How law firms should prepare for the next economic downturn

Jordan Furlong, whom you all know from his writing at Law21.ca, was kind enough to sit down with me for our annual year-end discussion on the state of the legal market. This time we discussed a range of topics, from legal innovation in Canada and pushes towards regulatory reform to the growing presence of the Big Four in legal and advice on preparing for the next economic downturn.

CBA National: Has innovation finally come to the Canadian legal marketplace?

Jordan Furlong: To a certain extent. Everybody talks about innovation, of course. But for me, innovation starts growing teeth when actual money is spent and actual lawyers' time is dedicated to creating products and services and systems and changes that did not exist before. We're at that first stage now, and in fairness, you're seeing many large Canadian firms doing this. In no particular order, Fasken Martineau, Osler, McCarthy Tétrault are out in front in these areas. Gowling WLG and Blakes are also showing real interest. You'll find other firms that, a bit more around the periphery of this change. The next steps are harder, though, because they involve two things that are really difficult for lawyers individually and law firms collectively to do. The first is to truly listen to what their clients are telling them that they want; about their business and their industry; what their internal targets and mandates are. Firms should listen, go away, think about it on their own time, and come back with something that will help them meet their goals and objectives. The second aspect — even harder — is that innovation needs to change how the law firm works; how lawyers work; and how the law firm operates. That's the kind of innovation that is most desperately needed. But the number one thing to do is figure out how to compensate people within your firm, based on their accomplishments, and not just the hours they bill. Also, how are you pricing the services that you are providing to your clients?

N: Is changing the compensation structure even possible?

JF: I am pretty sure that in practical terms it's not possible. To me, that’s the major obstacle law firms are up against. They're simply not designed to work in a market such as the one they have right now. If a firm came to me tomorrow and said, "We agree, we need to completely change our compensation system, re-wire our entire system inside and out. How do we go about doing that?" I might say, “That could be an insurmountable change management challenge." 

N: There have been some interesting developments on the regulatory side. B.C. has recently passed legislation that would establish a class of licensed paralegals, over the objections of many lawyers. A Saskatchewan task force has also recommended recently that non-lawyers be able to provide some legal services. What do you make of all this?

JF: That the challenges and breakdowns in the justice system around family law and access to legal services for consumers and individuals — something we have been aware of for quite some time — has now penetrated into mainstream consciousness. Politicians are aware of this, which means it has reached a high enough crescendo that it has become detectable to their hearing. That should be a reliable indicator to us as lawyers how bad the problem has gotten. In many ways, we have grown immunized to this because we've been hearing about and talking about access to justice for decades. I don’t mean that we don't care. I think we do. But collectively we have ceased to pay a whole lot of attention to it. And as the problem gets worse, we don't recognize the increasing intensity of the issue. Depending on the type of government that hears it, the risk is that you may not necessarily like the way things roll out. What the government has made clear, especially in British Columbia, is it will invite your opinion, and get your input. But it is perhaps fully prepared to move ahead without either your input or your acquiescence. That’s the risk you run if you ignore a problem long enough, and allow it to reach ears of people who are beyond your ability to influence.  And what if those ears belong to people who have no difficulty in deciding to do away with lawyer self-regulation and the independence of the bar? 

N: Where do you see the most significant growth in the legal industry in the next little while?

JF: It's probably around managed legal services. And the drafting of contracts, which increasingly will be automated or at least augmented by automation. Start-ups are also talking about the management of contracts and contract lifecycle solutions and so forth. Any given company has more contracts than it knows what to do with them. Ask your average small businessperson how many contracts your business has right now, and they probably wouldn't be able to tell you. There is a huge opportunity right there, but it's not one that law firms, acting in a traditional manner, are going to grab. 

N: What’s your take on the Big Four consulting firms moving into the realm of legal services?

JF: I don’t think it’s a matter of the Big Four targeting law firms. They are inadvertently getting into our market because legal services for them are just another aspect of what their corporate clients need. So really, they are just targeting one another and competing with one another to become the dominant primary providers of business and consulting services to the world's corporations. And they are focused on a whole bunch of different aspects of running corporations, which happen to include compliance, governance and risk management. We're just in their way.

N: After years of growth there are fears that a recession may not be too far off. What would you advise law firms to do to get ready?

JF: Think to 2008, and you’ll remember that firms were stung badly. But you know what? They cut associates and secretaries. And they took all sorts of steps to cut away excess baggage. Most law firms today are substantially leaner and probably even more profitable than they were back then. But the problem now is there’s no more fat to cut. If you said to a law firm right now, "You've got to reduce your overall expenditures by 17 to 20 percent", or something like that, I don’t know where they would do it. So I would be looking for ways to generate revenue from systems, technology, and fixed price, high-margin assets. Look for ways you can introduce technology or some other system that will allow you to generate the same kind of revenue with a lower cost. Profit margins on technology just get better — with lawyers they don't really change much. The second question is, “what are you not offering today that your clients would like?” Either the clients have made it clear to you, or they don't know yet. But if you do enough research with your client and listen, you may discover something that you're not currently providing, but that you could. It just might not involve lawyers.

This interview was edited and condensed for publication.