the specifics about the organizational structure that was used.  However, I have had personal experience with a Texas-based law firm’s efforts to provide multidiscipline, complementary, and integrated services before - with a firm in the late 1980s and early 1990s that attempted to meet the needs of clients in dealing with the then financial institution crisis and the real estate industry collapse by providing financial consulting and workout consulting services through an affiliated company.  Simply creating a structure to do such and still be in compliance with the then rules under the Texas Disciplinary Rules of Professional Conduct was nightmarish enough.  But the clashes between the culture and the management style, substance, and direction of the business entity, on the one hand, and of the law firm, on the other, were tantamount to nuclear war.  I wish Thompson & Knight the best in its endeavor and hope that they are successful.  Despite my experience some 15+ years ago, I believe that the multidiscipline approach to the distribution of legal knowledge well may be one of the keys to the legal industry’s ability to reposition itself within the information value chain in ways that will enable it to compete successfully for the future.

Comments

[I'd rather not say]

I'm not here to defend the large US law firm business model - in fact, I think it is broken. But as regards comparison to a consulting practice, I practice in an area that competes with consultants, and there is in fact a fair amount of movement between the law firms and consulting firms. When you speak of cultural differences between the two, I have long thought it was grounded in the approach to malpractice. The lawyer in the law firm wants to do things thoroughly - even when the amount involved in the transaction does not justify it. It is not just the culture of the practice of law, it is a real fear of malpractice liability. Clients trying to save pennies may say sometimes they don't expect Cadillac service on all matters, but if they didn't get it, watch out.

The consultant, on the other hand, is willing to take risks and do work of a quality commensurate with the pay involved, typically believing that the client's lawyers will be responsible for any legal compliance, and it is not his or her problem. In fact, they plaster their work with disclaimers that a lawyer should be consulted. Consequently, the consultant only needs not to be grossly negligent. This drives the lawyers working at the consulting firm nuts unless they can free themselves from the worry they might be wrong and learn to enjoy flying by the seat of their pants.

The result is that consulting firms get high volume, low margin, simple work, and for bet-the-company, low volume, high margin work, the leading boutique law firms get it because it has to be right. I'm fine with that. And the profits of actually doing the high margin work, at least to date, have been greater than the profits from overseeing a consulting firm doing the low margin work.