Wednesday, December 08, 2010

The Nature of the (Law) Firm

John Robb has a thought provoking comment on Ronald Coase's classic paper The Nature of the Firm.  Robb points out:

Coase asked the question:  if markets are extremely efficient (as maintained by many), why isn't everything built/done using contract labor?  
The reason he found is that when trying to get something complex done, market prices don't capture many of the costs involved.  
For example:  It costs money/time to find the right people, to negotiate for their labor, to find/acquire the right investors, to establish the right processes, to set up the organizational control systems, etc  In short, because it's expensive to do this, entrepreneurs typically create a company so that they only have to go through this process once.
Is this still true today?
Robb thinks this no longer necessarily holds true today, thanks to largely online, open-source markets that can dramatically increase the efficiency of building what I've been calling "ad hoc firms."

This trend and potential also applies to law firms.  Traditionally--and lawyers generally not known for their innovation in terms of their own business structures--law firms are classical "firms" precisely for the reasons highlighted by Coase:  there is substantial cost involved in assembling the right team to optimally serve a client.  That inefficiency, however, is melting away for those prepared to capitalize on the potential of new marketplace formats for labor and services.

Just as Coase pointed out, if there were no costs involved in assembling the right team, then all legal services would be delivered by tailored and just-in-time assemblages, or "ad hoc firms."  In fact, if there were no costs involved in creating such assemblages, it's quite clear that ad hoc firms could deliver superior knowledge, talent, service and value than traditional firm models.  I'm not sure whether we've already crossed the threshold where the value derived outweighs the cost of the ad hoc firm model, the obvious desire of traditional firms to keep their heads firmly planted in the sand notwithstanding.  What I am confident in is that we're rapidly moving in that direction, and that both legal service providers and consumers need to position themselves for the day when that line is undeniably crossed.  And, because of the widespread reticence to even acknowledge this dynamic let alone do something about it, there is tremendous potential for those individuals positioning themselves for that future today.


Shlok Vaidya said...

Definitely. Look at the foreclosure conflict. They're definitely coming together ad-hoc to act as an ad-hoc, virtual law firm. Here's a BW article on the topic:

JSoroko said...

The Naval Postgraduate School (NPS) has a Center for the Study of Hastily Formed Networks - generally networks formed in disasters or after attacks. There are great inefficiencies in hastily formed networks- setting up comms, geographic reference, etc.
With litigation - it's not a diad between "firm" and "ad hoc team." Since I've been an attorney, investigator, litigation consultant - a lot depends on mutual trust. If ad hoc teams are assembled from existing networks - people who've worked together, perhaps trained together, share common technical standards (e.g. familiar with the same software) and have either clear lines of authority - or sufficient trust to have horizontal organization - you can have the best of both. But an ad hoc team that's perfect on paper - but don't know each other - everyone's reputation is in the hands of everyone else. People I've worked with repeatedly trust me when I interview a witness and report back. This is a very important question - but not a simple diad of "law firm," on the one hand, or assembled team, on the other.
There are also questions of: how big is the engagement - how long will it last - long enough for the team to gel?
And shared space?
And - there are economies of scale for attorneys in sharing support staff, equipment, billing systems, docketing systems. In my view, those economies are nontrivial. Am looking forward to continued conversation on this topic.

Jeff Vail said...

I think you raise an important point: repeated use of the same players, even if always in different combinations, could dramatically cut these inefficiencies. So could some kind of social currency or rating metric that is objective, rule-based and transparent--examples like the E-Bay seller's rating, or even the AVVO ratings are a start, though by no means without their own flaws. Ad hoc law firms have a big initial advantage over ad hoc networks formed in response to disasters in that we can (and should!) be planning for them--and as you point out laying the groundwork for cloud based project management, document sharing, etc.--well in advance.

In many cases, i think lawyers do much of this already, it's just a question of thinking about it more explicitly in these terms. We develop a network of expert witnesses, for example, that we draw from as needed, and over time the transaction cost (think back to the last time you had to find an expert in a totally new field) go down. In large firms, partners may do this with a pool of associates, or a wide selection of paralegals, etc. But even the largest firms can't provide the same scale of talent pool available to an admittedly ad hoc firm--and that, in my mind, is one of the key hurdles, to stop conceptualizing of one's practice as "solo" or "AmLaw 100" and start thinking of it as an individual working as part of a team to provide legal services, a team in which one's individual role could vary from "researcher," "proof reader," or "document reviewer" to "quarterback," "strategist" or "project manager."

Admittedly, everyone wants to be the quarterback or boss, but I think there is room in this kind of ad hoc conceptualization to provide things often missing at either small firms or large: individuals at ALL LEVELS can continually get experience in leadership (perhaps smaller cases for more junior attorneys) while simultaneously getting mentorship and training from more senior attorneys (or, for more experienced participants, at least from people with a specialty different from their own). If you accept (as I do) that large firms fulfill something of what Richard Susskind called a "teaching hospital" role for younger attorneys, then team efficiency and value may be further increased when compensation includes mentorship and training in addition to (or sometimes in lieu of) money...