New Study Highlights the Threat of Alternative Legal Service Providers to the Traditional Law Firm Model
JOY A. LONG
A newly released joint report from the Center on Ethics and the Legal Profession at Georgetown University Law School and Thomson Reuters Legal Executive Institute (LEI) could cause some soul searching among law firms. The 2019 Report on the State of the Legal Market reveals that the traditional law firm business model is crumbling due to new market realities, including the expanding availability of alternative legal service providers (ALSPs).
A Changing Legal Landscape
The report reinforces what many law firm leaders already suspect: They need to take a longer-range, more strategic view of their capabilities and competitive positions in the marketplace. For example, while the demand for law firm services has been essentially stagnant, corporate legal spending has risen steadily, suggesting that firms are losing market share. While part of such losses can be attributed to growing in-house staffs, it also reflects the shift of legal work to ALSPs, including accounting and consulting firms.
According to the report’s lead author, it was long assumed by both law firms and clients that legal work could only be performed by lawyers. But new competition, technology and innovative legal service delivery models are rapidly transforming how services are provided and delivered to clients.
The report’s findings are consistent with those of a 2018 global survey of ALSPs conducted by the Georgetown school, LEI and Oxford University Business School. According to that survey, the ALSP market had grown significantly to about $10.7 billion in annual revenues, or a compound annual growth rate of 12.9%.
Even more striking, the 2018 survey confirmed that ALSPs’ services were moving into territory generally thought of as too sophisticated for nonattorneys. This includes regulatory risk and compliance, project management, legal research and corporate due diligence work.
A New Legal Service Model
Some things never seem to change, though. The 2019 report cites a common hurdle facing many law firms trying to adapt to new market realities — partner resistance. Too many partners are mired in their beliefs of “legal exceptionalism,” which prevents them from recognizing the threat from ALSPs, such as accounting firms.
The authors of the report propose a dynamic model that categorizes law firm services on a continuum. It runs from “unique legal expertise” (i.e., private equity practices) at the top to “comprehensive legal services” (day-to-day services that clients require to run their business) and down to “ancillary support services” (services that nonattorneys can cover, including document review and coding). The report concludes by urging law firms to make honest assessments of where their key practices fall along the continuum. Only then can they begin to make the necessary strategic decisions to optimize competitive advantages.
The Future is Now
The report emphasizes that each law firm’s strategy will differ, depending on factors such as its client and practice mix, market positioning, competitive advantage, reputation and culture. Law firms should take the time to understand where they may be on the continuum and how changes can affect their business.
Cryptocurrency Payments for Legal Services: Should You “Byte” the Bullet?
Cryptocurrencies, like Bitcoin, are not going to replace traditional currencies any time soon, but a growing number of law firms have begun to accept these currencies as payment from clients. Before your firm accepts crypto payments, you need to understand how these currencies work and some of the issues they raise.
What Are Cryptocurrencies?
Cryptocurrency generally refers to a decentralized form of digital currency. Bitcoin and Ethereum probably are the best known, but dozens of others are out there, including Zcash, Ripple and Litecoin.
Cryptocurrencies are virtual assets, with no physical form, and deemed to be property by the IRS. Transfers are instant and tracked in a blockchain ledger instead of with a bank within a centralized banking authority (see, “What is Blockchain?” below).
The value of cryptocurrencies comes in part from their utility, or people’s willingness to accept them as payment. The value also reflects its scarcity. In the case of Bitcoins, for example, no more than 21 million “coins” can ever be created.
What is Blockchain?
Blockchain technology generally refers to a digitized, distributed ledger or database that records and shares information kept secure through cryptography. The information is stored in chronological, unalterable blocks, each of which includes a time stamp and a link to a previous block. The blockchain is distributed across open networks, providing a public, verifiable history of transactions.
Blockchain is likely to impact many transactional practices, from mergers and acquisitions to the sale of real estate, securities and other assets. Real estate transactions represent one important area where blockchain could have a significant impact by providing a technology where anyone can record and view land records. And smart contracts could use blockchain technology to automate sequential performance once conditions are verified, thus mitigating the risk of breach, fraud and human error.
What Is In It for Law Firms?
Some firms have begun accepting cryptocurrencies as payment for a very simple reason — their clients demand it. Technology and other intellectual property companies are among the clients that could have cryptocurrency assets they want to use to pay for legal services. Financial technology, payment processing and securities clients might have similar demands in the near future.
Offering clients more payment options generally improves collection rates. Some firms have found that they attract new clients when they accept cryptocurrencies. It may be that accepting crypto makes these firms appear more aligned with innovative clients.
What Are the Potential Risks?
Perhaps the biggest concern associated with cryptocurrencies is their price volatility. The price for Bitcoin can move more than 10% in a single day. This may create problems in light of ethics rules that require attorneys to charge reasonable fees. A Bitcoin fee that is reasonable when negotiated could become unreasonably high by the time of payment (and, of course, it also might become unreasonably low from the firm’s perspective). Your firm can mitigate this risk by referring only to U.S. dollars in fee agreements and invoices.
A Nebraska ethics advisory opinion — the first issued by a state ethics body addressing receipt of digital currencies — provides additional guidance. When a cryptocurrency payment is received, it suggests, the firm should immediately convert it into dollars according to market rates and then credit the client’s account using dollar amounts. The firm must advise the client of this process so the client does not expect an increase in the value of the currency to create an additional credit to its account. In addition, the client may have tax consequences from using a virtual property to pay for services.
Firms must also evaluate how to safeguard client funds if they are held in cryptocurrencies. Trust accounts are an effective safe guard for cash, but, as property, cryptocurrencies cannot be deposited in bank accounts. According to the Nebraska opinion, if the payment will be drawn on for future fees, the firm should immediately convert it to U.S. dollars and deposit the amount into the appropriate trust account. Firms that do not convert client funds will need to develop effective internal controls such as encryption or store cryptocurrencies offline. You might, for example, keep them on a USB drive locked in a safe (referred to as “cold storage”).
Look Before You Leap
Despite their increasing prevalence, cryptocurrencies are not for everyone. Your firm should take the time to educate itself and evaluate the associated pros and cons before taking the plunge into accepting virtual payments.