The document provides a history of the American legal profession and law firms from 1776 to the present. It discusses the rise of large law firms serving corporations in the late 19th/early 20th century. It also outlines key changes in the legal industry from the 1970s onward, including increased competition, demands for alternative fee arrangements, and the growth of in-house legal departments and outsourcing. The document argues that law firms now face pressures to differentiate themselves, manage costs more efficiently, and address the evolving needs and expectations of clients.

1. 4819-5624-6370
Institute for the Future of Law Practice
Presented by Tim Mohan
May 14, 2018
The Innovation Imperative for Law Firms

2. A Larger Industry Perspective

3. Two Professions
2
1976 – Heinz and Lauman Study of the Chicago Bar Association
Essentially two separate professions:
Lawyers that represent
individuals
Lawyers that represent
corporations
Hardly any
overlap
Earn less Earn more
Repeated study in 1995 – Gap grew significantly

4. Wage Gap Between Sole Practitioner and
Law Firm Partners Has Increased
3
Sole
practitioners
saw their
buying
power
shrink
by over
34%
from
1988
to
2010
2.3
times
2.6
times
7.6
times
Sole practitioner average
income $10,850
Law partner $25,280
Sole practitioner average
income $38,393
Law partner $98,765
1967 1988
2010
Sole practitioner average
income $46,560
Law partner $354,018
Source: Benjamin Barton, Glass Half Full, The Decline and Rebirth of the Legal Profession, 2015

5. 4
Legal Process
Outsourcers
$1B
Corp
Legal
Depts
$160B
Big
Law
$95B
Mid
Size
$73B
Small
Firm
$108B
Source: Thompson Reuters
Total Legal Industry Market Size is
Approximately $437 Billion

6. A Brief History of American
Legal Services and Law Firms

7. 1776 – 1830
Birth of the American Legal Profession
6
§ Lawyers frequently also businessmen or farmers
§ Worked as sole practitioners or in small partnerships
§ Lawyers entered practice through apprenticeship and local court
admission
§ Early bar associations tightly controlled lawyer admissions to bar
Source: Benjamin Barton, Glass Half Full, The Decline and Rebirth of the Legal Profession, 2015

8. 1830 – 1870
Rise of Populism, De-regulation of the Profession
7
§ State governments dismantled barriers to entry
§ 1800 – set period of preparation for admission in 14 of 19 states
or territories
§ 1840 – 11 out of 30
§ 1860 – 9 out of 39
§ Movement from appointed to elected judiciaries
§ Small, poor profession populated mainly by sole practitioners
Source: Benjamin Barton, Glass Half Full, The Decline and Rebirth of the Legal Profession, 2015

9. 1870 – 1930
Industrialization, Growth of the American Bar
8
§ 1850 – 22,000 lawyers in the U.S.
§ 1900 – 114,000
§ 1930 – 160,000
§ Less time spent in court, more in the office
§ 1872 – Only 14 firms with four or more lawyers
§ 1914 – 216 firms with four or more lawyers
§ “Large” law firms emerged serving the same large clients over time
Source: Benjamin Barton, Glass Half Full, The Decline and Rebirth of the Legal Profession, 2015

10. Number of Firms with Four or More Lawyers
9
1872 1882 1892 1903 1914
New York 10 23 39 64 85
Chicago 2 2 4 23 41
Boston 0 2 2 13 18
Cleveland 0 0 2 8 13
Kansas City 0 0 1 8 13
Detroit 0 1 3 6 12
Philadelphia 0 0 1 5 12
Milwaukee 1 1 2 6 8
Cincinnati 1 1 2 6 8
Buffalo 0 0 3 4 7
TOTAL 14 31 58 141 216
Source: Benjamin Barton, Glass Half Full, The Decline and Rebirth of the Legal Profession, 2015

11. The Cravath System
10
Hire associate lawyer
apprentices from top law schools
Train extensively and gradually
increase responsibility
Progress to partner for select
few after extended probationary
period
“Up or out” – those that do not
make partner are placed into
other employment
Allow the first significant use of
leverage as a driver of profits
Source: Marc Galanter and William Henderson, “The Elastic Tournament: A Second Transformation of the Big Law Firm, Stanford Law Review, Vol. 60, Issue 6, 2008

12. Technology Advances Increase Output
11
§ Stenographers and typewriters
§ Telephone
§ Proliferation of printed materials (including reported cases and
digests) and introduction of the filing cabinet
Source: Galanter and Palay, Tournament of Lawyers: The Transformation of the Big Law Firm (1991)

13. Rise of Bar Associations and
State Supreme Court Regulation
12
§ American Bar Association founded in 1878 – championed
higher bar admission standards
§ Early 1900s – state supreme courts regulate bar admission:
three year education from an accredited law school and bar
exams required
Source: Benjamin Barton, Glass Half Full, The Decline and Rebirth of the Legal Profession, 2015

14. 1930 – 1948
Lean Times for Lawyers
13
§ Courts and bar associations reacted to the Depression by clamping
down on bar admission standards and the unauthorized practice of law
§ Nonetheless lawyers and law schools suffered –
– Lawyer average salaries didn’t exceed 1929 levels again until 1943
– Law school admissions plummeted from 40,000 in the late 1920s to a low
of 6,000 in 1943
§ Modern legal profession, however, was set in place during this period:
- Strict education requirements
- Written bar examinations that were long and difficult
- Extensive review of character and fitness
Source: Benjamin Barton, Glass Half Full, The Decline and Rebirth of the Legal Profession, 2015

15. The ‘50s and ‘60s
The “Golden Age” for Law Firms
14
§ Period of prosperity and manageable growth for firms
§ Information about firm finances, billing, income, and client relations not shared with
outsiders - or with very many insiders
§ “Cravath Method” still in wide use
§ Starting salaries uniform by jurisdiction
§ No lateral partner movement
§ Chances of making partner small – estimates of averages between 1 in 7 and 1 in 12
§ Transactional practices more profitable than litigation
§ Extreme client loyalty
§ Hourly billing begins in the mid-1960s
§ No “boorish” concerns regarding efficiency, productivity, marketing and competition
Source: Galanter and Palay

16. The ‘70s and ‘80s
Fundamental Changes
15
§ More lawyers – from 285,933 in 1960 to 655,191 in 1985 – a 129%
increase
§ More spent on law – GNP (in constant dollars) derived from legal services
more than doubled from $15 billion in 1960 to $35 billion in 1985
§ Larger firms begin to dominate – between 1972 and 1986 the market
share of the 50 largest law firms doubled
§ Technological advances – photo reproduction, computerization, on-line
data services, overnight delivery, fax machines multiply the amount of
information that can be produced and the velocity of its circulation
§ More litigation – civil filings in federal court grow from 59,284 in 1960 to
273,670 in 1985 – more litigation work defending businesses that are large
law firm clients
§ The billable hour becomes the dominant means of pricing for law firms
Source: Galanter and Palay

17. Transformation of Law Firms During This Period
16
§ Late 1950s – only 38 firms with more than 50 lawyers – more than half in New York
§ 1968 – largest firm in the U.S. had 168 lawyers
§ 1985 – 508 firms with 51 or more lawyers
§ 1986 – largest firm had 962 lawyers and there were 148 firms larger than the largest firm
in 1968
§ Multiple location firms become more common
§ In-house law departments increased in size – relationships with law firms became
more transactional
§ Size matters – “one stop shopping” and brand recognition
§ Firms start to run themselves more like businesses – pay attention to financial
metrics
§ 1986 – American Lawyer publishes law firm financial information for the first time
Source: Galanter and Palay

18. Transformation of Law Firms During This Period
(continued)
17
§ Lateral movement begins
§ Restrictions on lawyers advertising loosened – culture of
selling and business development begins
§ More “non-equity” partners and payment lawyer employees
§ Higher salaries and more starting salary competition
Source: Galanter and Palay

19. 1990s to 2008
Further Growth and Boom Times for Law Firms
18
§ Liberalization of the traditional up-or-out principle
§ Growing share of lawyers not vying for partnership
§ Partnership becomes less permanent
§ More lateral movement – mostly to larger firms
§ Acceptance of compensation differentials not based on seniority
§ More non-lawyer management functions
§ More firms with national and international footprints
§ Many firms held together by economics rather than culture
Source: Galanter and Henderson, The Elastic Tournament: The Second Transformation of the Big Law Firm, 60 Stan. L. Rev. 1867 (2008)

20. The Second “Tech” Evolution
of Law Firms

22. State of the Legal Services
Market Today

23. 22
Source: William Henderson, Indiana University

24. Source: William Henderson, Indiana University
23

25. 24
% Change in Number of Employed Lawyers by
Practice Setting, 1997 to 2016
27%
46%
203%
-25%
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Law Firms Government In-House ©Legal Evolution PBC

26. 25
Growth in Demand for Law Firm Services

27. 26

28. § Refusing rate increases, while pushing realization to historic lows
§ Requiring alternate fee arrangements (AFAs) not based on the
billable hour
§ Inviting the purchasing department to the beauty contest
§ Scrutinizing every lawyer’s value on their matters (not just 1st and 2nd
years)
“Get used to it: They’re exercising their market power, pure and simple.”
Source: Bruce MacEwen
27
Clients Exercising Market Power

29. Market Dynamics Have Fundamentally Shifted
§ From decades of clients as “price takers” and fundamentally
price-inelastic demand
§ To a world of excess capacity:
- A battle for market share
- Severe and chronic temptations to undercut on price – to the point
of seemingly irrational tenders in response to RFPs and otherwise
- Extremely challenging to cut capacity in a more sophisticated law
firm while maintaining or enhancing morale
Source: Bruce MacEwen
28

30. The New Legal Job Market
§ The Impact of the Great Recession
- Approx. 60,000 legal sector jobs lost 2008-09 (US BLS)
- 8.7% of all US law firm associates lost their jobs in 2009
- Sector was still down approximately 50,000 jobs at end of 2012
§ The Impact of Technology
- Internet (Google, Legal Zoom, etc.) has made legal information available
to everyone
- Technology assisted document review: faster and better
- Commoditizable work is being automated, lowering price
§ The Impact of Globalization
- Emergence of price sensitive global legal services supply chain (legal
work flowing to India, other markets)
- Disaggregation of legal services
29

31. The New Legal Job Market (continued)
“For the legal industry, the results in 2012, another turbulent
year, were largely a repeat of trends that emerged over the
prior three years. In fact, we think it is time to let go of any
lingering notion that the industry will revert to the boom
years before the Great Recession anytime soon. With profit
growth and other financial indices reaching lower setpoints in
the past four years, we anticipate that the current state of the
industry will remain the norm for the foreseeable future.”
Source: 2013 Citi Private Bank/Hildebrandt Client Advisory
30

32. Orrick Talent Model
31

33. Possible Future Distribution of Lawyer
Roles at Law Firms
32
Expert lawyer (including technological expertise)
Technical sales person
Client manager
Transaction manager
Associates
Limited license lawyers and staff attorneys

34. 33

35. Source: William Henderson,
Indiana University
Adapted from Clayton Christensen’s The Innovator’s Dilemma
34

36. How Do Law Firms Make Money?

37. Law Firm Profits Equal
Fee Revenues Minus Unreimbursed Costs
36
Fee Revenues
Hourly billed matters
Alternate fee arrangements (AFAs)
- Fixed priced matters
- Success and contingency fees
- Hybrid pricing
- Retainers
Unreimbursed Costs
*Other includes malpractice insurance premiums,
settlements, payments to former partners, and all
other expenses not shown separately.
Source: National Law Journal & ALM Legal Intelligence, The Survey of Law Firm Economics: A Special Report, 2009 - available at: http://almlegalintel.com/Surveys/SLFE
ATTORNEYS
61%
STAFFING
18%
OTHER*
9%
OCCUPANCY
6%
EQUIPMENT
2%
REFERENCE
1%
PROMOTION
2%

38. Profitability Tactics for Law Firms
37
• Earn higher fees through specialization, innovation, adding more value
• Use marketing and business development to get “better” work
• Speed up skill-building process in staff
• Invest in new (higher-value) service
1. Raise Prices (Fee Levels)
• Improve engagement management performance
• Increase leverage in the delivery of services
• Make greater use of paraprofessionals and lower cost lawyers
• Develop methodologies to avoid duplication of effort
2. Lower Variable Costs (Delivery Cost for Each Engagement)
• Deal with underperformers
• Drop unprofitable services
• Drop unprofitable clients
3. Fix Underperformers
• Increase utilization (billable hours or other output measure per person)
4. Increase Volume
• Improve speed of billing
• Improve speed of collections
• Reduce space and equipment costs
• Reduce support staff costs
5. Lower Overhead Costs

39. The Problem With
Traditional Selling of Services

40. “If you don’t find a way
to make money while
you sleep, you will
work until you die.”
Warren Buffet

41. Aligning Law Firm Strategy

42. Three Significant Issues for Law Firms and the
Big Issue for all Professional Services Firms
41

43. Three Significant Issues for Law Firms
42
Increasing difficulty of
differentiating the firm to
clients and potential lawyers
Pressures from in-house
counsel on pricing and
service delivery models
Threat of competition from
non-traditional service
providers
1
2
3

44. The Big Issue for all Professional Services Firms
43

45. Law Firms Should Avoid the
“One Size Fits All” Strategy
44
ü “maintain and improve our human
capital;
ü use technology to become more
efficient and obtain a better quality
of life;
ü attract and retain the highest quality
personnel;
ü adopt a series of initiatives to
improve and expand client
relationships; and
ü continuously improve the firm’s
economic performance.”
In the next three
to five years our
firm will:
Source: H. Edward Wesemann, Creating Dominance: Winning Strategies for Law Firms, 2005

46. Thinking About Where a Law Firm Plays
45
The Models
Global Players – spanning three or more continents
Capital Markets – centric firms headquartered in a global financial center, often historically tethered to a major
investment bank
King of Their Hill – firms headquartered in non-global cities catering to sophisticated upper and middle market, mostly
non-financial services companies, and very high net worth individuals
Boutiques – known primarily for one thing
Category Killer – specialists targeting one broad but not necessarily high-intrinsic-value practice
The Hollow Middle – one-size-fits-all, not a special destination, generic law firms
Integrated Focus – firms, a newly emergent species, “synergistic super boutiques”
Bruce MacEwen’s Taxonomy of Law Firms (2014)

47. David Maister on Strategy
46
Strategy is About Saying
“Strategy is deciding whose business you are going to turn away.”
“As companies keep discovering to their detriment, it is certain
business decay if you try to please all possible market segments.
The broader the group of clients to which you try to appeal, or the
wider the range of services you try to provide, the less customized
your offering can be to each segment within that group.”
Source: David Maister, Strategy and the Fat Smoker, 2008

48. How Will Law Firms Succeed in the Future?
47
Branding Will Determine Success
Smaller, Specialized Firms
More Non-lawyers
Better Listening to Clients
“Soft Skills” Win
Internal LPOs
“Tech” Lawyers
Scaling Through Product Sales

49. Branding Will Determine Success
48
The status of a law firm’s brand will be the biggest
determiner of its long-term success.

50. First Law of Branding: The Law of Expansion
49
§ 1988 – AMEX had a handful of credit card lines
and 27% of the market
§ Introduces a “blizzard” of new cards including:
Senior, Student, Membership Miles, Optima
Rewards Plus Gold, Delta Sky Miles Optima,
Optima True Grace, Optima Golf, Purchasing
and Corporate Executive – Goal: Issue 10 to 15
new cards per year
§ 2002: AMEX had an 18% market share
The power of a brand is inversely proportional to its scope.
Source: Al Ries and Laura Ries, The 22 Immutable Laws of Branding, 2002

51. Second Law of Branding: The Law of Contraction
50
A brand becomes stronger when you narrow its focus.
Source: Al Ries and Laura Ries, The 22 Immutable Laws of Branding, 2002
Sells submarine sandwiches
Sells toys
Sells pizza – and only for delivery

52. Smaller, Specialized Firms
51
Specialization, driven by branding and
technological innovations, will result in relatively
smaller, but highly scaled, law firms.

53. The Bermuda Triangle of Law Firm Management
52
Size of Firm
Organizations sink in the middle
Informal
management
structure
Formal
management
structure
Source: Ashish Nanda, Harvard University
Cost

54. Avoiding the Bermuda Triangle
53
To be successful according to this model, law firms have two choices:
1. Stay small and specialized, develop a brand in that area of
specialization, and run the organization with informal management
structures.
2. Be really big, develop a huge brand, and run the law firm like a
corporation.

55. Considering The Dunbar Number
Source: www.socialsciencespace.com/2013/11/robin-dunbar-on-dunbar-numbers/
54
British Anthropologist and Psychologist Robin Dunbar:
Ø Humans can only comfortably
maintain 150 stable relationships;
Ø Numbers larger than this generally
require more restrictive rules, laws,
and enforced norms to maintain a
stable, cohesive group.

56. More Non-Lawyers
55
Non-lawyer revenue producers will outnumber lawyers –
many tasks now taken on by lawyers will be performed by
non-lawyers, either directly or using technology tools.
As a result, the number of lawyers in a firm will not keep pace
with the increase in this non-lawyer staff.

57. Better Listening to Clients
56
Law firms will seek more proactive feedback from clients.
Voice of the
Client
Encouraging process
and service innovation
More Formal
Client
Feedback
Using technology tools
After Action
Reviews
Engaging with clients
regarding what went
right and what went
wrong

58. “Soft Skills” Win
57
Successful
Lawyer
Technical
Ability
Emotional
Intelligence

59. 58
Quoting Harvard Professor William H. Bossert:
“If you’re afraid that you might be replaced by a
computer, then you probably can be − and should
be.”
Colvin on lawyers:
“Their best chance of prospering may well lie in using
interpersonal abilities….[s]mart lawyers can still do
great….but not just because they’re smart. The key
to differentiation lies entirely in the most human
realms of social interaction: understanding an
irrational client, forming the emotional bonds needed
to persuade that client to act rationally, rendering the
sensing, feeling judgments that clients insist on
getting from a human being."
Geoff Colvin on “Soft Skills”

60. What Law Departments Value Most in
Their Outside Counsel
59
ü Partnership – Willingness to take the long-term view and share
risks. Ability to partner with in-house counsel and other law firms.
ü Understanding Business and Goals – Willingness to invest in
understanding of company’s needs.
ü Responsiveness – Providing the right people at the right times.
ü High Quality Work in a Cost Effective Manner – Great client
service at a competitive cost.
ü Innovation and Flexibility – Willingness to adapt to the law
department’s approach. Desire to provide innovative ways to
permit law department to meet its goals.
Source: Association of Corporate Counsel

61. 60
Top Non-Legal Skills Chief Legal Officers Seek to
Develop in Their Law Department
Source: ACC Chief Legal Officers 2015 Survey

62. Law Firms Should Engage in Selective Hiring and
Promotion Emphasizing Intangible Skills
61
ü Personality
ü Communication skills
ü Creativity
ü Curiosity
ü Passion
ü Sympathy
ü Listening
ü Follow-up
Source: Mark McCormack, Never Wrestle with a Pig, 2000

63. Internal LPOs
62
Law firms will create their own LPOs.
McDermott Discovery Center
Allen & Overy

64. “Tech” Lawyers
63
NewLaw Training and Pipeline Programs
Institute for the Future of Law Practice
Innovative Collaboration
Dentons NextLaw Labs
Law School “Tech Lawyer” Curriculum
Chicago-Kent
Colorado
Fordham
Georgetown
Michigan State
Stanford
Technologically-savvy lawyers will create
a new paradigm in the practice of law

65. 64
Adding revenues at
the same pace you
are adding costs
Adding revenues
at a much greater
rate than costs
Source: Ron Carucci, Midsize Companies Shouldn’t Confuse Growth with Scaling, Harvard Business Review (2016)
Scaling Through Product Sales

66. 65
How to Create Scalable Growth
Source: Ron Carucci, Midsize Companies Shouldn’t Confuse Growth with Scaling, Harvard Business Review (2016)
Ø Replace “counterfeit strategies” with real market identity
Ø Build capacity to scale – continuously question how the
organization should look
Ø Welcome standardization – few people remember who
invented the automobile, but nearly everyone recognizes
Henry Ford

67. Law Firms are Selling Products
66

68. Design
Thinking
Data
Analytics
Technology
Process /
Project
Mgmt
Business
Tools
Legal
Knowledge
& Skill
The
T-Shaped
Lawyer
Adapted from R. Amani Smathers
Type 1 Innovation
Type 0 Innovation
67

69. Working Smarter
68
Staffing,
PM/KM
Innovation
Pricing
Client
Value

70. Type 0 Innovation:
Adapting law to fit new social,
political, and economic complexities

71. EMERGING GROWTH MATURE SATURATED
Bring Work
In-house
Type 0 Innovation
Growth Strategies <<>> Sustaining Strategies
Source: William Henderson, Legal Evolution 70

72. Type 1 Innovation
Improve the quality, cost, and delivery
of existing legal solutions

73. Extraordinary
Events
Experience
Demand
Efficiency
Demand
Top of the Pyramid?
Traverse the
Pyramid?
Source: William Henderson, Legal Evolution 72

74. 73
Chapman’s Innovation Strategy
§ Use innovation to deliver our traditional legal work
more accurately and efficiently.
§ Deliver work that would otherwise be too expensive
for us to do using technology and alternative staffing.
§ Design solutions for our clients to use themselves.
§ Sell solutions we have developed to the legal market.

75. Institute for the Future of Law Practice
Presented by Tim Mohan
May 14, 2018
The Innovation Imperative for Law Firms