Transformative Practice: will the traditional law firm model dominate much longer in Canada?

It’s already beyond question that the traditional law firm model will not survive as the virtually exclusive method of delivering legal services. In Canada, if it wasn’t already a myth, it went the way of the dodo when paralegals were integrated into the profession’s regulatory scheme but allowed to operate independently. In the UK and Australia, where alternative business structures have been a fact of life for some time – more than a decade in Australia – the mystique of the traditional law firm as the be-all and end-all legal services provider is in tatters.  

But competition will no more put an end to the traditional law firm model than nurse practitioners or drugstores providing flu shots will put an end to doctors practising traditional medicine. Competition may put an end to certain types of law firms and it may put an end to traditional law firms providing certain kinds of services. Just as medical general practitioners may be eased out of the flu shot business, certain services offered by law firms are becoming unbundled. Competition may also change the way in which traditional law firms operate. None of that means that extinction is the only reasonably foreseeable future for the law firm as we know it today. 

Opponents of change will undoubtedly denounce these arguments as sophistry. The problem with the argument, they will say, is that if enough changes are made to traditional law firms by way of ownership, control or otherwise, we are no longer talking about “traditional law firms” at all. But that overlooks an important reality: traditional legal practice is of necessity and has proven to be a moving target. It changes with time and circumstance. So do “traditional” law firms. Consider, for example, that the all-consuming hourly rate approach to billing, now earmarked as the weak link in the way traditional firms deliver services, is just a creature of the last 50 years or so. Before that, the relationship partner “set the fee” based on a number of considerations — a practice that bears remarkable similarities to what cost-squeezed law departments are demanding from their external legal providers today. 

As the fearsome Borg species put it in the television series Star Trek, then, “resistance is futile.” Not because the competition will be intense, but because the very existence of the competition is client-driven both by a public hungry for better access to justice and by a business community that can no longer bear the cost of the inefficiencies built into the way that its external legal advisors have operated historically. 

On this analysis, continuing change in the way legal services are delivered is inevitable. That this will affect the viability of certain law firms and change the shape of others is also inevitable. What is not inevitable is that the traditional law firm will no longer be the dominant legal services provider to the business community, largely because business will always require “trusted advisors.” The shape and extent of the services the traditional law firm provides, however, may change and its traditional functions and functioning may have to take the shape of a new tradition. After all, in today’s fast-moving world, the idea of a “new tradition” is, well, hardly new. 

 

This having been said, it behooves us to inquire just what’s going on out there. How fast is it moving? Whom has it already affected and whom will it affect going forward — and how? In what ways are the various segments of the profession reacting to the prospects for change? 

The looming elephant is, of course, alternative business structures. ABSs are highly controversial because they allow non-lawyers to participate in the ownership of law firms and allow entities other than law firms to offer legal services. Both the UK and Australia permit these structures, and Singapore is about to adopt them, but the American Bar Association has so far rejected the concept. 

The Law Society of Upper Canada set up a working group in 2012, headed by Malcolm Mercer in McCarthy Tétrault LLP’s Toronto office, to look into Ontario’s legal market. The group’s report made it clear that the status quo is not a viable option. It recommended four ABS models, all of which involved partial or unrestricted ownership by non-lawyers, as a basis for further consultation with the Bar. 

The four models contemplate permitting up to 49 per cent non-lawyer ownership in entities that provide legal services only; unrestricted ownership by non-lawyers of entities restricted to providing legal services; allowing 49 per cent non-lawyer ownership in entities that provide legal and non-legal services save for services that pose a regulatory risk; and permitting unlimited non-lawyer ownership in entities providing legal and other services except where a regulatory risk arises. 

In February 2014, LSUC voted to proceed with further consultation. 

Mercer is unwilling to predict the outcome of the consultation, but suggests that the “implicit model” in the report is that of a regulated entity that would have no restrictions on the proportion of ownership by non-lawyers and that would provide both legal and non-legal services — in other words, the most liberal model. 

“We’re not talking about deregulation,” Mercer says. “We are talking about licensed entities controlled or regulated by the Law Society that will be subject to the same fiduciary, confidentiality and conflicts rules to which the profession is now subject.” 

Mercer is a member of the Canadian Bar Association’s Legal Futures Task Force whose August 2014 report mimicked the LSUC report in its insistence that the status quo is not a viable option for the profession. 

While the CBA report focuses on innovation for the profession generally, its core recommendations would also permit ABSs, including multidisciplinary partnerships, “on a carefully regulated basis” that would shift from the current system of regulating individual lawyers to entity regulation that would feature proactive compliance-based regulation of law firms. 

Both the CBA and the LSUC processes are at an incipient stage. In neither case have the recommendations become organizational policy. “What Convocation authorized was a discussion with stakeholders about the advantages and disadvantages of ABSs,” Mercer says. 

The CBA process is also embryonic. “We’re laying the groundwork for at least some of the recommendations to become CBA policy at the February 2015 meeting of the CBA Council,” says CBA Past President Fred Headon, who is also the Assistant General Counsel – Labour and Employment Law at Air Canada. 

Once CBA policy has been formulated, the group plans to engage in discussions with the Federation of Law Societies of Canada. “The Federation is a helpful forum in which to talk with the law societies about how to make our recommendations a reality,” Headon says.  

Reality, however, will have to be achieved on a province-by-province basis that in some cases may require legislative change. “The difficulty is that the various law societies may have different views about ABSs and it would be problematic if the regulatory regime were to differ across the country,” Mercer says. 

Although the law societies have not responded publicly to the CBA report, reaction from individual lawyers has been diverse. “The comments we’ve received have spanned the spectrum from very enthusiastic to the expression of significant concerns,” Headon says. 

ABS opponents contend that non-lawyer ownership will compromise the professionalism for which lawyers have fought so hard. Bradley Wright of The Wright Law Firm in Ottawa, who was elected as a Bencher on four consecutive occasions and is now a Life Bencher (an ex-officio Bencher who cannot vote), told Lexpert following the release of the LSUC report that ABS implementation would undermine the independence of the legal profession for spurious and dubious benefits. “You can find a lawyer in a grocery store in England, and that’s crazy,” he says. 

But Mercer points to the ABS experience in Australia and England to support the argument that entity regulation should alleviate critics’ concerns about change. 

“What the experience abroad shows is that if we can get beyond regulating individual lawyers to regulating the entities, and beyond a system of rules supported by sanctions for non-compliance to a proactive compliance-based system that recognizes how important organizational culture and policy is in terms of mitigating risk, the risk inherent in adopting ABS structures might not be nearly as great as some people imagine it is,” he says. 

The best guide to whether Mercer is right or not may be in an analysis of the UK’s experience in the seven years since the revolutionary Legal Services Act 2007 (LSA) came into force. But it’s important to remember that the legislation was phased in gradually over five years and it was only in October 2011 that the provisions allowing the creation of ABSs took effect. 

“The impact of the LSA has not been transformational so far,” says Tony Williams, former managing partner of Clifford Chance and Andersen Legal, and the founder of Jomati Consultants LLP, a UK-based management consultancy specializing in the legal profession. “I would describe it as more of a slow burn that is leaving important straws in the wind. Still, I’ve often expressed my belief that far less happens in two years than expected, but what happens in 10 can be beyond your wildest dreams.” 

 

Still, regardless of how it is described, there can be no question that the ABSs are making their mark. A May 2014 study by the Solicitors Regulation Authority, which licenses and regulates ABSs in the UK, revealed that 250 ABSs had been created in less than three years.  

The ABS population, the study revealed, was quite diverse. It ranged from law firms that had moved to include a non-lawyer in their ownership structure to large conglomerates, including insurance companies, which were providing legal services in tandem with other professional services.  

“Even local authorities are becoming ABSs and selling the services of their legal departments,” Williams says. 

From the perspective of size, some 52.1 per cent of ABS respondents had less than nine fee earners; 30.6 per cent had 10 to 49; 7.3 per cent had 50 to 99; 7.8 per cent had 100 to 499; and 2.3 per cent had more than 500 fee earners. 

But here’s what frightens the traditionalists: although the 250 ABSs represent less than 2.5 per cent of some 10,000 law firms regulated by the SRA, they had achieved “a significant share of the overall market” in certain areas of legal work. 

More particularly, ABSs accounted for a third of revenue in the personal injury market; captured a significant percentage of revenue in mental health matters; in non-litigation matters such as mergers and acquisitions, estates, and consumer and social welfare law; and were otherwise spread relatively evenly across a range of legal work (see sidebar). 

“The largest impact has been on retail firms, claims management firms, personal injury firms and other firms who do highly commoditized work,” says Richard Turnor, a former Allen & Overy LLP partner and currently a name partner at Maurice Turnor Gardner LLP, a London boutique whose practice includes a focus on professional services firms.  

Indeed, it is this end of the market that has been most vocal in its opposition to ABSs in Canada. 

“Malcolm Mercer and his committees have blindfolds on,” says Patrick Brown of Toronto’s McLeish Orlando LLP, one of the country’s most respected personal injury boutiques. “When it comes to personal injury, access to justice is not an issue because we all work on contingency fees.” 

Citing the impact of Australian ABS Slater and Gordon on PI practice in the UK, Brown maintains that institutionalizing ABSs in Canada will lead to the evisceration of the country’s independent PI Bar.  

Slater and Gordon is a multinational law firm headquartered in Australia that employs more than 2,500 people worldwide. Using the capital generated from its public offerings, Slater entered the UK market in 2012. In less than three years, it has become the seventh-largest international firm in the UK. It has now purchased about one quarter of the UK’s PI practices, which generated some $180 million in revenue for Slater in the 2013/14 financial year; internationally, Slater’s PI practice generated some 80 per cent of the firm’s $400 million in total revenue. 

“Slater and Gordon is looking at coming to Canada if and when we get ABSs here,” Brown says. “If it does, there’s no way even a successful PI firm like ours can compete with an organization that has hundreds of millions in revenue and probably $50 million for advertising. We haven’t even had to advertise so far and if we can’t compete when that changes, how are the guys in Goderich and Stratford [Ontario] going to do it?” 

That’s a good question. It’s one that many independent pharmacists likely asked themselves when Shoppers Drug Mart, Rexall and Jean Coutu started building retail chains that were so much more than pharmacies, turning many pharmacists, the technical owners and professional guardians of the branded stores, into what some saw as little more than glorified employees. 

 

The scenario plays out somewhat differently, however, for the major law firms. 

“We haven’t seen any knockout proposition outside of the retail space in the legal market,” Williams says. “But when we talk about the major firms, we’re talking about tremendously conservative professionals and buyers of their services, so it doesn’t surprise me that meaningful change will take some time.” 

Turnor acknowledges that the major law firms have not been “that impacted” by ABSs. But he senses their time is coming sooner rather than later. “It can’t be long before it happens, largely because of what the Big Four accounting firms are doing in the legal space,” he says. 

What they’re doing is using the ABS structure to set their sights firmly on the legal market. 

“By embracing ABSs, Ernst & Young and PricewaterhouseCoopers, with KPMG not far behind, are presenting a very serious challenge to traditional law firms,” says Charles Hurdon, the Ottawa-based managing partner of Norton Rose Fulbright Canada LLP.  

PwC already has a legal network of 2,400 lawyers in 80 countries and is on record as aspiring to become a top-20 legal services player in the next five years. The accounting giant made its first move into Canada in March 2014, acquiring Toronto-based immigration law firm Bomza Law Group.  

E&Y’s legal network has approximately 1,000 lawyers in 43 countries. In February 2014, E&Y admitted Chinese law firm Chen & Co. into the network and plans to expand its legal services across Asia. 

For its part, Deloitte Legal operates globally in Europe, Africa, Latin America, Australia and Asia. In 2014, it opened a domestic law firm in Shanghai. Its foray into the Canadian legal services market also came last year, when it acquired Toronto document review company ATD Legal Services, which provides a full range of discovery-related offerings.  

Interestingly, Deloitte has taken the position that document review is not legal work, insisting that the lawyers it employs to do the work do not need errors and omissions insurance. LSUC has countered that document review in a litigation context is in fact legal work.  

 

Regardless of the merits of that particular debate, this much is clear: Deloitte and others are growing the range of law-related services they are offering to the same market that lawyers play in. “Others” include the likes of US-headquartered Axiom, which is not a law firm but describes itself as “a new model legal services firm.” 

Axiom, which recently raised US$28 million in a second round of private-equity funding, provides lawyers on a placement, outsourcing or project basis to large corporations that have legal departments. Not being a law firm, Axiom cannot provide services to any business that does not have in-house counsel.  

Needless to say, however, companies large enough to have GCs rank highly among the preferred clients of most large firms. Not surprisingly, then, the restriction has not affected Axiom’s growth. It is now a 1,000-person entity, serving Fortune 100 companies in 13 offices worldwide. Last year, British Telecom entered into a three-year deal with Axiom to provide legal support services in the UK, the US, Africa, Middle East and Asia.  

There’s a similar success story in Canada in the form of Cognition LLP, which is a law firm and boasts more than 40 lawyers with approximately 400 years of in-house experience. The cutting-edge firm, founded about 10 years ago on the principle that retaining a traditional law firm or hiring full-time in-house counsel is “too expensive for most start-ups and smaller companies” and “too inefficient for big companies facing budget cuts or staffing freezes.” It features former in-house counsel, most with experience at major law firms, who can augment the operational, commercial, transactional and intellectual property needs of in-house legal departments at companies.  

“We provide something that fits between full-time in-house counsel and traditional outside firm services,” says Cognition co-founder Joe Milstone. “Our goal is to provide in-house counsel work better, faster and cheaper than any other outside provider could do it.” 

Cognition does so at lower cost than Big Law, a model made possible by maintaining rigid control over Cognition’s expenses. The firm claims that its fees are one-half to one-third that charged by the country’s major firms. 

“We keep our overhead very low,” says John Rider, who bears the unique title of Chief Innovator at Cognition. “There are no fancy offices because our lawyers are dispersed from their home sites to work with the clients at their place of business.” 

There are other factors as well. 

“We don’t have 200 years of history or dead-weight partners,” Milstone says. “Our mantra is that we’ll spend money only on adding value to clients in terms of lower costs, better service or better people. We don’t spend on real estate and we use cloud technology to the maximum — and that’s a great leveller.” 

Cognition divides its market into small and medium-sized companies that don’t have general counsel, where Cognition lawyers are what Milstone calls “fractional GCs,” and larger companies where Cognition supplements the work done in-house and also provides certain services previously outsourced to traditional external counsel. 

“Originally, 70 per cent of our work was from [small and medium-sized enterprises] and 30 per cent from larger companies,” Milstone explains. “Of late, the reverse has been true.” 

Still, Rider insists that Cognition is not trying to compete with Big Law. “We run the firm on an entirely different corporate model,” he says. “For example, our lawyers don’t have to worry about attracting clients because we have a dedicated sales team to do that.” 

Nor is Cognition able to provide an army of lawyers for major, multi-billion dollar transactions or massive pieces of multi-jurisdictional litigation. “What we can do in those cases is play the role of in-house counsel by running the file,” Milstone says. “We can also internalize some of the work and be part of the in-house team.” 

Unlike the major law firms, Cognition uses “associates” in a limited fashion. “We have added three or four juniors at the head office,” he says. “We use them when extra help is required for clients who want a price point that is even lower than what we generally offer, for work that requires only basic law school training.” 

Toronto’s Conduit Law Professional Corporation, an 11-lawyer firm, also functions as a service that provides in-house counsel with lawyers “to address your needs as they emerge within your business.” It provides “The Gap Lawyer,” who fill gaps in in-house teams; “The Targeted Lawyer,” aimed at everything from short-term projects to special engagements; and “The Embedded Lawyer,” essentially a general counsel on demand who works at the client’s office. 

Like Cognition, Conduit is a lean machine: for the most part, its lawyers work out of the offices of the firm’s clients. The firm’s administrative core is a cloud-based management platform developed by Clio, a Vancouver-based technology company. 

Along the same lines, Avōkka, a relatively new entrant to the market, bills itself as providing “virtual general counsel” on a part-time basis and “counsel on tap” for special situations and projects. 

Also crowding the market are legal staffing agencies, such as Robert Half Legal, which use independent contract attorneys and paralegals to service routine work. Other companies, like Toronto-based Legalwise, send routine work offshore. 

 

But what exactly will all this competition mean to major firms? 

The obvious answer is that some of the major firms will choose not to compete for certain mandates. 

“There are certain specific types of work that we, as a global firm, just won’t compete for based on cost,” Hurdon acknowledges, explaining that he is not talking about specific kinds or sizes of clients, but rather of categories of work. 

Fair enough. Holt Renfrew doesn’t compete with Walmart based on cost either. Still, it’s important to recognize just what’s at stake here. Williams warns that the argument about the threat alternative providers pose to major law firms has been “sterile” for the most part. 

“In a major firm, the commodity/high-end distinction that is so popular today does not really exist,” he says. “Every major piece of work has elements of process that can be commoditized, and some rocket science, with the rocket science being a very small part of the time spent on and the legal fees charged for the deal.” 

The problem, Williams says, is that law firms are overcharging for process work that can be commoditized, and undercharging for value work. That leaves them two alternatives: either slim down and stop doing process work and charge more for value work; or find a way to change the traditional model so that the firm can compete on process work. 

The first alternative has some serious risks: firms that start splitting off the due diligence part of large transactional work, for example, may find that clients don’t much like having to deal with more than one provider. The upshot is that they may seek the services of a firm that has dealt with the process work or cut costs in an innovative fashion. 

As it turns out, that’s precisely what motivated Torys LLP to establish the firm’s own Legal Services Centre (LSC) in Halifax, Nova Scotia. After hearing from clients that they wanted Torys to service more of their legal needs, the firm identified certain areas of corporate work that had a repetitive element, like due diligence, contract review and corporate reorganization implementation. In other words, the LSC is focused on legal services, unlike some of the US and English models that house support services such as IT, HR or accounting in their low-cost centres. 

“It’s not bet-the-farm work, but it is important recurring work within our clients’ matters that nonetheless requires legal judgment,” says Christopher Fowles, who moved from Toronto to head up the Halifax operation. “None of this work will be billed at hourly rates but rather will be competitively priced through fixed-fee arrangements that will vary depending on our clients’ requirements.” 

Fowles expects the LSC, which currently is staffed by three lawyers, to grow to as many as 20 legal professionals in 18 months. “The LSC will design innovative service delivery by combining experienced lawyers, best available technologies and legal project management techniques and processes,” Fowles explains. “The efficiency innovations of the LSC will then be migrated into the other offices of the firm, with which the LSC will be fully integrated.” 

In other words, Halifax is not set up as a client-facing office. “We will not generally practise Nova Scotia law nor will we seek local clients,” Fowles says. “All of the lawyers in the LSC will focus primarily on national work, and they will be called to the Ontario Bar.” 

While Torys’ self-standing LSC is a first in Canada, using low-cost centres to meet client demands is not a new concept in the country. Gowling Lafleur Henderson LLP has long used its Hamilton office as a low-cost centre for mortgage remedy and related collection work. Norton Rose has also taken advantage of the offices the firm has in less costly centres. 

“We’ve used Québec City and Ottawa as a resource for large mandates but also for smaller mandates for which we wouldn’t have otherwise been able to compete,” Hurdon says. “For example, we have been able to price due diligence well using a national team approach that drives value for clients regardless of where the deal comes from.” 

 

An overview of the international legal market suggests, however, that innovation beyond low-cost centres will be required of traditional law firms. 

Baker & McKenzie, for instance, has created Baker & McKenzie Compliance Consulting, a wholly owned firm subsidiary. BMCC provides legal advice and corporate compliance professionals in lower-cost risk-management scenarios. Baker & McKenzie has also partnered with SAI Global, an international provider of governance, risk and compliance products, services and technology, to make information services available to global clients. 

Otherwise, some of the big UK legal firms are providing technological services to their clients. Berwin Leighton Paisner LLP owns and controls Lawyers on Demand, which provides freelance contract lawyers to companies. DLA Piper has an ownership interest in Riverview Law, an ABS that provides legal services on fixed annual contracts. 

In the US, international employment law boutique Littler Mendelson P.C. has been a leader in providing cost-effective online case management and compliance systems for clients. Seyfarth Shaw LLP developed SeyfarthLean, a client service model that combines the principles of Lean Six Sigma (a productivity system focused on eliminating waste) with robust technology, knowledge management, process management techniques, alternative fee structures and practical tools. 

“The whole structure of the legal community and law firms is changing before our very eyes,” Turnor says. “Traditional law firms have no choice but to innovate further if they’re going to cope.”