The bold experiments of Arizona and Utah to relax the rules against fee sharing with non-attorneys are still in their infancy, but the prospect of these changes to Model Rule 5.4 is among the most exciting we’ve seen in American law in years to have. To help me analyze the opportunities ahead, I spoke to an ABA-certified legal rebel, law professor Bill Henderson, last week. Henderson’s research, previously named America’s 100 Most Influential Lawyers by the National Law Journal and America’s Most Influential Legal Educator by National Jurist Magazine, focuses on applying cutting-edge metrics to the legal profession.
As was to be expected, Henderson had given thought to the new fee-sharing rules. As Henderson sees, with the relaxation or removal of their local versions of Model Rule 5.4, Arizona and Utah are ahead of the inevitable next step in the evolution of law: productization.
The revolution comes from inside the house
Henderson is not buying the argument that allowing outside investment in legal services will suddenly solve long-standing problems of consumer access to legal services. “If we want to talk about access to justice, let’s talk about overhauling the court system and settling disputes over small stakes, and really wondering if we need a personal adversarial process for $ 2,000 cases. No, this has nothing to do with rule 5.4. “
Rather than capital being the driver of access to legal services, Henderson sees the greatest innovations from existing law firms involving technology and business professionals as investment partners.
“The advantage of the relaxation of the rules is not the capital, but the multidisciplinary cooperation of higher quality. It takes so long to bake these business models that it scares venture capital and private equity. LegalZoom has been around for 20 years. Axiom has been around for 22 years. It’s good business, but not disruptive. UnitedLex has been around for 15 years and has not had a major liquidity event. These are long-bake problems. By relaxing from 5.4, you can invite someone into the company as a technologist and make them a partner. Now they are in for the sweat balance, and that can lead to better dynamics for these longer-term baked goods. “
Bring the talent
Some of these technology-based innovations have already taken place in law firms, but of course Rule 5.4 has given them a bottleneck. Henderson gave me the example of Eric Wood at Chapman and Cutler.
As Henderson relates, Wood “happened to be a lawyer, but he was a technologist. He scoured the internet for fantasy basketball data and was very good at analyzing data for fantasy basketball. “Wood reached out to his company and suggested they develop tools to automate their own products. For his first project, he automated largely non-billable parts of the closing process for loans, which his company processed in a product called Closing Room. It was a complete success. Wood’s automation efforts lowered the cost of customer shutdowns, reduced the likelihood of errors in the documents, and reduced write-offs. Chapman and Cutler sold Closing Room to NetDocuments in 2018.
Wood made his partner a partner because of his technological contributions that enabled him to participate in the upward trend that he had helped create. Since he was a lawyer, it was an easy step. The problem for the entire profession is that many people can create the tool that Wood made, but the vast majority don’t have a law degree. Why bother hiring a bunch of attorneys for one salary when literally every other industry is rewarding your contributions with equity?
This hurdle no longer exists in Arizona and Utah, meaning companies in these states have access to a deeper talent pool than ever before.
Briefs, burgers and bonuses
My conversation with Henderson kept coming back to the concept of “productization,” the process of taking an abstract concept or bespoke service and turning it into a product that can be widely sold to the public. A hamburger is a broad concept that can be made in thousands of ways. A Big Mac is a product.
If you need an example in the legal field, consider wills. In the past, the only way to get a will was to pay an attorney to draft a will. Now consumers can purchase an off-the-shelf basic will from LegalZoom or a number of other providers, and the chances are it might work well for their needs. The will was produced. Not much else in our job.
Henderson sees the law being produced whether we like it or not. “This is one of the final stages of personal legal advice. Yes, hourly billing is very lucrative. Yes, we are fortunate enough to have clients, but for today’s junior partners, this will fall apart. “Some law firms, like Littler in the labor law area, have already made progress.
Law firms that produce their work and develop tools to solve customer problems are rewarded on several fronts. First, customers love new tools, and they love the predictability of their spend that productization gives them. The legal profession hasn’t seen too many better mousetraps in the past few decades, so the law firms that build them can go banking.
The productization of services also tends to make them cheaper, meaning consumers and small businesses suddenly have access to essential services that they could not previously afford. Henderson believes that the relaxation of rule 5.4 ultimately responds to the problem of access to justice.
Return of the company
Interestingly, law firms could regain institutional strength that has largely diminished over the past few decades. As I discussed in this column, one barrier to law firms making long-term investments is that clients are increasingly tied to individual lawyers rather than the firms themselves. When you take money from the stock pool to invest in the company, the chances are the rainmakers who pay for the investment will go to a company that leaves more money in the pot. However, when customers fall in love with a company’s proprietary tools, suddenly both the customer and partner tend to stay close, making it easier to keep investing in the company itself.
Investing early in tools developed by technologists could start a positive cycle that empowers companies smart enough to move early. On the other hand, Henderson argues, “The market is going to dissolve here by itself. There will be quite a number of companies that are underinvested and basically have to move into rescue merger mode. I think that’s going to play out in the next 15 years. “
James Goodnow is the CEO and managing partner of NLJ 250 Fennemore Craig. At 36, he became the youngest known executive director of a major US law firm. He has a JD from Harvard Law School and two corporate governance certificates from MIT. He is currently attending the Judge Business School at Cambridge University (UK), where he is working towards a Masters in Entrepreneurship. James is the co-author of Motivate millennials, which reached number one on Amazon in the category “Business Management New Release”. As a practitioner, he and his colleagues created and operated a technology-based company Practice of the plaintiff and business model. You can connect with James on Twitter (@JamesGoodnow) or by email at [email protected].