The “Hollywood Model” Pivot in Legal Services

The COVID-19 crisis has changed all of us. Across the legal services industry, law firms and in-house legal departments are undergoing rapid transformation. For many, more important is the change that comes next. Making cuts and tweaks at the edges to survive the crisis won’t ensure long-term success. What’s required is a fundamental rethinking of business models to meet the evolving needs of consumers of legal services moving forward. Creating greater flexibility in operations will be the key to success in the future.

Rigid Business Models are Failing

On April 15, the U.S. Commerce Department announced that retail sales plunged 8.7% in March, the biggest decline since the government started tracking such statistics in 1992. That same day, reports emerged that JC Penney, and other retailers, may be preparing for bankruptcy.

At the same time, online retailers, such as Amazon, are enjoying record sales. Amazon’s stock recently hit an all-time high, with a market capitalization of over $1.2 trillion.

The staggering differences in fortunes between different retailers is a reflection of a simple truth: Smart and nimble business models can thrive in good and bad times.

Across the legal services landscape, times are tough. Law firms of all sizes are reducing headcount, cutting compensation, and eliminating summer associate programs in order to shed costs and adapt to remote-working environments. Corporate legal departments are also being impacted due to across-the-board cost-cutting measures at many companies.

Right now, most in the legal services industry are in survival mode, and taking actions that are needed in the moment. However, law firm and in-house leaders undoubtedly have one eye on what’s coming next. Speed and agility are paramount to get to the other side of this crisis, but long-term strategic planning, including business-model pivots, can give rise to big opportunities in the future.

What Will the “New Normal” Operating Model Look Like?

One of the obvious consequences of the COVID-19 crisis, which is all but certain to lead to a deep and painful recession, is that it is forcing businesses to reduce all non-essential spending. Some of these cuts will be temporary, but others are likely to sustain as businesses experiment and adapt to new modes of working.

For example, prior to the COVID-19 pandemic, most law firms resisted adopting remote-work environments, instead opting to operate out of expensive office space. Certainly not all, but no doubt many firms will rethink their investments in commercial real estate leases once they have had the opportunity to assess the feasibility of having a more dispersed workforce. Rather than having everyone under one roof, firms may decide that an office is better served as a place to meet clients, when necessary, and host critical infrastructure operations. By reassessing their needs for square footage, firms can significantly reduce fixed costs in the process.

The biggest fixed cost for law firms, as well as corporate legal departments, is labor, and particularly highly-compensated lawyers. In response to contracting demand, many law firms are responding by laying off lawyers and staff and reducing compensation.

Not every law firm, however, is playing defense right now. Some are well-positioned for a crisis, with business models that thrive in both good and bad times, and are hitting the accelerator. For instance, firms that sustained a significant corporate restructuring practice, as well as other counter-cyclical practices, are in a position to gain market share—both now and moving forward.

Firms that did not previously reinvent themselves and their business models will now be forced to. One of the near-term survival mechanisms for such firms will be to look downstream for work, such as document review, which is not profitable for them to perform but can support fixed labor costs. While these and other actions to drive revenue in the door may be a short-term fix, it’s not a long-term strategy for thriving in the future. Reinventing one’s business model will require thinking through a new path forward.

Embracing the “Hollywood Model”

One solution that we expect to see more firms, as well as corporate legal departments, embrace is shifting fixed labor costs to variable ones by building more flexible workforces and service offerings in order to meet market demands. Rather than being beholden to rigid business models beset by high fixed costs, law firms and corporate legal departments will look to alternative legal service providers (ALSPs) for resources that enable more flexibility. Instead of relying exclusively on fully-staffed, fixed-cost teams, law firms and corporate legal departments will, to a much greater extent, assemble teams based on the specific needs of a project, allowing them to reduce fixed financial commitments.

This sort of nimble, flexible approach is sometimes called the “Hollywood model.” In Hollywood productions, a producer assembles a team to work on a project, such as a movie, and the team works together for as long as is necessary to complete the project. The Hollywood model allows organizations to meet demand in real-time, by bringing together different people with complementary skills to tackle complex projects. It also allows them to scale up or down quickly because more of their costs are variable.

ALSPs will enable more law firms and corporate legal departments to build more flexible business models moving forward. By offering the rapid deployment of legal talent, technology, and processes that can be plugged-in to support an existing infrastructure, organizations can more nimbly adapt to market circumstances, rather than being bogged down by under-utilized resources. For example, an ALSP can provide specialized legal talent on-demand, a team of lower-cost lawyers to handle a large document review, or efficiency-enhancing legal technology when it is needed—and then remove it when it is not.

Flexible business models will benefit law firms and corporate legal departments by helping them to become more efficient and profitable. They will also be beneficial for individual lawyers. While fewer lawyers may be employed full time if more organizations make a shift to the Hollywood model, lawyers who desire more flexibility and have specialized skills will be highly sought after—much like a highly-skilled sound or animation specialist in Hollywood.

The COVID-19 crisis is exposing the weaknesses of rigid business models in the legal services industry. Such models may have been sustainable when times were good, but those days are over. What is needed is a more flexible, nimble approach, enabled by ASLPs, that allows law firms and corporate legal departments to meet the evolving needs of legal consumers while remaining profitable.