Arizona and Utah’s bold experiments relaxing the rules against fee-sharing with nonattorneys are in their infancy, but the prospects of these changes to Model Rule 5.4 are some of the most exciting we’ve seen in American law in years. To help me parse through the coming possibilities, I spoke last week with an ABA-certified Legal Rebel, law professor Bill Henderson. Previously named one of America’s 100 most influential lawyers by the National Law Journal, and America’s most influential legal educator by National Jurist Magazine, Henderson’s research focuses on applying cutting-edge metrics to the legal profession.
As might be expected, Henderson had thought-provoking takes on the new fee-sharing rules. As Henderson sees it, by relaxing or removing their local versions of Model Rule 5.4, Arizona and Utah are getting ahead of the curve on the inevitable next step in the evolution of law: productizing.
The Revolution Is Coming From Inside The House
Henderson doesn’t buy the argument that permitting outside investment into legal services will suddenly solve the long-standing problems of consumer access to legal service. “If we want to talk about access to justice, let’s talk about revamping the court system and carving out small stakes disputes and really ask ourselves, do we need to have in-person adversarial proceedings for cases that are worth $2,000? No. That has nothing to do with Rule 5.4.”
Instead of capital being the driver of access to legal services, Henderson sees the biggest innovations coming from existing law firms bringing technology and business professionals into the fold as equity partners.
“The advantage of relaxing the rules isn’t capital, it’s higher quality multidisciplinary collaboration. These business models take a long time to bake, so long that it scares venture capital and private equity. LegalZoom has been around for 20 years. Axiom has been around for 22 years. It’s a good business, but not disruptive. UnitedLex has been around for 15 years and hasn’t had a big liquidity event. These are long-bake problems. By relaxing 5.4, you can invite somebody into the firm as a technologist, and you can make them a partner. Now they’re in it for the sweat equity, and that can lead to better dynamics for these longer-term bakes.”
Bringing The Talent
Some of these tech-based innovations were already occurring in law firms, but they were naturally bottle-necked by Rule 5.4. Henderson gave me the example of Eric Wood at Chapman and Cutler.
As Henderson tells it, Wood “happened to be a lawyer, but he was a technologist. He scraped the internet for fantasy basketball data and became very good at analyzing data for fantasy basketball.” Wood approached his firm and proposed developing tools to automate their in-house products. For his first project, he automated largely nonbillable portions of the closing process for loans his firm was handling in a product called Closing Room. It was a smash success. Wood’s automation efforts lowered client closing costs, reduced the likelihood of errors in the documents, and slashed write-offs. Chapman and Cutler sold Closing Room to NetDocuments in 2018.
Wood made partner off the strength of his technological contributions, allowing him to participate in the upside he helped create. Because he was a lawyer, that was an easy move to make. The problem for the profession as a whole is that lots of people can create the tool that Wood did, but the vast majority don’t have a law degree. Why bother putting your brain power into making a bunch of attorneys wealthier for a salary when literally any other industry will reward your contributions with equity?
In Arizona and Utah, that hurdle no longer exists, meaning firms in those states can access a deeper talent pool than ever before.
Briefs, Burgers, And Bonuses
My conversation with Henderson kept coming back around to the concept of “productization,” the process of taking some abstract concept or bespoke service and converting it into a product that can be sold broadly to the public. A hamburger is a broad concept that can be made thousands of ways; a Big Mac is a product.
If you need an example in the legal field, consider wills. It used to be that the only way to get a will was to pay an attorney to draft one. Now consumers can buy a basic will off the shelf from LegalZoom or a number of other providers, and chances are it will work well for their needs. The will has been productized. Not much else in our profession has.
Henderson sees the law being productized, whether we like it or not. “This is one of the last stages of one-to-one consultative legal services. Yes, hourly billing is very lucrative, yes we’re lucky to have clients, but for today’s junior partners, this is going to start to break apart.” Some firms, like Littler in the employment law space, have already started making progress.
Law firms that productize their work and build tools to solve customer problems will reap rewards on multiple fronts. First, customers love new tools, and they love the predictability in their spend that productizing gives them. The legal profession hasn’t seen too many better mousetraps in the last few decades, so the law firms that build them stand to make bank.
Productizing services also tends to make them cheaper, which means that suddenly consumers and small businesses might find themselves with access to crucial services they previously had no way to afford. This, Henderson believes, is how relaxing Rule 5.4 ultimately responds to the access to justice problem.
Return Of The Firm
Intriguingly, law firms could find themselves regaining institutional strength that has largely been waning over the past decades. As I’ve discussed in this column previously, one impediment to law firms making long-term investments is that clients have become increasingly wedded to individual lawyers, rather than the firms themselves. Taking money out of the equity pool to invest in the firm increases the likelihood that the rainmakers paying for the investment may leave for a firm that will leave more cash in the pot. But if clients have fallen in love with a firm’s proprietary tools, suddenly both the client and the partner are more likely to stick around, which makes it easier to continue investing back into the firm itself.
Early investment in technologist-developed tools could initiate a virtuous circle that strengthens the firms smart enough to move early. On the flip side, Henderson argues, “the market is going to winnow itself here. There’s going to be a whole bunch of firms that are underinvested that are basically going to have to go into rescue merger mode. I think that’s going to play out over the next 15 years.”
James Goodnow is the CEO and managing partner of NLJ 250 firm Fennemore Craig. At age 36, he became the youngest known chief executive of a large law firm in the U.S. He holds his JD from Harvard Law School and dual business management certificates from MIT. He’s currently attending the Cambridge University Judge Business School (U.K.), where he’s working toward a master’s degree in entrepreneurship. James is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. As a practitioner, he and his colleagues created and run a tech-based plaintiffs’ practice and business model. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at [email protected].