In 2008, the Motley Fool asked Blockbuster CEO Jim Keyes how he was responding to his biggest competitors. His answer? Not at all. "Neither RedBox nor Netflix are even on the radar screen in terms of competition," he said. It wasn’t a new attitude, either. Just three years earlier, Keyes’ predecessor passed up the opportunity to buy Netflix, the video-by-mail turned video-by-streaming company with a $94 billion market cap, for a mere $50 million.
Today, Netflix is one of the most powerful media companies around, while almost no Blockbuster stores remain in operation. Life comes at you fast.
So, what does Blockbuster, the one-time corporate leader turned cautionary tale of failure, have to do with the legal profession? Hint: it has nothing to do with VHS tapes and everything to do with failure to innovate.
It’s quite possible that the legal industry is at a similar tipping point. Those who ignore the changing world could find themselves like Blockbuster. Those who take advantage of emerging technologies could see themselves gain a Netflix-sized advantage.
You’re Doing It Wrong: Law's 10 Years of Stagnation
Many law firms today are in a position similar to Blockbuster’s in 2008. On a surface level, that’s not a bad place to be. In 2008, Blockbuster operated over 6,000 retail stores. It had doubled down on some new technlogies, Blu Ray and HD DVDs, and it was considering taking over Circuit City. Revenues had been slipping, but the rental chain still brought in $5.29 billion that year, a hefty chunk coming from late fees alone.
It’s not like Blockbuster wasn’t focused on the fights ahead of it, either. It just had the wrong fights in mind. Keyes cited WalMart as his major competition, the Apple store as his inspiration for the company’s future. He was wrong.
And that’s why Blockbuster circa 2008 and the legal industry today have so much in common.
A new report, the 2018 Report on the State of the Legal Market, produced by Thomson Reuters and Georgetown Law’s Center for the Study of the Legal Profession, concludes that many, if not most, law firms have misjudged the challenges ahead and adopted a strategy of “consensual neglect.” Consensual neglect is defined as “the tendency of organizational decision makers to tacitly ignore events that undermine their current strategy and double down on the initial decision in order to justify their prior actions.”
As Thomson Reuters explains:
Strategic blind spots, decision-making inertia and unwillingness to adapt strategies to changing conditions can lead decision makers to ignore signs that the world has progressed and current strategies may not be working.
The report is a sobering read, full of chart after chart showing stagnating growth, limited demand, declining productivity. Some lowlights:
Demand: Demand for legal services was essentially flat in 2017, continuing a 10-year-long streak of little to no demand growth. Where demand was increasing, it was increasing slowly. Corporate practice generally saw demand grow 1 percent, patent litigation 0.7 percent, tax 0.2 percent. Where demand declined, it declined at a greater rate. Bankruptcy demand was down 3.9 percent, litigation down 1.3 percent, real estate 1 percent.
Productivity: Productivity, measured by hours worked per month, per lawyer, remained stagnant, averaging 121 hours. That’s the same as 2016 and 13 hours below 2007 rates. The total cost of those lost billable hours? A loss of $74,100 per lawyer.
Standard Rates: How are lawyers responding? By raising rates. “During 2017, law firms continued to raise their standard rates, albeit by a fairly modest 3.1 percent,” according to the report.
Realization: As rates have risen, the ability to collect has declined. Collection realization—that is, actually getting paid for your billable work—has dropped from around around 92 percent of standard rates in 2007 to around 80 percent for Am Law 100 firms and 85 percent for Am Law Second 100 and midsized firms today.
Profit Margins: Flat demand, declining productivity, and lower realization rates combine for static profits. Law firm profit margins were flat in 2017, having trended steadily downward for the last decade.
What’s that mean? A whole lot of treading water. But you can only doggy paddle for so long. When the next big disruption comes along, something like an economic downturn after the past eight years of steady growth, many firms will be ill prepared to withstand it.
The problem is that, when the next economic downturn occurs, the levers that law firms used to mitigate the impact of the last recession are not likely to be as effective. This is in large part because firms would be starting from a significantly lower base than they enjoyed in 2007 – e.g., revenue per lawyer is lower than at the start of the last downturn, the ranks of equity partners can’t easily be trimmed much more than they already have been, and there is every indication that client resistance to ongoing rate increases is stiffening and not weakening. All of which suggests that the negative impact of the next downturn could be fairly severe.
Things are likely to get worse before they get better. Despite the past years of general economic growth, demand for legal services has been flat or declining. Survey after survey show that high-spending corporate customers are bringing more legal work in house. Meanwhile, alternative legal service providers are experiencing rapid growth. While their estimated overall revenues pale in comparison to total U.S. law firm revenues—$8.4 billion vs. $275 billion—almost all of their growth has been within the past few years, and almost all of it has been based on replacing services once provided directly by law firms.
“What is becoming increasingly clear is that the market in which law firms are required to operate today may in reality be quite different from the one that most law firm partners have fixed in their minds,” the report states. “So far, the realignment of competition across the legal industry has been limited, but the direction of movement is clear and the pace of change is accelerating.”
Opportunities for Change, Opportunities for an Advantage
Of course, it’s not all doom and gloom. There are possibilities for reformation, the report notes.
To be successful in addressing the new market realities, however, it is essential for firms to listen carefully and respond proactively to the concerns of their clients. And those concerns—at least since 2008—have been driven by consistent client demands for greater efficiency, predictability, and cost effectiveness in the delivery of legal services.
Alternative staffing strategies, flexible pricing models, work process improvements, and innovative technology can all help firms respond to their new realities, even to thrive in them.
In fact, here’s where firms who have been shut out of past opportunities have a distinct advantage. In the discovery context, to handle a document-intensive case several years ago meant sending work out to expensive vendors and taking on six-figure consultants. It often meant going head-to-head against giant firms who were investing huge sums in on-premises discovery systems, and often feeling outgunned.
Today, many of those firms are still stuck on that dated approach, an approach of consensual neglect. They’re hanging on to their on-premise technologies years after their utility has passed. They’re bringing in armies of contract attorneys for costly, brute-force doc review projects. Or they’re locked into a vendor-based approached that is slow, expensive, and risky. And they’re not willing to change. Indeed, they don’t view their approach as a problem. They’re Blockbuster.
Smarter, nimbler firms aren’t on equal footing. They’re at an advantage. Today’s innovative legal technology has greatly reduced the barrier to entry for firms looking for transformative legal tech. Thanks to the cloud, everyone from Big Law equity partners to pro se litigants can access some of the most powerful legal technology available.
They don’t need massive investments in infrastructure, a lengthy, expensive contract, a dedicated IT team, or even extensive training. They just need to realize how some simple changes can benefit their processes, automate their unprofitable tasks, and allow them to bring in more billable hours.
The cloud made Netflix. It killed Blockbuster. Which are you?