The Fannie Mae Law Firm? Complacency Is Not an Option

Silvia Hodges in Law Journal Newsletters, February 03, 2012

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by Silvia Hodges

What do Coca-Cola, Intel, Nippon Tel & Tel, Merck, Toyota, and Novartis have in common? Top 10 most valuable global corporations by market capitalization in 1998, today they are replaced by PetroChina, Industrial & Commercial Bank of China, Apple, BHP Billiton, China Mobile, and Petrobras. (Only GE, Microsoft, Royal Dutch Shell, and Exxon Mobil managed to be on both Top 10 lists.) In a world without the protection of the profession, fates can and do change quickly. Or think of the com- panies that were praised in the book “Good to Great.” Where are Fannie Mae and Circuit City now? The space next to some Wal-Marts is still vacant. Factors that led organizations to great- ness yesterday might not help in the future. And new competi- tors pop up and take over. HOW ABOUT LAW FIRMS?

In our industry, you might say that such examples are far and few between. If we take Profits Per-Partner (PPP) as the yardstick, Quinn Emanuel would be such an example. In 1998 not on the scene, in 2010 the firm ranked number two in the U.S., right after Wachtell. However, if we leave the elite and cast the legal net, the picture changes. Entirely new competitors have emerged. The three leading legal process outsourcing companies (LPOs) may still not scare traditional law firms, but their market share has significantly grown at a time when most law firms painfully felt the downswing of the economy. The market size of the LPO business is hard to estimate, but industry sources believe them to be between $500 million and $800 million. Bullish forecasts guesstimate the size of the industry to reach $15 billion in 2015. And their client lists have significant overlap with any leading law firm’s. Just for reference — in 1998, only CPA Global was already existent, Integreon was founded that year, and Pangea3 just recently came into being in 2005.

THAT’S NOT ALL

Again not a likely competitor for top global law firms, Legal Zoom, founded in 2001, is gnawing away business from small law firms. A recent Forbesarticle warned that “Just as Craigslist decimated the newspaper industry by taking away its low-end but profitable classified- ad business, LegalZoom targets the high-volume, low-cost business of providing basic consumer and business documents.” And most recently, Rocket Lawyer was launched by none other than Google. “Tradi- tional lawyers may not like it, but venture capitalists are pouring money into one of the last industries to resist commoditization on the Web. Google Ventures today announced it is part of a group that infused $18.5 million into Rocket Lawyer, which bills itself as the ‘fastest growing on-line legal service.’”

Traditional lawyers will definitely not like it: For $19.95 a month, you can have your documents reviewed by a real lawyer and even get le- gal advice at no additional cost by Google’s Rocket Lawyer. Try that retainer suggestion with any traditional firm.
Add another: The Big Four accounting firms today employ more lawyers globally than behemoth Baker & McKenzie. One can assume that not all of their lawyers focus solely on tax or act as internal counsel, but do substantive legal work.
Snubbing those competitors misses the point. Many traditional law firms still argue that they offer high- quality legal services that these new competitors don’t. And many a partner has told me that once the economy bounces back, “everything will go back to normal” — as it always does. I then like to mention an article I read in The Economist, arguing that failure starts when firms attribute their success to their own superior qualities and become dogmatic about their specific prac- tices, failing to question their relevance when conditions change. Does that sound familiar? It goes on saying that things become worse when firms overreach and deny

threats. “Warning signs mount, but the firm’s headline performance remains strong enough for bosses to convince themselves that all remains fine. Problems are invariably blamed on external causes.” Funni- ly, in these times when law mergers are du jour again, the article contin- ues that it does not help to gamble on supposedly transformational ac- quisition either.

CHANGES ARE INEVITABLE

I’m not a doomsayer, but the legal profession can only ignore the signs of the times and protect itself from incumbent and future competitors for so long. The American Bar As- sociation tried to corral newcomers, notably, Legal Zoom, but the Federal Trade Commission (FTC) warned that the proposal could represent re- straint to trade. McKinsey cautioned that “The legal industry is losing its immunity to the macroeconomic forces that have propelled consolida- tion and stratification in other industries. Of the world's largest law firms (measured by revenue), all but the most profitable are in some peril.

Across the Atlantic, the framework is already changing. Lawmakers in England and Wales have proactively addressed trade restrictions. Since Oct. 6, the profession there is more liberalized. It remains to be seen how this will influence the market, how much venture capital will be pumped into new competitors in the legal market. But I’d take any bet there will be McLaw franchises, perhaps at your local Wal-Mart? Let’s not forget — clients vote with their wallets. They determine the fate of firms, and who will remain great.

Dr. Silvia Hodges regularly lectures and publishes on law firm marketing and management, and teaches at Fordham Law School.