Adolescence

Last week we had two events that drew interest. The first, of course, was the NFL draft. Hundreds of players competed for a career that lasts on average 2.66 years (down from 4.99 years in 2008). The total number of NFL players hovers around 1,700. Around 25% of the players end each year injured or unable to play for another reason. For some who make the cut, the prize is an NFL career no matter how short. For others, it is the money.

The second, of course, was the annual release of The American Lawyer’s list of the 100 largest U.S.-based law firms, based on revenue. The average career of a lawyer is 10 times than that of the average NFL player. Many individual law firms have more than 1,700 lawyers and it is rare for a law firm to place a lawyer on the firm’s injured or unable to practice list. For some lawyers who make the cut into Big Law, the prize is the chance to make equity partner at a firm and, at the largest, receive annual pay in the millions. For others, the prize is the chance to pay off some college and law school loans.

The departure rates from the NFL and Big Law are high. The number who make it to the top earning echelon is small (the percent of equity partners compared to number of lawyers in the firms is now down to about 20%). Neither football nor law presents a high probability of making it to wealth and fame.

Many sports fans live for the draft and many lawyers live for the AmLaw 100. Neither event means much in the modern world. Many first round NFL picks flame out. Some law firms will disappear in a few years. What you do is more important than where you land on a list.

I find the AmLaw 100 list interesting because it reinforces my belief that the legal industry’s maturity level is around 100 years behind the rest of the world. Lawyers take pleasure in watching themselves and their industry live through events that for others happened long ago. We are living through an instance of Edmund Burke’s saying, “Those who don’t know history are destined to repeat it.” For those fond of movies, we are at the point where everything goes into slow motion. You see people, cars, buildings, and debris float gently through the air. You know there is a crash, but in slow motion it seems more like a complex ballet than a tragic and unnecessary event.

The Legal Industry Goes Where Others Have Gone Before

Looking at the arc of other industries will help us see the possible arc of the legal industry. Cast your mind back to the beginning of the 20th century.  We will start with the retail industry. Richard Warren Sears and Alvah Curtis Roebuck founded Sears, Roebuck & Company in 1886. It started as a watch company, issued its first catalog in 1888, and they gave it the name we know in 1893.

Kmart, joined with Sears, traces its roots to 1897, though most consider 1899 as the official start date. S.S. Kresge founded the company with his friend John McCrory. They operated stores under the S.S. Kresge banner until the 1960s, when the company opened the first Kmart store (beating Walmart by four months).

James Cash “J.C.” Penney opened his first store in 1902. By 1913, that store had grown into a small chain and the company took on the JCPenney name. At one time JCPenney was the yin to Sear’s yang. A large shopping mall thrived with Sears as the anchor tenant at one end and JCPenney at the other.

The late 19th century and start of the 20th century saw a retail landscape dominated by small, mom-and-pop dry goods stores and early groceries. The large retail stores that dominated the landscape by the 1950s and 1960s were just getting started.

Today, most of the large retail chains have died and the remaining few struggle. Some predict 2017 will pass all prior records for number of retail stores closing through bankruptcy. Many point to the rise of ecommerce as the new force killing off the old model. The remaking of the U.S. retail scene has many causes. But, the pattern of moving from a craft structure through consolidation to a few survivors is not unique to that industry.

Steel, aluminum, banking, and insurance, are some of the many industries that have followed a similar pattern. The automotive industry is another. At the turn of the 20th century, automobile making was still a cottage industry. There are high-end specialty care makers today, but for the rest of us there are a few companies that dominate the showrooms. If you want a service industry that went through the pattern, look at public accounting. If you want another service industry struggling to survive, look at journalism. According to Clayton Christenson, consulting is now following the arc of the legal industry.

A Peak At The Legal Industry’s Future

Let’s look at the arc of the legal industry during the prior 40 or 50 years. Once there was a large middle class of law firms. Now we see a few regional firms. The majority of those firms that sat in the middle either merged upstream or broke apart. The upstream mergers, marked by larger firms joining into much larger firms, continue the consolidation trend. The cottage industry of law is evolving into a proto-retail or automobile industry.

If we look at the current legal industry structure we see a faint image of the future. In articles, you read about industry “stratification.” In size, we have the verein firms. These are behemoths by historical legal industry standards. Compared to service entities outside the industry, they are small. The largest public accounting firms and consulting firms dwarf the largest law firm. The trend, however, is unmistakable. Some firms are positioning themselves to be the “Big 4” of the legal industry.

Below that size we have consolidation in the second tier. This tier runs deep and it will take years, perhaps decades, to sort through who will have staying power. Firms in the second tier will face greater challenges as the practice of law evolves. They must either find a niche or face extinction. Differentiation will be key to survival.

The emerging picture also shows us that we should distinguish between size and profits. Historically, we have linked size to profits. Equity partners at the largest firms made the most money. As the industry has evolved, the link has cracked. The largest firms are not the most profitable. That isn’t the same as saying partners in those firms struggle. But we know that being the biggest jewelry chain is not the same as being Harry Winston jewelers. As most service businesses have found, at some point you must choose. You can be the largest or you can be the most profitable, but being both seldom works.

In the background of our picture, there is a hazy structure. The vague outline is there, but we can’t quite make it out. It is the possibility of allowing those who are not licensed to practice law to own law firms. If or when this happens, the picture will change. In theory, law firms will emerge that can compete in size with other professional services firms.

As in the other industries, we will see many models for legal services providers as the industry evolves. That transformation is underway. The most remarkable element of the transformation is that lawyers held it off for so long.

The Legal Industry’s Adolescence

The wild card—the thing that could change the picture overnight (remember, the iPhone is barely 10 years old)—is technology. Retail, automobile, and other industries went through consolidation and transformation during immature technology periods. The legal industry is going through its adolescence in the midst of a great, technological upheaval. Amazon emerged from technology to disrupt the retail industry and Tesla emerged to disrupt the automobile industry. But, both industries had gone through adolescence long before the disruptors appeared. Not so for law.

Negotiating adolescence is tricky and will be so for the legal industry. Amidst the confusion about artificial intelligence, automation, and blockchains, we have new ideas such as self-completing contracts. We have to tease out what lawyers do from the routine task of getting it done.

Part of getting through he experience is having an idea what we want life to be like afterwards. What do we see as the roles of lawyers in society? What will those lawyers contribute that adds value? Adolescents go through a phase where they search for their role in the world. Lawyers have not faced that challenge before, but we face it now. Answering could be as tough as making it in the NFL. I look forward to seeing how we do.