Fortunately, there are treatments.
If you work in the legal industry, the above graph from Thomson Reuters’ 2020 Report on the State of the Legal Market should terrify you. What it shows is an industry steadily sliding towards obsolescence, not because the need for legal services is declining but because hiring a lawyer is becoming more expensive, thus making it less affordable to those paying the bill.
This affliction, which we also see in the “meds and eds” sectors, is called Baumol’s cost disease or sometimes just cost disease. See Post 042 (discussing concept and its application to law). It was first identified and described by William Baumol, a famous economist who was trying to understand the wage structure of workers in the performing arts, a sector that is fundamentally immune to increases in productivity. See William J. Baumol & William G. Bowen, Performing Arts, the Economic Dilemma (1968).
Unlike the performing arts, productivity gains in law are not impossible, albeit the biggest constraints have less to do with capital or technology than how lawyers’ minds have been conditioned and socialized. In this post, I’ll describe the problem and then offer three examples of proven “treatments” for cost disease in the legal sector.
What’s Baumol’s cost disease?
In classical economics, wage growth is presumed to be the outcome of increased productivity. A new widget machine or process is invented, which enables workers to make twice as many widgets in half the time. A portion of the time savings is passed along to consumers in the form of lower prices, typically increasing consumer demand. Another portion is passed along to workers in the form of higher wages.
The same is not true, however, in sectors with little or no productivity growth. As Baumol observed, “no one has succeeded in decreasing the human effort expended at a live performance of a 45 minute Schubert quartet much below a total of 3-man hours.” Baumol & Bowen at 164. Yet, despite their lack of productivity gains, wages of performing artists go up, as does the income of lawyers, doctors, and college professors.
Baumol and other economists subsequently refined the theory, observing that large productivity gains in some sectors (e.g., manufacturing, technology, agriculture) can have the effect of increasing the relative prices in other less productive sectors, particularly those that rely on highly educated knowledge workers. See Post 042. The chart below, from Vox, illustrates the phenomenon.
On the one hand, this is a sign of a richer society. On the other hand, a continuous increase in relative price will eventually have the effect of reducing consumer demand—and that’s the dilemma currently affecting the legal sector.
Cost disease in law
Returning to the Thomson Reuters data in the lead graphic, in 2019, lawyer fees increased by 4.6%. Meanwhile, demand for legal services stayed almost flat (+0.6%) and “productivity” actually decreased (-1.4%). I put productivity in quotes because our industry uses it in a rather strange and rather specific way—each timekeeper is presumed to have an inventory of hours. Productivity is up if more hours are being sold. Productivity is down if available lawyer hours remain on the shelves.
Overall, however, we know that lawyers are increasing hourly rates above the consumer price index. See Clio Legal Trends Report 2019 at 45-46 (plotting average hour rate in Clio dataset against CPI). At least for ordinary consumers, we are seeing a diminution in demand. Between 2007 and 2012, while spending on legal services in the business and government sectors increased by 17% and 20% respectively, spending by individuals decreased by 10%, dropping from $65.5 billion to $58.8 billion. See Post 037 (discussing decline of the PeopleLaw sector).
The problem has been building for decades now, exacerbated by the business model created and popularized by “white shoe” firms at the turn of the twentieth century. Lawyers sell hours of time, with the price going up each year. But at the end of the day, there are no more hours to bill. A day in court still takes a day. A good deposition, like Beethoven’s Opus, is not improved by being shorter.
Lawyers serving individuals—and I am such a lawyer, focusing on workers’ compensation in the state of Washington—are more vulnerable than our corporate law counterparts. If we are only selling time, our higher hourly rate reduces the demand for our services. This vicious cycle is why the real incomes of PeopleLaw lawyers decreased by nearly 50% over a 20-year period. See John P. Heinz et al., Urban Lawyers: The New Social Structure Of The Bar 6–7 (2005) (comparing Chicago lawyers serving people in 1975 versus 1995); see also Post 037 (discussing Chicago Lawyers I and II studies and the struggles of lawyers serving people).
No one likes this model
What’s really remarkable about this problematic business model is that neither lawyers nor their clients like it and yet it persists.
For the past several years, Clio, a cloud-based practice management software company, has published a Legal Trends Report, part of which is devoted to studying legal consumers. In 2018, the top three reasons consumers with legal needs chose not to hire a lawyer all revolved around costs, with 35% saying the “benefits are not worth the money” and 28% percent of consumers saying that they avoided hiring a lawyer because “the overall/final cost isn’t clear.” See Clio Legal Trends Report 2018 at 22. In 2019, 76% of consumers said that when they contacted an attorney they wanted to get a clear sense of how much their legal issue could cost, with 64% reporting that they failed to get satisfactory answers. See Clio Legal Trends Report 2019 at 26-29. The billable-hour model is driving demand away from lawyers.
Although lawyers report that their highest priority is increasing revenues, they also acknowledge that higher rates tend to result in fewer hours sold and higher write-offs. See Clio Legal Trends Report 2019 at 49-51. Even as lawyers complain about their work/life balance (made worse by the need to prospect for work) and some experiment with value-based billing structures, the billable-hour model persists at about 86% percent of legal revenue.
The reasons for this persistence are deeply rooted but well expressed by an anecdote from Mike Whelan in his book, Lawyer Forward (2019). Mike was explaining to some ethics experts his flat-fee billing model that charged clients a set amount for each stage of the case when he was asked this question.
“But you return some of the funds if the case settles early, right?”
“Why would I do that? The clients only pay for what they want: an agreed resolution that they can live with. If I get there quickly, they’re even happier. Most want to pay me a bonus, not get money back.”
“But that would violate Rule 1.04 [Texas’s Fee Rule]. It would count as an unreasonable fee.”
This mindset is what Mike refers to as the “Churn,” an unhappy cycle lawyers find themselves in, building businesses with no assets in a career only as valuable as their next hour.
The Churn is nothing more than a symptom of cost disease and it has so infected our profession that ethics experts believe profiting off increased efficiency is a violation of our rules of professional conduct. It doesn’t even matter that it’s in the client’s best interests. An analogy throws our dilemma into sharper relief. We’re locked out of our car. One locksmith charges $100 an hour and it will take him one hour, his rival charges $600 an hour but will have the car opened in just ten minutes. The price is the same, who do you hire? The one that makes our lives better sooner!
Another angle on these ethics concerns shows itself in the way lawyers treat each case. Though we like to talk about “legal services,” there is in truth only one legal service offered by the vast majority of lawyers—full-scale representation to the absolute best of the lawyer’s ability. We are required to be diligent in our representation of our clients, which many argue prohibits us from giving anything less than our all to every case. The best-selling car in America is the Toyota Camry, yet lawyers presume we are ethically bound to only sell Bentleys.
The service lawyers offer is not the product that most clients want and they are proving it with their wallets. But it doesn’t have to be that way.
Three treatments for cost disease
Cost disease need not be fatal. Indeed, there is a bright future available to those who are willing to pursue it.
There are new types of legal products that are changing the way individuals consume legal services. And so far, the results are striking. I refer to the most popular new legal products as Freemium Services, Subscriptions, and Commoditized Legal Products.
(1) Freemium services
Freemium Services tackle simple and well-defined elements of a legal issue and they do it for free.
While you may wonder how freemium services can help lawyers overcome cost disease, these services are extremely effective at triaging cases. Freemium services divert low-value work away from lawyers so that they can focus on clients looking for specific, well-defined, high-value legal work.
For example, at Palace Law, the front page of our website has chatbots that assess Washington workers’ compensation claims and provide strategic plans for users to pursue their claim as well as an estimated value of the claim. Every year, approximately 500 users take advantage of these highly specialized freemium services. If you estimate just 15 minutes for every call from a potential client, that’s 125 lawyer hours saved annually. Best of all, about 5% of those users have high-value claims and end up becoming paid clients of our firm.
Another example is Forrest Carlson of Assemble Law Group, an estate planning attorney in Washington who created wa-wills.com, a website where users can create a will for free by themselves. The website regularly sees about 5,000 new visitors a month. When users come to a stumbling point, they contact Forrest in order to get the specific help they need—so many in fact, that Forrest has had to pass off a lot of the middle-value work to another attorney.
On a larger scale, Joshua Browder’s DoNotPay is a legal app that has, among other things, helped consumers save over $4 Million in parking tickets for free, albeit some of these users are opting into paid services that are also AI-enabled. See Jeff John Roberts, “For $3, a ‘robot lawyer’ will sue data brokers that don’t delete your personal and location info,” Fortune, Mar. 5, 2020.
Subscriptions are an old idea gaining incredible market share in consumer markets, from Amazon Prime (access to a large bundle of goods, services, and discounts) to highly specific products like Quip toothbrushes.
In law, subscription services won’t necessarily work for every practice area, but innovative lawyers are finding more and more applications for it. Clients love it because they get a fixed price (usually on a monthly or quarterly basis) for legal assistance they are likely to need. In exchange, lawyers get a steady income, loyal clients, and often the opportunity to solve problems earlier and more efficiently before they get out of hand.
The most common use of subscription services is in business law. Smaller companies that can’t justify the time and cost of their own in-house counsel can benefit from essentially sharing in-house counsel with other companies for a monthly fee. For example, Nimbus Legal has built a phenomenal firm by offering to small companies to be “your general counsel.”
Similarly, trademark and business strategy attorney Kimberly Bennett of K Bennett Law has specified her practice even further, offering subscription-based brand protection and growth support for companies on the rise.
But subscription models can extend beyond just representing businesses. Melissa Hall built her law firm Smol Law around subscription services to individuals and families. See Smol Law Business Model. Much like a general practice physician, Melissa is your general practice attorney. For a low monthly fee, she is available to help her clients with any of the various legal issues people face on a daily basis and she can meet with you or your family annually for a “check-up.”
These subscription models are exactly what Mike Whelan was building for himself as he tried to break free from the Churn of cost disease.
(3) Commoditized products
Commoditized products are my favorite solution to cost disease because it comes closest to making the legal industry look like every other consumer industry.
Commoditization is about offering clients a wholly defined and clearly priced legal product. This can be hard for a profession that loves answering every question with “it depends,” but it is our best chance at saving the legal industry. Every law firm has the potential to offer some kind of commoditized product. And as the popularity of this service grows, clients will demand it.
Commoditized products can be as simple as flat-rate services like Navigate Law Group’s uncontested divorce with children for $1,800 or as complex as inventing products to help clients guide themselves through the legal process like Megan Zavieh’s multifaceted State Bar Playbook, which sells for $1,500 and enables attorneys to defend themselves in State Bar of California discipline system (talk about a niche market getting productized!).
One of the most impressive examples in the commoditized products space is Hello Divorce, created by lawyer Erin Levine. Launched in January of 2017, Erin was trying to reach out to consumers who had been left behind as a result of cost disease. In a customer success story on the Clio blog, Erin commented, “We were being pushed by our community to provide more cost-effective, human-centered services. I wasn’t able to do that with the firm in a way that made financial sense for us. So, I had to figure out a way to automate most of the process and be innovative.”
What resulted was an online platform where consumers in search of divorce help can pay a monthly subscription (cancelable at any time) for varying levels of legal assistance. If consumers get stuck or want help, they can also pay a fixed fee for a legal coaching session or assistance with specific documents. The results are every lawyer’s dream–a business generation machine throwing off work ideally suited for the lawyer’s skill set. Even though gross receipts were down in the first years of Hello Divorce, net income was up during that same period while Erin’s attorneys were able to work fewer hours.
Survival through change
If our industry is to survive, we have to make a change. Cost disease is a very real threat. Colleges have student loans to protect their industry, medicine has insurance, and musicians have concert halls but no outside forces are coming to save the lawyers.
It is up to us to inoculate the legal industry against cost disease. We do this by finding efficiencies and accepting that most consumers don’t want, don’t need, and can’t afford top-shelf legal services. For them, some limited help is better than none. We have to charge consumers based on value delivered, not hours spent. If not, the state of the legal profession will only get worse. How long can you survive?
For additional information on the emerging world of legal products and other alternative legal service models, see Jordan L. Couch, “New Legal Products With Up-Front Costs Benefit Clients and Firms,” Wa. St. Bar News (Nov. 2019).