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Why law firms can’t compete

Structural and regulatory changes are needed to get to the root of why law firms fail
Why law firms can’t compete

Law firms are failing. They are failing society and clients by not providing accessible and affordable legal services and by offering the wrong services. They are failing their internal stakeholders by assuming only senior lawyers contribute to law firm success.

These shortcomings can’t be easily fixed with the latest technology or management practice trend. Instead, the future success of law firms requires a shift from short-term thinking to long-term thinking. This means rewiring two key components of law firm DNA — the partnership structure and law firm regulation — and adopting an employee-owned corporate structure that allows non-lawyer employees an ownership stake. This type of innovation is profoundly more important than any app, open office design or project management tool, and requires us to come together as a profession to effect change.

We know the problem: better and more affordable services are being developed by non-traditional providers. As a profession, we spend a lot of time wringing our hands (and writing) about the rise of our competitors, the growth of in-house capacity, the threat of automation, the success of big accounting firms and the rise of artificial intelligence. Yet we are not responding because, as many legal futurists (like Jordan Furlong) and academics (like Jonathan Molot) have pointed out, to do so requires long-term thinking — but law firms are driven to pursue short-term rewards.

The roots of law firm short-termism are clear. Very few retiring lawyers are “bought out” in a meaningful way; they simply withdraw their capital. Because they have little financial stake in the future of the firm, they are motivated to pull as much money as possible out of the firm while they are practising. These senior partners often control the firm, leaving the people with the least interest in long-term results responsible for major decisions. The outcome is a misalignment between what motivates decision-makers (short-term profit-taking) and what is best for the enterprise (long-term strategic investment), with a resulting bias toward decisions that increase current annual partner compensation at the expense of accessibility, client service, employee well-being and long-term profitability.

The implication of this deeply ingrained short-termism is that law firms are failing their stakeholders.

Law firms are failing society. We are mandated by the self-regulatory social contract and our canon of professional ethics to promote accessibility and affordability of legal services. Technology and process improvement are the most direct paths to delivering these, yet firms are neither investing in nor hiring the right people to do them. We are not delivering on our societal commitments.

Law firms are failing clients. In general, we have not embraced better business processes and technology, trained the “technology-enabled lawyer” that the future demands, embraced fee structures that better align our interests with those of our clients, or adopted lean processes and project management. We are not producing what our clients want.

Law firms are failing their people. When firms make decisions driven by short-term thinking, culture suffers and retention rates drop. The dark psychology of the billable hour and current-year profit-per-partner has a significant impact on firm-wide happiness. Short-term thinking about human resources means firms do not invest in the right human capital at the right times, leading to talent shortage and increased stress. Retention suffers because internal advancement and the prospect of “partnership” are set aside in favour of short-term profit-taking. We are not giving our people what they need to stay and succeed.

All of this points to a clear path. Law firms must restructure as sustainable long-term businesses that can attract and retain the right kind of talent for the emerging legal market. To do this requires two things: changing our corporate business model to promote long-term thinking and changing our regulation to allow us to compete for and motivate the right kind of talent.

In terms of the corporate business model, law firms need to move from the “capital-in, capital-out” model that favours short-term thinking toward an equity-based model that encourages long-term growth of the business. We must open our equity doors earlier so that the generation that best understands technology and user experience is encouraged to come, to contribute and to stay. In my own firm, we have recently converted to an employee-owned corporate model for these exact reasons. Starting at the time they are called, lawyers are allocated rights to acquire shares based on a valuation formula driven by the two key drivers of law firm success: how profitable the firm is and how well we are doing at developing firm (instead of individual rainmaker) goodwill. Retiring lawyers can sell down their shares at the same valuation over time, meaning they have a lasting interest that keeps them invested in long-term planning.

This first change — a move to a broad-based employee-owned corporate model — is not easy. It asks the most powerful partners to question deeply held assumptions about contribution, to question their own entitlements and to cede control. It asks all lawyers to build a collective instead of individual books and to sacrifice short-term rewards for long-term incentives. It is a hard path, but one essential for a firm’s future success.

While fixing law firm capital structures is entirely within a firm’s control, extending ownership to non-legal talent is not. The list of potential key players is long: business and HR executives, technology professionals, project managers, accountants, business process specialists, design-thinkers and administrative professionals, to name a few. Our competitors are winning the battle for this talent because they can attract, retain and align key talent (irrespective of specialty or background) around a common goal through ownership in the enterprise. Unfortunately, law firms do not currently have this option. Even if we can set aside our egos and admit that non-lawyers play a meaningful role in firm success, we are prevented by regulation from opening our capital structures to attract and retain this talent. Without this important tool, we are giving our competition a head-start in the race towards improved access to legal services and better client service — the foundations of our professional mandate.

To help law firms compete on these important fronts, we need to open our ownership rules to allow for non-lawyer employee-ownership. I am not talking about jumping with both feet into a wave of law firm IPOs, but instead looking to existing, tested and trusted rules. For example, the British Columbia Legal Profession Act permits law-firm ownership by relatives of lawyers and may soon permit law firm ownership by licensed paralegals. Extending these rules to include employees of a law firm while they are employed by the firm would be a safe and incremental change, yet one that sets up our profession to succeed in the modern legal market.

This type of important policy change requires us to come together as a profession and encourage our law societies to support regulatory amendments that allow non-lawyer employee ownership. If we are not able to fiercely compete for the right talent — including offering them ownership of our enterprises and treating them like equals — we will continue to give our competitors that running head start. For me, this regulatory reform is the most essential innovation, and the biggest opportunity, facing our profession.

Rob Miller is CEO and co-founder of Miller Titerle + Company, an employee-owned law firm that values long-term thinking, continuous improvement, openness, happiness and authenticity.

  • The Unaffordability of Legal Services Problem Must be Solved First

    Ken Chasse
    Most important for law firms and all lawyers is solving the unaffordable legal services problem because it victimizes the majority of society and therefore the majority of law firms. The cause of that problem is the obsolescence of the method of producing legal services. As a result, there are no economies-of-scale in the practice of law. Therefore law firms have no way of increasing their cost-efficiency as the time necessary to produce legal services increases. Therefore the price of legal services must increase. That is due to the increases in the volume of law, its complexity, the speed with which it changes, its increasing dependence upon complex technology, and the explosion in the volume of records that electronic records technology has produced for lawyers to take account of. For example, the great increase in the time and complexity of electronic discovery proceedings is due to the explosion in the volume of records that every business and institution now has. So, the solution is to adopt a method of producing legal services that does create the large economies-of-scale that the affordability of legal services for all income levels of society requires, i.e. go through the same transition in production methods that all of the competitive manufacturing of goods and services has been going through for over 150 years, which is, from "cottage industry" methods to "support services" methods of production. That process has just begun in the legal profession. Solve the affordability problem so as to maximize the impact of any law firm restructuring. To understand more as to how to solve the affordability of legal services problem (the A2J problem), read these articles: (1) “Access to Justice—Unaffordable Legal Services’ Concepts and Solutions (SSRN, pdf., Nov. 7, 2018, pdf., 153 pages); at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2811627; (2) “Law Society Accountability for the Access to Justice Problem” (SSRN, Nov. 27, 2018, pdf, 26 pages); at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291699; at: (3) “Canada’s Law Societies Need a Civil Service” (SSRN, Jan. 9, 2019, pdf., 41 pages); at: https://ssrn.com/abstract=3311712; and, (4) “Artificial Intelligence: “Will it Help the Delivery of Legal Services but Hurt the Legal Profession?” (Slaw, November 21, 2018), at: http://www.slaw.ca/2018/11/21/artificial-intelligence-will-it-help-the-delivery-of-legal-services-but-hurt-the-legal-profession/.
  • I agree with you

    Alistair Vigier
    "They are failing their internal stakeholders by assuming only senior lawyers contribute to law firm success." Completely agree. It's a team effort.