Big Law. New Law. Ethical Risk

I have been encouraged to think about the issue of the ethics of innovation for a blog George Beaton has run where the comment section has gone into a rare kind of creative construction.  It’s a big topic, and I cannot do it justice tonight.  But I can try and post some pointers and thoughts; in the hope they provoke discussion.

From various quarter were hear, as cri de Coeur, the idea that innovation is either saviour or end of the legal profession.  Both views are based on slightly different meanings of professionalism.  And my intuition, based on reading hundreds of blogs and hearing dozens of speeches on the subject is that the Innovators tend to mean that innovation is the saviour of law as a business and the Traditionalists that business is the problem, and on that basis innovation should be resisted.  In reality though, both positions overlap.

From the ethics and infrastructure perspective there is plenty to worry about in the context of big law.  Hourly fees and fee padding is one.   The economisation of legal work is another.  Lawyers compare themselves, their value, their firm’s value against economic metrics.  It is what gets them promoted; or allows them to swing more swiftly through flexible lockstep.  There is a plausible case for saying this makes them less ethical.  There is an interesting body of research suggests that the more one is encouraged to think of one’s work within a ‘business frame’ the more likely one is to be unethical.  But it is dangerous for law firms to take such research seriously: money is visible, they are chastised by journalists if they seek to make it less visible, and they have to compete in the numbers game to keep recruitment and retention stable.

The third worry is the strength of client alignment this generates.  In-house lawyers are regularly sneered at by private practice cousins for their willingness to do for their employers what ‘independent’ outside practitioners would not.  But if recent scandals have told us one thing it is that private practice firms have been implicated often enough for me to doubt the strength of the distinction made.

Now we could debate whether this rather critical take on the ethicality of Big Law is accurate or exaggerated.   I do not know, but I offer it as a reminder that we should not compare innovation or alternative business structures against overly rose-tinted views of how things are without the upstart start-ups.  For this post’s purpose the interesting question whether innovative business models will make ethical pressures stronger or weaker.  I wouldn’t like to speculate.  On one level, the ‘we’re  better business people’ schtick of the Innovators is a reason for thinking that things might get a bit worse.  My own emphasis would not be on this broad, cultural indicator, indeed there is evidence from Parker et al that lawyers can lead clients astray as often as vice versa.  The important thing will be  the kinds of business model that are run within innovative firms (which may directly incentivise particular kinds of behaviour) and the way in which staff are valued within such firms (of which the incentive structure is but one important part).  Innovative firms have the opportunity reconceptualise ownership, management and status within firms – so an interesting question is will they take that opportunity to design out the economic metricisation of individual performance and promotion.

Moving away from the idea that large proportions of your staff are in competition firstly for partnership and then for profit per partner has a lot to commend it.  Can they do it and recruit the best staff, or good enough staff?  Will they try?  One glimmer of hope is Bill Henderson and Marc Galanter’s research which suggests that what motivates young lawyers to stay with firms is not bonuses and salary levels but things like quality of work.   Another is the research basis that suggests strong incentives diminish the motivation of those doing complex work.  A re-negotiation of the human capital bargain may be possible but who’s going to go first?  Big law has too much to lose too quickly.

Let me push this question a little further.  One of the ways that Innovators claim, with some justification, to be more ethical is through the challenge to the problems of exploitation and short termism associated with hourly billing.  Yet there has to be a worry that through swapping hourly billing for fixed fees one set of ethical problems is swapped for another.  To deal with the economisation of practice argument first: law firms could just switch billable hours targets to fixed fees targets.  The economic signal is still strong; the ethical risk remains heightened.

Proponents of fixed fees however like to emphasise how fixed fees shift some of the risk of legal work back on to providers.  This better aligns lawyer and client interests and encourages more efficient or innovative responses to legal problems.  What they really mean is they shift some of the risk of excessive cost back onto providers.   What they tend not to mention is that fixed fees shift the risk of cutting corners back towards the client.  But, c’est la vie and all that, the kinds of clients that are typically being talked about can assess that risk themselves.  To which I would add: kind of, sort of.  Again, there is utterly unsurprising evidence that fixed fees alter the lawyer’s internal calculus of what work a job needs: do I need interview this witness is probably yes if it’s an hourly fee, probably not if it’s a fixed fee.    This may not be all that sinister, the lawyer does not know whether interviewing the client will really be useful or not.  And if the lawyer does not know, then I’m going to guess the client does not know either.  The risk calculus is different but no one knows whether it is better.

So in the short term innovation towards new pricing mechanisms poses risks to the client interests which may or may not be as serious as the risks posed by hourly fees.  I reckon on the issues being somewhat less serious.  My assumption being that fixed fees will help squeeze out some excess profit-taking on hourly bills which has nothing to do with protecting quality.  Beyond that, mispricing and mismanagement of fixed fees will led to corner cutting on cases, and some more conventionally serious (but hopefully isolated) insolvency related ethical problems where whole business models crash because fixed fees have been mispriced.

The interesting thing for me about fixed fees though is the potential for them to reframe the way lawyers and clients think about law and legal services.   Law firms will have to think about and predict cost much more finely.  They and clients will have to weigh up the cost and benefits of building particular steps into any legal process.  Both parties have strong interests in understanding value and achieving stable and predictable outcomes.  The rather shallow notion of fixed fees being better for the client, and better aligning lawyer and client, will get deeper.  Alignment may become more genuine.  I am usually un-impressed by what I hear on value side of the equation; but occasionally I do sense more impressive and thoughtful approaches that harness systemisation and big data beyond the (not so simple) science of cost management and prediction.  At the moment my sense is that value largely means getting from point A to B (in legal terms basically as we have always done) as quickly, efficiently and with as reassuring as sense of the quality of work as possible.  Better alignment will come when both sides have more than just a sense of value.  At the moment, client and lawyer judgments about what really works are often (not always though) based on experience – a sometimes myopic, bias-ridden teacher but the best one available.  Innovators genuinely looking to disrupt markets have to offer significant reassurance on the quality issue: they have to work harder to show their products really work.  That will drive a stronger, more evidence based interest in value and quality in the long run.  Though again, innovators have every incentive (and are likely to be less opportunistically biased) to believe their own hype.  They will overreach and fail; and sometimes succeed.

A final point is a return to the theme of values which we have touched on when thinking about money.  Our own values influence ethical decision making. In broad terms our values can be reduced to two dimensions.  Along one of these, we differ in how important extrinsic and intrinsic motivations (how interested in fairness and others we are vs how interested in our own status and rewards). Unsurprisingly, the latter is less likely to be ethical than the former.  The Innovators will claim that they are better set up and incentivised to conceive of themselves as genuinely looking at the clients’ needs.  Whether the public interest in the administration of justice gets much of a look in is more difficult to speculate on.  The second dimension is the extent to which we are open to change or resists it in favour of security and tradition.  Broadly, as I understand it, the latter group is less likely to be associated with unethical behaviour.  Innovators are more willing to try something different; and sometimes, like Canadian Mayors and Senior Bankers that means they may be more willing to try things they shouldn’t.