The first development is summed up in a question framed by an LPO Savvy blog post: what does LPO do for an encore? It’s not fair to say that the value of legal process outsourcing lies entirely in its vast price differential with traditional law firms; but it is fair to say that that’s where many LPO conversations start. Saving money, especially on the scale that LPO offers and in this economic environment, is not to be dismissed lightly; but as LPO Savvy notes, “cost competitiveness alone is not going to propel the industry’s longevity.” Asian upstarts in other industries like cars and electronics often began by offering basic services at low prices; but they didn’t stop there:

Japanese automakers have been able to achieve [success] largely due to their ability to innovate. They did more than just maintain their competitiveness when they set up their manufacturing processes onshore. They brought with them their processes and managerial tools … fresh ways of managing Lean Manufacturing operations such as Kanban. Kanban was an innovative means of managing inventories in the manufacturing process unseen in the industry. It took cost and unnecessary steps out of the supply chain processes that went into producing automobiles.

Putting this back to the LPO perspective, I struggled with what the Indian LPO’s Kanban could be? What is the innovative game changer that we possess and can bring to the table? … The creative minds behind Kanban developed the practice through many trials of error and rework. But the need and desire to change how their processes were carried out was apparent to them, thus driving their need to explore ways to change.

There is an acute need to bring innovation to how legal services are carried out — a need that LPOs helped to highlight, and an area where they’ve already made much progress, but one that they themselves must now tackle head-on. LPOs have contributed to a slowdown (if not a dead stop) in the previously unstoppable rise in law firm fees; but are they also leading the way in re-engineering the means by which legal work is done, finding and implementing the new “killer apps” for law? And if so, are they successfully advertising and selling that fact to clients? LPO companies are still ahead of many law firms in applying process improvements and reducing costs, but their lead is not insurmountable.

Consider this example: legal process outsourcers have had greater difficulty cracking the Australian market than the UK or the US, in large part because in-house counsel there are apparently more reluctant to try new approaches and more fearful of LPO quality and security failures. So LPO provider Pangea3 is trying a different tack: a partnership with Australian law firm Advent Legal that will see the two collaborate on a wide spectrum of “junior work.” Advent and fellow Australian firm Balance Legal have to some extent already filled the LPO role in their country by their widespread use of secondments to reduce client costs and increase client integration, and have reaped the reputational benefits. LPOs have had to adapt, and this partnership — reminiscent in some ways of the alliance system between Indian and western law firms — is an example.

If I were an LPO, I’d be nervous every time I read about a law firm that provided secondments, gave legal project management training, managed its workflow, unbundled its services, used decision trees, or even employed Lean Six Sigma, because it means they’re starting to adopt some of my stock in trade. The critical battleground in the legal services marketplace is not price, but innovation: inventing and implementing more efficient and effective ways to carry out legal work. That’s a tougher and far more important assignment than simply lowering the cost of associate work, and whoever figures it out first and best could, like Toyota and Sony, dominate this market. LPOs are in a strong position to compete in this race, but they’re not the only contestants.

The second development emerging from LPO’s appearance is that a surprising number of law firms are adopting — and adapting — the outsourcing model themselves. They’re figuring out that the important question isn’t which type of provider (law firm, LPO, whoever) gets to do what kinds of legal work; the question that matters is who will serve as the primary liaison to the client and direct the allocation and assignment of legal work.

The days when legal work flowed from a client exclusively to a law firm and back again are over; the reality now is that numerous providers are in play and numerous models are on offer. While a number of UK firms have embraced LPO providers as a means to get legal work done more cost-effectively, some firms remember the words of Rio Tinto’s one-time GC Leah Cooper, who said law firms should think of Rio’s LPO partner CPA Global as an extension of the company’s in-house department. Law firms don’t like anyone — offshore LPO, procurement department, accounting firm — coming between them and their client. So in future, what really matters is this: who sits next to the client, receives its instructions, and decides how its legal resources are to be allocated among myriad providers? Smart law firms are taking steps now to ensure that that answer is never in dispute.

Here are two examples of what I mean.

Mexican Waves. Despite its name, law firms involved in a Mexican wave system don’t send work back and forth across national or continental borders; instead, the work circulates between firms in bigger cities and those in smaller, less expensive locations. The system was pioneered by UK firm Lovells — now transatlantic giant Hogan Lovell, and interestingly, the term no longer appears on the new firm’s website.  Clients like the Royal Bank of Scotland prefer a Mexican Wave arrangement to a pure LPO because they can cut costs while still retaining a long-term relationship with their primary law firm. Eversheds has adopted a sort of internal Mexican Wave by outsourcing work to its own firms’ lower-cost locations worldwide. And Magic Circle firm Freshfields rejects suggestions that its recent discussions about “referral arrangements” with smaller law firms is a Mexican Wave arrangement, but it’s hard to tell the difference. Meanwhile, some UK firms are outsourcing directly to law firms in foreign jurisdictions: Lewis Silkin, for example, is sending litigation work to Minter Ellison’s New Zealand office.

Outsourced law departments. One of the most interesting developments of the past several months has been a pair of joint ventures between UK law firms and public-sector law departments. In February, Geldards LLP and the Kent County Council created a new entity called Law:Public that will handle not just all of KCC’s legal work, but will also seek out work from local governments and public sector agencies across England. Law:Public’s 100 lawyers (80 from KCC) will charge below-market rates to these increasingly cash-strapped clients and will boast unparalleled experience and expertise in this sector. Then in March, large UK utility Thames Water essentially transferred its legal function to London firm Berwin Leighton Paisner, leaving behind a core group of in-house lawyers to provide strategic legal advice to the company. Here’s the key quote from a BLP partner: “With this model, we’re able to say that BLP’s embedded in the business. Other models such as LPO take you a certain way, but [they] don’t necessarily do what clients want, which is complete alignment.” In both cases, a law firm has completely integrated its operations and interests with those of a key client, ensuring continuing control of the assignment of legal services.

What these developments share in common is the law firms’ recognition that when clients say legal work has to be carried out differently and more efficiently, they mean it. Clients are putting all their options on the table and studying them closely, and many of those options don’t involve law firms much if at all. Some firms have therefore come to realize that they need to (a) find different ways of getting clients’ work done that (b) still leave the firm as the conduit through which that work flows and as the primary provider of the highest-value services.

What we’re starting to see now is an industry-wide jostling for position by legal services providers, each competing not just for the client’s attention but also for the coveted “quarterback” or “foreman” role that directs work to the other players, supervises its production, and takes ultimate responsibility for the result. Law firms used to hold that conduit position by default; they can’t count on that anymore, and the threat of losing that position is as close to an existential one as the legal profession should care to come. Clients are going to have more and more options for their legal work in the next several years, and managing all those options is a difficult and demanding job; but whoever holds that job will have an extraordinary amount of influence with the client and over the other providers. That’s the new Holy Grail for law firms, and I think that’s why a few smart firms are now taking outsourcing seriously: because they need to get very good, very quickly, at managing the production of legal work by a multitude of different providers.

Two specific sets of players should be concerned by all of this. The first is LPOs and other upstart providers of legal services, because if law firms (a) figure out how to manage legal work more effectively and (b) become entrenched as clients’ primary legal services overseer in a multi-provider environment, these entities risk a serious clipping of their wings. And the second is North American law firms: all the examples in this post and almost all the examples I’ve seen of this trend are in the UK, Australia and New Zealand: if any US firms are working on this, they’re keeping an extremely low profile. That’s risky, because this trend won’t take long to metabolize and it won’t take long for some clear winners to emerge. Law firms that don’t recognize this trend might find that an important and decisive war ended before they even knew it had begun.

1. Price wars are a death spiral. Every time you reduce your fees for a service to undercut a competitor, you set off a chain reaction whereby everyone in the market goes one step lower until even the “winners” can’t turn a profit. (Although read this James Surowiecki column for a counter-intuitive take on price wars.)

2. Price-cutting leads to quality reduction. It’s simple: if you’re not bringing in as much money for the same work, you need to cut back somewhere else: firing an able assistant, scrimping on new supplies, taking on more files than you can competently handle. (Although read the rest of this post for my thoughts on cutbacks.)

3. Price is an important marketplace signal. Unsophisticated buyers (and in the law, that’s most buyers) want the best deal, but they also worry about services that seem too cheap to be true. Lawyers offer a top-quality product, and a robust price for that product gives buyers confidence in its quality. (Although it’s perilous to count on the continuing ignorance of your customer base.)

So it’s both sensible and logical to tell lawyers not to compete on price. Yet for all that, I’ve come to believe that it’s not good advice anymore. I think we need to learn, as a profession, how to compete on price in ways that sustain our businesses.

It’s fine, in the abstract, for a lawyer to refuse to match or beat a rival’s lower price for a given product or service. The first few times a lawyer loses a client that way, she can content herself that she held the line against the devaluation of her services and that a client who only cares about price will be a difficult client throughout. But what happens when she loses the fifth client, or the tenth, or the fiftieth, because of price? What happens when clients start to consistently say, “I can get these services at a substantially lower price down the street,” or “I like working with you, but I can’t justify the premium that you charge”?

Many lawyers are already in this boat — much of the residential real estate bar, for instance. For these lawyers, refusing to compete on price is not a practical option, because their clients have made clear that price is the most important factor in their purchasing decision. There’s little point in charging what you believe is a fair price if no one’s buying at that price. Worse, more lawyers are going to join that boat over the course of this decade, as technology, collaboration, globalization, and regulatory change combine to rearrange the competitive landscape. We may complain about low-priced “non-lawyer” competitors and denigrate the quality of their work, but if clients buy what they sell at those prices, that’s going to affect what everyone else can charge. And not only will the quality of their offerings improve over time, but it also won’t be only “non-lawyers” doing it. Whether we like it or not, price will become a significant competitive factor, and it will be dangerous to run our businesses pretending otherwise.

So what can we do? The risks of constant price reductions detailed above are all too real, yet the day will soon come where we have to lower our prices just to stay in the marketplace conversation. If you can upgrade the type and quality of your services to premium or luxury levels and therefore maintain or even increase your prices, good for you. But there’s only so much room at the top of the mountain and not everyone can stand there; and in any event, raising the quality of what you offer often requires increasing what you spend to offer it, getting you no farther ahead.

But you don’t need to compete on price if you can go one better: compete on cost. Reduce the inefficiencies in your practice, streamline your processes, systematize where feasible, outsource if possible, reallocate resources to match the appropriate level of talent to the appropriate sophistication of tasks. This isn’t about freezing salaries or eliminating positions or taking away free coffee or all the other myopic expense-reduction steps many law firms took during the financial crisis. This is about restructuring your business in smart ways that reduce waste, cut down on system leakage, fine-tune your engines and upgrade your capacity.

Competing on cost means you spend less to get the same results as your law firm competitors, and puts you on an even footing with the non-firm competitors currently storming the gates. No matter what happens in the marketplace, one rule never changes: profit = revenue – expenses. Even if your revenue is down, you’ll still turn a profit if your expenses are down further: the lawyer who charges $500 for services that cost him $200 is doing better than the lawyer who charges $1,000 for services that cost him $900. You can’t control what the market will pay you; but you can control, to a large extent, what you spend to compete in that market. If you ever expect to seriously offer fixed fees to the marketplace, you absolutely must start by competing on cost.

Here are some examples of how you can compete on cost:

- Install a legal project management system. Probably the simplest way to introduce business efficiencies to your law firm is to adopt the principles of legal project management. From a basic back-of-the-envelope process for doing certain tasks systematically all the way up to a full-scale Lean Six Sigma re-engineering of your entire operation, you’ll wind up with clearer goals, more explicit processes, more efficient systems and increased productivity.

- Automate anything repetitive that moves. Your client intake system, your most frequent inquiries, your most common procedures, your most familiar routines: if the same basic task occurs more than occasionally in your firm, it should be converted into a template, a checklist, a document assembly system, or some other means by which completion is made faster, variation is made more difficult, and fewer resources are expended needlessly.

- Move work up and down the talent chain. Move dictation and transcription from secretaries down to voice-recognition devices. Move legal research to freelance specialists across town or outside the country. Move administrative tasks to virtual assistants. Move e-discovery to people or systems actually qualified to do it. Then train the people who used to do low-value work in high-value skills like project management, business development, human resources and so forth. Same people, same resources, but better allocated and with new capabilities.

- Use technology wherever possible. Practice management software, on your server or preferably in the cloud, delivers huge efficiency gains. Specialized accounting software for law offices reduces errors and improves productivity. Take advantage of low-cost, internet-based contact management systems. Give serious thought to going paperless, or at least paper-less. If you’re already using these tools, constantly train your staff to become more proficient with them. Exploit what Dave Bilinsky calls the “new leverage”: using technology to achieve higher rates of return on each hour of work.

- Give serious thought to outsourcing. There’s one reason big firms like WilmerHale and CMS Cameron McKenna have struck deals with legal process outsourcing firms to move millions of dollars worth of business and back-office functions to smaller centers: efficiency gains that help them compete on cost. To be sure, there are human costs to be dealt with, but if you take a hard look at the numbers, you might find the logic of outsourced operations to be inescapable.

- Come up with a non-hourly billing and compensation system. It probably goes without saying that the single biggest inefficiency in most law firms is the fact that tasks are worth more the longer they take and the more resources they consume. Hourly billing — and more importantly in this context, hourly compensation — is a productivity hemorrhage that’s becoming far more damaging to firms than to clients. And it is not sustainable.

You can probably look around your office right now and find five ways that costs could be reduced or efficiencies could be introduced without a corresponding drop in quality (and maybe even an increase). Most often, the reasons why your firm avoids dealing with these inefficiencies are personal or political or both. But it’s not mission impossible, as the saying goes; only mission difficult. And I would suggest that as of right now, it’s also mission critical. Getting a grip on and eliminating inefficiency in a positive, sensible way is probably the most under-valued tool law firms possess to increase their productivity.

If there’s a downside to this approach, I don’t see it. Suppose that none of these dire warnings come to pass, and that the legal marketplace remains the safe, cozy, bloated anachronism it’s always been. By making cost competition a strategic priority, you’ll have increased your profitability vis-a-vis your rival firms, channeled more money to your partners, become more attractive to potential lateral hires, and given your firm the leverage, if you ever wanted, to make your rivals compete on price on your terms.

But say the marketplace erupts in the ways I’ve been describing, and hyper-efficient competitors emerge that can beat your usual fees by 30, 50, 70 percent or more. Without a streamlined operation in place and no time to install one in the chaos and pressure facing you, you run the serious risk of becoming another victim of market change. But if you’ve already prepared to beat these new entrants at their own game, you’ll at least have a fighting chance. Competing on price might be a necessary evil, but competing on cost can be the key to your success.

The letter, which comes from the Nova Scotia Association of Realtors, warns homeowners that they are “accepting with open arms increased risk of liability, threats to you and your family’s safety. Realtors protect you and your family from any ill-intended strangers that will come in to your home under the pretense of wanting to buy,” the letter advises, before it goes on to warn of lower sale prices and longer sale times. …

Jim Carragher insists a lot of his new business comes from private sales gone bad. “I’m telling you that it is so terribly sad when I get that phone call at the 11th hour from someone who was trying to sell their home who suddenly realizes they have made a terrible mistake,” he says. “Their deal falls through, they already bought something unconditionally. I try to help, but I tell you sometimes it’s just too late to undo the damage.”

Nonetheless, as the article explains, sell-it-yourself realty continues to grow, in part because the times are passing Realtors by. Read this excerpt from the article (and change “real estate agent” to “lawyer” throughout): Real estate agents … tend to be middle aged or older, and growing out of touch with a younger generation that prefers online options and is more comfortable with the idea of private sales than their parents would have been. “These kids aren’t going to use an agent,” he says. “That’s just the way this is going. The agents are older and the buyers are younger, and they’ve had the Internet their whole lives.”

Lawyers also are under regulatory pressure (in England & Wales through the Legal Services Act, in Canada by the Competition Bureau, and the Missouri lawyers suing LegalZoom for the unauthorized practice of law better hope their suit doesn’t produce the wrong kind of finding). But still we resist new competition through UPL restrictions, we seem to regard technology as a nuisance more than a service facilitator, we routinely warn clients of the dangers of going it alone, and we maintain (patronizingly) that we always end up fixing the messes left by unrepresented clients. And like Realtors, we remain amazingly confident, even smug, about our indispensability. I once sat through a focus session in which lawyers, asked what would happen if laws and their practitioners disappeared, solemnly predicted that anarchy and blood in the streets would follow.

The one thing that concerns me most, as an observer of the extraordinary change in this marketplace, is that the majority of the profession has no idea what’s coming. Most of the lawyers with whom I’ve dealt over the past several years simply can’t envision a world where lawyers aren’t considered essential to the social and economic fabric. They might recognize that times are tougher and costs are rising and prices have topped out and clients are more demanding. They might be resentfully aware that providers outside the profession are entering the market with lower-price offerings, and they might grudgingly accept that technology allows things to be done faster and cheaper than they used to be. But they’re not putting it all together. They’re not following this road to its conclusion, because they can’t really see how the world could get along without us. The inevitability of lawyers is our fundamental precept, and it has become a mental block.

It’s this sense of inevitability that we need to shake to pieces, because it seems to lie at the heart of the profession’s blasé attitude towards change. Lawyers are far too complacent for the circumstances we’re facing, maintaining a sense of privilege born from decades of profitable work in a protected environment. I’m not trying to persuade anyone that lawyers will disappear (although I’m no longer prepared to discount that possibility 100%), but rather to help lawyers understand that we face an immediate mandate of transformation in order to remain relevant to and valued by the marketplace. We can’t charge according to our time and effort anymore. We can’t use a model that sets our financial interests in opposition to our clients’  anymore. We can’t tell our clients who may and may not offer them legal services anymore. We can’t serve the market on our unilateral terms anymore. Many lawyers don’t believe any of those things, and very few lawyers believe all of them. But I believe them all to be true, and I’m not the only one.

The plight of Canadian Realtors probably matters little to us — in fact, to the extent we hear about changes in the real estate marketplace that increase consumer choice and lower prices, we’re probably cheering on the trust-busters and the innovators. It doesn’t seem to occur to us that we’re as vulnerable as they were — just as secure in our monopoly, just as highly rewarded for our efforts, just as dismissive of the potential power of the market. The inevitability of lawyers might once have been a fact. But now it’s fiction, one that’s sustained in our minds but less often in anyone else’s. The sooner we abandon that fiction, the better our chances of responding in time to survive in some recognizable and profitable form. And it has to be soon. Lawyers should know better than anyone else what a ticking clock sounds like.

We all know the basics: China is already an economic giant whose engine has kept the global economy from tanking completely over the last couple of years. It holds nearly $1 trillion in US currency, it’s gobbling up natural resources everywhere from Canada to Africa to feed its phenomenal growth, and it’s widely considered the odds-on favourite to dominate, or at least co-dominate, the world in the decades to come. But its legal industry doesn’t seem to be considered a global threat by its western counterparts, thanks in part to a paucity of English speakers, the lack of common-law fluency, and difficulties with the enforcement of the rule of law in China generally.

While all of that may be true, it’s no reason to dismiss or take lightly the opportunities and threats presented by China’s recent but substantial interest in the provision of legal services. Firms that look upon China solely as a source of clients, rather than of potential competition, could be making a mistake. Here are four quick reasons to take China’s legal industry seriously.

1. Growth. China’s legal profession is growing astonishingly fast, from a nearly zero baseline. Thirty years ago, the entire country had only 212 lawyers in 79 law firms; today, those numbers are 150,000 and 14,000, respectively, a huge jump but still proportionally well below the American lawyer-to-population ratio. And there are many more Chinese lawyers on the way: Sida Liu of the University of Wisconsin-Madison told the Georgetown Law Firm Evolution conference in March that China had opened a staggering 500 new law schools in the last ten years. That’s probably too many for anyone’s good, but the critical mass will be there.

2. Sophistication. Chinese law firms are acquiring business and management skills faster than their Western counterparts did at similar stages of development. Leading Chinese (and Indian) firms are moving from eat-what-you-kill arrangements to lockstep partnerships, seeking to establish long-term enterprises that prioritize the firm’s welfare above the individual’s (something that comes more easily in China, culturally speaking, than in the west). Devotees of David Maister’s one-firm firm will recognize this approach. And interestingly, some Chinese firms are already talking about merit-based pay for associates — something still not widespread among US or UK firms.

3. Talent. In China’s legal talent wars, Western lawyers and firms are more often emerging on the losing side. This is happening in law firms — one example that stunned the Magic Circle was the departure of a top Clifford Chance capital markets partner to Shanghai firm King & Wood. But it’s also happening, more importantly, among clients: homegrown in-house counsel are becoming far more common in the Chinese offices of global companies, particularly thanks to their skill at navigating difficult compliance issues in a still-developing business environment. These lawyers have often been trained in foreign firms and law departments, but they’re now flexing their muscles independently.

4. Power. China is working to minimize or overcome those features of its society and economy that limit its global capacities. While English is not nearly as common in China as in India, the Chinese government is busily teaching 200 million of its citizens the language. China needn’t depend heavily on American or English business, not when it’s cutting $60 billion gas deals with Australia or looking to increase $60 billion worth of annual trade with India. One scholar argues that the gap between Chinese law and that practised in the west is narrowing. And as my Edge colleague Rob Millard has pointed out, as economic power diffuses from west to east, the day may well come when Chinese law, not Anglo-American common-law, is the default system for business transactions.

These are all reasons why China’s law firms and legal professionals deserve serious pondering in any consideration of the future legal services marketplace. But here’s one more, and it might end up being the most significant: China’s government has no qualms about owning and directing corporate entities on a global basis. China boasts the world’s two biggest banks and five more in the top 50 worldwide, and the government is an extremely active stakeholder in those banks and their business decisions. Picture the law firm equivalent: a global legal services provider financed and directed by a Chinese state apparatus with pockets so deep it makes massive LPOs look like garage startups by comparison. If you think competing with privately funded service providers with billions at their disposal would be tough, think about competing with a law firm backed by about a trillion US dollars and an extremely persuasive board of directors. That’s a law firm business model no one is contemplating in the West, and it would be a game-changer of the highest order.

This is not, let me emphasize, yet another paean to China’s imminent and inevitable rise to mega-power status: this is a country with plenty of challenges and problems, many of which figure to cause significant trouble and misery inside its borders within the next decade. Nor does it pretend to be an in-depth examination of China’s legal profession, which has issues of its own to cope with. Many things can and likely will still happen to push China off its current trajectory and slow its progress — but these should be delays, not failures. Corporations and governments worldwide are thinking hard about what to do when China truly hits its stride; the legal sector should be doing the same.

The necessary parts: one salad spinner, some hair combs, a yogurt container, plastic lids, and a glue gun. The finished product: a manual, push-pump centrifuge that could be a lifesaver in developing world medical clinics. … A team of college students invented this low-cost centrifuge, which can be built for about $30, as a project for a global health class at Rice University. The teacher challenged them to build an inexpensive, portable tool that could diagnose anemia without access to electricity, and the tinkerers got to work.

The students, Lila Kerr and Lauren Theis, found that spinning tiny tubes of blood in the device for 10 minutes was enough to separate the blood into heavier red blood cells and lighter plasma. Then they used a gauge to measure the hematocrit, the ratio of red blood cells to the total volume. That information tells a doctor whether a patient is anemic, which can in turn help to diagnose conditions like malnutrition, tuberculosis, HIV/AIDS, and malaria. … “We’ve pumped it for 20 minutes with no problem,” Theis said. “Ten minutes is a breeze.” It has proven to be fairly robust. “It’s all plastic and pretty durable,” Kerr said.

If you think the multinational makers of expensive medical devices would fight a cheap innovation like this, then let me also introduce you to the Mac 400, a hand-held electrocardiogram developed by General Electric’s health-care laboratory in Bangalore, as reported in The Economist:

The device is a masterpiece of simplification. The multiple buttons on conventional ECGs have been reduced to just four. The bulky printer has been replaced by one of those tiny gadgets used in portable ticket machines. The whole thing is small enough to fit into a small backpack and can run on batteries as well as on the mains. This miracle of compression sells for $800, instead of $2,000 for a conventional ECG, and has reduced the cost of an ECG test to just $1 per patient.

The Economist goes on to explain, in a special report on innovation in emerging markets, what these developments represent: a reinvention of the product development cycle for markets with very limited resources. Like Japan before them, which developed lean production systems to compensate for a lack of physical space and material, India and China (and a few other smart entities) are developing production systems for buyers without much money, mobility or infrastructure:

[Companies] are taking the needs of poor consumers as a starting point and working backwards. Instead of adding ever more bells and whistles, they strip the products down to their bare essentials. Jeff Immelt, GE’s boss, and Vijay Govindarajan, of the Tuck Business School, have dubbed this “reverse innovation”. Others call it “frugal” or “constraint-based” innovation.

Chances are that you, like me, live in an affluent society and are familiar with unnecessary options. Most of us have more consumer choices than we need or could hope to sample, choices that don’t make our lives that much better or happier. Most of us have never used 80% of the buttons on a standard remote control or could even identify what they do. Most of us with elderly parents wish someone would invent a computer with only four functions: “Read email,” “Write email,” “Send email,” and “Check the weather forecast.” Most of us can, for a few cents, supersize the meal we just ordered, even though what we ordered was enough to satisfy us just a few moments earlier. Collectively, we’re hooked on the idea that more is better — and in our low-cost, resource-rich world, that’s an idea both easy to indulge and profitable to sell.

Frugal innovation is what the other 80% of the world needs. In places where resources are scarce but needs are great, solutions have to be affordable, reliable, resilient, easy to distribute, and easy to use. Consumers in these places don’t need the most complete, top-of-the-line, every-optional-extra product or service: they need something quick, sturdy and accessible, something tailored to their restricted circumstances. For a good example, watch this scene from Apollo 13, where the ground crew had to find a way to fix a carbon dioxide buildup in the capsule using nothing but the materials that the astronauts themselves had in their crippled spaceship.

Frugal innovation is also what the legal services marketplace needs. This marketplace, led by its dominant providers in the legal profession, has always tried to offer more and costlier services to more and richer clients, time after time. Its business model assumes that the ability and willingness of clients to pay whatever is charged for the most comprehensive services is inexhaustible, despite the reality that that particular market feature peaked long ago. We continue to focus our efforts on offering more and more services to fewer and fewer people at higher and higher prices. In the short run, hardly anyone benefits except us; but in the long run, we won’t either, because our product development cycle is now out of step with the growing reality of the marketplace.

Most people have very limited resources to spend on legal services, and I don’t just mean money. Obviously, the price of legal services is what discourages many people from seeking them out, but there are other and more acute resource deficits. Time is a big one: the legal process can be tortuously lengthy and complicated, especially in litigation. Moreover, lawyers are notorious for making clients wait months to hear from them. Even the process of learning about your legal situation and finding a lawyer who can help you is so diffused and decentralized that many would-be clients give up after the first hour of searching. In addition, most people work or have family responsibilities during the day; where do they find the time to make their way downtown to a law office during regular hours? These are resource shortages, just as a lack of money is. But by and large, the legal profession hasn’t concerned itself with these shortages, because we’ve made a good living serving the minority of the population that’s willing and able (or obliged) to purchase our services on our terms.

The winners of the 21st-century legal marketplace, however, will include those who offer frugal legal services. They’ll figure out the resource restrictions under which most people labour and will modify their products, services and delivery systems accordingly. They’ll strip down their offerings to the bare minimum to ensure functionality, remove unnecessary features, and automate and externalize as much of their process as possible — not just to streamline costs, but also to give clients hands-on access to those services, to be used on their terms. Frugal innovators will relentlessly simplify and de-accessorize legal offerings, constantly asking themselves: can we make this easier? Are there steps we could remove, features we could do without, elements that add cost without adding equivalent value? Can we make this mobile, scalable, adaptable, or 24/7-accessible? If you’re not asking these questions, I can promise that your future competitors — both inside and outside the profession — already are.

There are three good reasons why lawyers should embrace frugal innovation. The first is that it opens up much of the dormant legal market, teeming with would-be clients who can’t afford much but are absolutely willing to pay it. It’s a categorical falsehood that you can’t make money on low-cost products in low-income markets; ask Wal-Mart and McDonald’s, to name just two consumer-friendly corporations, about their most recent quarterly profits. There’s only one rule for turning a profit: spend less than you charge. The recent leaps forward in technology, automation, project management, unbundling and other cost-reducing measures in the law have provided lawyers the tools to do this. Frugal legal services can generate a profit, so long as they’re offered in an efficient, systematic, cost-conscious way.

The second is that frugal innovation in the law would go a long way towards making access to justice a reality for millions of people. Regular readers will know how outrageous I find our current complacency with a legal system that’s accessible only for institutions, the well-off, and the very poor. The unacceptability of heart disease running rampant in India, with only clunky, immobile, expensive ECG machines to deal with it, is what led GE to develop the Mac 400. What is the legal profession — specifically, what are our biggest, richest, GE-equivalent law firms — developing to meet the needs of millions of people whose lives are harder than they need to be because they can’t afford traditional legal services?

And third, frugal innovation in the law will lead lawyers to rediscover the power and attraction of the basic. We’ve developed a fondness for complexity, not only because it pays more, but also because it satisfies our risk-averse need to cover off all possibilities. Most clients, however, don’t need all or even most possibilities covered off. They just need something they can afford that meets their present demand. They understand that the less you pay for something, the more you take your chances — they accept this trade-off all the time, in every industry and walk of life, and they’ll accept it in the law too, if we just give them the opportunity. It’s time we ended our infatuation with expensive complexity and began offering affordable simplicity again.

Lawyers, as much as anyone else, have become hooked on the “more is better” fallacy; in the future, thanks to frugal innovation, less will be better. Less will be more profitable, more market-aligned, and more socially necessary than ever. The only thing we really need to change, in order to get there, is our minds.

Today, in 2010, innovation in the provision of legal services is breaking out all over. I won’t even try to list all the innovations and inventions emerging from outside the profession — from LPOs to e-discovery software to online legal information to collaborative social networks — that have helped drive this change. But even within the profession, a quick review of reports just in the last month shows us that:

* AmLaw 20 firm WilmerHale announced plans to move its back-office functions to the Dayton, Ohio, area, employing nearly 190 people in tech and billing support, conflict checks, data entry, finance and human resources. Current WilmerHale employees in these sectors will have the “opportunity to relocate.” The firm wants to consolidate services, reduce costs and increase ease of access (and an incentive package didn’t hurt, either).

* Major firms like Dechert LLP and Duane Morris are embracing project management and all the benefits it can supply, including greater efficiency, more accurate pictures of profitability, and better communication with clients. Taking advantage of training programs and years of financial data on previously billed work, these firms intend to use project maangement to compete effectively for fixed-fee work.

* Global giant Clifford Chance is overhauling its associate bonus system, taking the once-unthinkable step of reducing the role of hours billed in that calculation. More important considerations for bonus payouts will now include overall achievement, effort, business and technical skills, client satisfaction, teamwork and community work.

* It’s not all big-firm news. A new small firm in Bristol, England, intends to practise law with no staff and no paper. Temple Bright LLP is using online providers for as many functions as possible and passing on the efficiency savings to its commercial clients. One of the founding partners puts it simply: “Our model for the modern legal firm is to strip out many of the overheads which make traditional practices expensive.”

* A lawyer and an ADR provider have jointly created what they’re calling a “litigation prenup” — a model contractual agreement that companies can use to limit litigation costs. It includes a mandatory prelitigation dispute resolution section (executives must negotiate directly with each other) and  limits on discovery, including interrogatories and requests for production of documents.

* And finally, Legal OnRamp, the leading online collaboration site for lawyers and in-house counsel, received an increased investment from founding investor Orrick, which itself is one of the most innovative large firms around. The announcement contained phrases, such as “collaborative resources,” “enhanced efficiency in the legal service model,” and “the transformation of the law firm-client relationship,” that will only become more common.

Keep in mind that none of these reports are about things that might happen, or that would be nice to see come about, or that constitute someday-blue-sky thinking: they’re happening right now, and they represent the serious commitment of a lot of time, money and resources by some smart, successful people in the legal profession. We’ve moved from talking about innovation to chronicling its actual on-the-ground implementation, and that’s a remarkable sea change to have taken place in just six years.

So as the 2010 InnovAction Awards launch, it’s my opinion, as the Awards’ chair, that they’ve never mattered more than they do this year. Call it a critical  mass, a tipping point or a watershed, the reality is that we’re at the threshold of a major and permanent shift in law firms’ approach to the legal services marketplace. The default setting, which has been “status quo” for a long time, is switching to one that welcomes opportunities, rewards efficiencies and rethinks traditional ways of going about our work. We need to pile into that default setting with enough weight and force to drive it over that threshold point. Before you know it, we’ll be in a legal services marketplace where even lawyers are glad to seize opportunities that can enhance their responsiveness and competitive position.

The details of the InnovAction Awards are laid out in this post at Slaw and in another one at LinkedIn’s Legal Innovations Group. The Awards, which have been given to small firms, global giants and non-firm entities in five countries on four continents, can cover everything from legal service delivery to legal marketing, from technological systems to client communication, and from law firm management to access to justice. The criteria are simple:

1. Absence of precedent (The innovation must have never been done, or done quite this way, before)
2. Evidence of action (An innovative idea was transformed into action, and not merely reflective of best intentions.)
3. Effectiveness of innovation (There is some measurable outcome that indicates the innovation is accomplishing what it was intended to do.)
4. Recent implementation (Action must have taken place within no more than three years prior to this entry)

Last year, the College instituted an Honourable Mention category for innovations that, while they might not be completely original, were executed or delivered in a unique way or to an unprecedented degree. So even if your innovation wasn’t the very first to appear, the way in which you did it might very well meet the Honourable Mention criteria. The entry fee for each submitted innovation is $US325. Complete details of the Awards, including the entry form, FAQs, the benefits of winning and a list of past winners, is available at the InnovAction home page.

Innovation in the law is an unqualified good thing, and if your firm or service provider has been encouraging and implementing it recently, now’s your chance to get the credit you deserve. If you have any questions or would like more information about the Awards, please don’t hesitate to drop me a line.

Okay, strictly speaking, it’s a report rather than a book. But I’m so interested in talking about this publication and its importance to the developing field of alternative fee arrangements (AFAs, a topic we’re focused on these days at Edge) that I’m willing to blur genres — and in any event, at 150 pages, it’s not like this is a pamphlet. The LegalBizDev Survey of Alternative Fees is written by consultant Jim Hassett, Ph.D., and is based on interviews with managing partners, senior lawyers and AFA managers at 37 of the largest 100 law firms in the United States. To a critic who objected that a self-selected 37% isn’t a statistically sound sample, Jim replied that while his results may not be scientifically “good,” they’re the best available resource on the subject. That is unquestionably true — but this report is also good, and is worth your time.

The Survey takes an start-to-finish look at AFAs: how they’re defined, how they developed, what drives clients to push for them, bidding strategies for lawyers who want to use them, nine common examples of AFAs, recommendations to both lawyers and clients for maximizing their effectiveness, and what the future holds. Although the author delivers content throughout, especially at the start and finish, the bulk of the Survey is drawn from the respondents themselves, in their own words. That last point is not insignificant: because Jim guaranteed anonymity to his interviewees (the 37 firms are named, but no comment is matched with a firm and all comments are anonymous), he received some wonderfully blunt opinions. Here’s one of my favourites, a quote from a law firm chairman that would never be made for attribution:

“I think it hurts lawyers’ egos to suggest that all of the work that they do is not brain surgery. And when you suggest that they might be able to get away with using people who are not junior brain surgeons, almost everyone will say, ‘Oh, no, no, no. To do my stuff, you really need to be a brain surgeon like me.’ And it’s just ridiculous. I think that there’s an odd and irrational pride in wasting money. It’s gratifying for people to brag to their friends about how much they have to pay summer associates, and how much they pay starting associates, like, ‘Isn’t this a crime? We’re paying young associates more than judges, but hey, they’re brilliant. And they work for me.’ It’s an odd situation. But I think we’ve been able to do that because the market has paid to deal with it. And that may all be over.”

This candour (which, by the way, speaks highly of the trust these lawyers place in Jim Hassett) pays great dividends in the form of unalloyed honesty from these law firm leaders, allowing us to see how they approach AFAs, what systems they set up to deal with them, and the successes (and sometimes failures) that resulted. It’s a pretty safe bet that these folks didn’t share everything they knew on the subject, and at least some of their reports and comments must have been a little self-serving or trumped up. But even if you apply that discount, the insights here are remarkable. I don’t want you to forgo the chance to read them all for yourselves, so here are two good ones:

“In the past, where we have proposed unilaterally various fixed-fee arrangements, the clients have turned them down, because they think that if we proposed them, there must be something wrong with them. We have proposed ten alternative fee arrangements for every one that is accepted. Maybe in-house counsel are afraid that outside counsel will sandbag them by building inefficiencies and excess margins into the fixed-fee quotes. … The larger problem with RFPs and alternative fees in general is really the trust issue.”

“One of our problems is that our partners seem to think they have a better product than the people we’re competing with. And so when the client compares our fixed fee with other firms’, they ask how come we can’t do the work for less. [The partners typically reply that competitors are] not offering the same product that we are, so I ask [the partners], ‘Why are we offering a product that the client won’t pay for?’ It’s a whole mindset that will require a long time to change.”

Much of the value in the Survey is derived from these first-person accounts, but Jim also does a service by rounding up, explaining and giving examples of nine common types of AFAs, along with their pros and cons, from fee caps (“the dumbest deal ever,” according to one law firm respondent) all the way up to portfolio fixed fees, limited contingencies, and holdback arrangements. And his recommendations for success in alternative fee arrangements — both to firms and to clients — are especially valuable. I won’t list them all, but it’s noteworthy that his dual sets of recommendations have two in common for lawyers and clients: improve management and focus on value.

Two things struck me when reading through this report. The first is the perhaps surprisingly high level of savvy displayed by these interviewees: contrary to the popular impression of large law firms in general when it comes to AFAs (an impression often reflected in this blog’s entries, it must be said), there are dozens of smart, informed and motivated lawyers in leadership positions within the AmLaw 100 who not only get the need for AFAs, but who are assessing the challenges, exploring options, and developing systems to implement them. If I were running a large law firm that competes with some of these firms, and I hadn’t done any serious work on AFAs within my organization, this Survey would make a chilling read. Most encouraging is the fact that these lawyers have identified the fundamental stumbling blocks to AFA implementation — cultural, financial, infrastructural — and are doing what they can to address them. That recognition doesn’t make these obstacles any less daunting, though.

The other thing that emerges from this Survey is that large corporate clients aren’t doing nearly enough to promote AFA relationships with their outside counsel. The number of times private-practice lawyers express frustration with in-house departments’ reluctance or intransigence to engage in serious AFA discussions is noteworthy: all too often, law firm AFA proposals to corporate counsel are greeted with polite statements of preference for a discount on hourly rates. Nor are corporate departments any better equipped to project-manage or otherwise administer an AFA system than their outside counterparts: more than one respondent cited the difficulty of trying to tell a general counsel that the lawyers in her department are as much the problem as the solution.

Overall, this is a powerful and important contribution to our collective understanding of alternative fee arrangements in law, a subject that Jim notes really is still in its infancy. For all that, the picture does feel incomplete: all the contributions and opinions come from law firms, and the absence of the in-house lawyer perspective leaves you wondering if general counsel might have a different view of the “reluctance and intransigence” problem about which their outside counsel complain. Perhaps a follow-up survey could speak with GCs of Fortune 500 companies, or be coordinated with the Association of Corporate Counsel as part of its Value Challenge, in order to provide another perspective, or perhaps be merged with the law firm survey to give a holistic view of this evolving area.

But on its own terms, The LegalBizDev Survey of Alternative Fees is a significant and very useful guide to understanding not just what AFAs are and how they work, but also the ongoing challenges and roadblocks to their implementation. Every law firm that seriously intends to tackle alternative fee arrangements would clearly benefit from reviewing this work.

1. Two blog posts in the last month at Stem Legal’s Law Firm Web Strategy blog have focused on social media in the law firm enterprise context. Here’s what I had to say about Facebook for law firms and Twitter for law firms.

2. Also at Stem Legal is an announcement about our new Media Strategy Service, under which I’ll be providing communications, media and social media consulting to law firms and legal organizations.

3. Over at The Lawyers Weekly, my new column — a primer on legal process outsourcing and what its impact on the legal services marketplace will look like — has now been posted.

4. Christopher Hill at Construction Law Musings kindly invited me to provide a guest post on how to be an effective construction law client, but it applies to clients in any area of law practice.

5. Shortly after addressing the ABA’s Bar Leadership Institute in Chicago last month, I recorded a series of very short interviews with ABA Now, in which I talked about new mentoring approaches, the evolution of preventive law, and the importance of relationships for bar associations.

6. Before my presentation to a symposium at Georgetown Law School last week on the future of law practice, I recorded a brief interview with Greg Bufithis at MyLegal.com that talked about some of the changes now underway in the legal services marketplace.

• It’s easy to understand.
• It’s inexpensive to implement.
• It lowers costs.
• It improves quality.
• It enhances communication.
• It facilitates lawyer training.
• It makes fixed fees profitable.
• It makes clients happy.

If it could cure cancer and direct an Oscar-winning movie, it could hardly be a more attractive proposition. For a profession suffering from aggravated clients, shrinking revenues, competitive inertia, archaic business practices and system waste, it’s the nearest we’ll come to meeting the definition of “panacea.” And yet, with few (but increasing) exceptions, there’s not much enthusiasm for it among lawyers and law firms — there’s an odd reluctance to embrace something that clearly delivers so many benefits. Identifying the source of that reluctance tells us something very important about lawyers and our capacity to adapt to the new legal marketplace.

The good news is that project management is starting to catch on within the profession. Two excellent recent articles in the legal press illustrate this, one in Canadian Lawyer (in which I’m briefly mentioned) and one in the Legal Intelligencer, which tells the success story of a law firm (Dechert) that took project management seriously, engaged a consultant (Pam Woldow) to help, and can already see the benefits. More good news comes courtesy of Tim Corcoran’s terrific blog post that addresses common concerns about legal project management and should be read by every firm whose lawyers are generating static about LPM. There’s also a very good book and a very good blog about legal project management by Steven B. Levy. In short, there’s a growing wealth of resources and reasons for lawyers to leap onto the project management express — yet this train still has many empty seats.

These same articles point us in the direction of the problem. “It’s pretty tough to get lawyers to change their ways,” a big-firm partner told Canadian Lawyer. A regional managing partner at Dechert entered training with deep misgivings about its broad applicability. “Doesn’t legal project management apply only to commodity practices?” is a question Tim Corcoran has to address. Resistance to innovation, yes — we all know that fits lawyers to a T. But what really comes across from these accounts is a sense that lawyers aren’t trying project management primarily because they don’t want to. It’s a resistance that does not, I think, have much to do with lawyers’ inability to grasp project management’s features or benefits. I think it has much more to do with lawyers’ distaste for procedure, systematization, methodology, routine — with process. For most lawyers, as my Edge colleague Rob Millard says, “process is a dirty word.”

Why is that? I think it’s because we lawyers pride ourselves on our capacity for ingenuity: the unexpected insight that makes a deal possible, the brilliant argument that turns a trial around, the stroke of inspiration that not only saves the day but also shows off just how bright we are. Smart people are drawn to the law like moths to a flame, and one of the things about smart people is that we prize raw intelligence over plodding procedure. We use loaded words — drudge, mindless, humdrum, grunt, and several less polite adjectives — to describe legal work that requires limited imagination, consistency over brilliance, and a lot of attention to detail. Any real reflection on the matter will show that work of this nature is no less valuable or worthy than the racier, hyper-intelligent work most lawyers crave — but in our professional culture, there is a clear distinction between the two, and it matters. (In this same vein, note the tone in which lawyers utter the word “commoditization.”)

It’s a distinction, unfortunately, that we draw at our peril. Our competitors, some inside the legal profession but most of them outside it, have no qualms about embracing project management and the systems-based benefits it confers. They look at the way lawyers have traditionally gone about their work and they see countless inefficiencies just asking to be exploited. Whenever a legal task gets outsourced to India or assigned to a computer program, project management is at work, exposing all the ways in which traditional lawyering not only wastes time and money but also fails to deliver the most effective and accurate result. We give document review and due diligence tasks to bright associates with zero training and zero interest in the job; our competitors apply rigorous scanning, screening and review templates by trained workers who actually like to do this sort of thing. Who do you think will get better results?

The day of the haphazard lawyer, who pursues a solution by intuition, experience and the loosest possible timetable, is drawing to a close. In his place is emerging the process-driven lawyer: disciplined, procedural and systematic, who understands that madness lies not in method, but in its absence. Most of us don’t like that idea. We’d much prefer to maintain the image of the ingenious lawyer who triumphs by intellect rather than by procedural discipline. It confirms our belief in our innate intellectual advantage over non-lawyer competitors — and, frankly, it makes us feel better about ourselves. At some level, we take offence at the idea of project management because it seems to reduce this wonderful profession of ours to little more than a series of steps, a collection of flow charts, that anyone could follow. (It’s not just lawyers, either; doctors are notorious for refusing even to follow hand-washing checklists. Read John Gillies’ excellent review of Atul Gawande’s The Checklist Manifesto at Slaw for some great insights on legal project management.)

The truth is, much of what lawyers do can be charted, diagrammed and proceduralized, and both the quality and the cost will be better for it. But that doesn’t mean there’s no room for smart, creative lawyers in the future. For one thing, systems don’t need to be straightforward and monotonous. More often than not, especially in the law, they’re complex and challenging, and they can easily be made elegant, precise, finely tuned, honed to a keen edge — the imagery of swordsmanship is intentional. And even within systems, a lawyer’s unique judgment, analysis and creativity can emerge. I teach a children’s liturgy class on Sundays, during which all the kids are given the same picture to colour; working from the same template and the same box of crayons, each of them produces vividly different and personalized pictures. The same can and does happen when lawyers work within systems.

Legal service providers who adopt systematic processes like project management will be more successful than those who don’t; there’s no doubt in my mind about this. So like it or not, you’ll have to embrace this new methodology. But what I really want to urge you to do is, in fact, to like it. Process is not a diminution of your intellectual gifts; it’s the honing, disciplining and improvement of them. Frameworks and road maps have never hurt anyone, and they’ve gotten things built and lives changed far more effectively and comfortably than we could have managed in their absence. Take a new approach to process — look at it with a fresh eye, and see what it can add to your professional life rather than what it can take away. Process doesn’t have to be a necessary evil; it can easily be a necessary good.