“Legal Zoom may be a new company, but the lesson is ancient: volume law practice is a struggle.”

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LegalZoom, which has valued itself at $483 million, is getting some negative feedback on that valuation. Carolyn Elefant points out that no matter whether you are churning work comp cases or peddling mediocre forms online, volume requires a constant stream of new clients, which costs money. That’s why LegalZoom spent $41 million on advertising for $12 million in profits … and it will have to do that every year.

Read The LegalZoom IPO: Proving That Volume Practice Doesn’t Work, Even 21st Century Style on myShingle.

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  • Hey Sam,
    Thanks for the link!
    Carolyn

  • Mike Lammers

    I have several issues with this post and with Ms. Elefant’s related articles:
    1. As a personal injury/work comp attorney I don’t appreciate being lumped in with LegalZoom and online peddlers of mediocre forms. I might be thin-skinned, but I take the whole “whether you are churning work comp cases” as a slight in this context. Usually when “churning” is used in reference to handling cases there is a negative connotation involved: somehow the attorney must be cutting corners or settling cases for less than they are worth. We handle a significant number of cases and I’m proud of the work we do. We are helping people in desperate need of legal help, and as a business we are doing quite well (especially in this market).
    2. As far as Ms. Elefant’s claims that volume practice areas are a struggle and a bad business model (something she asserts is an ancient[?!?] truism), I disagree.
    For a true solo shop a practice area that requires volume does present logistical challenges, even in the 21st century. However, I know many successful, skilled, passionate, fulfilled attorneys practicing in a number of different “one-off” practice areas (criminal defense, personal injury, workers compensation, family law, immigration, bankruptcy, etc.etc). Many of these attorneys spend entire careers in these areas in a solo/small context.
    3. The whole “feed the beast” aversion is also indicative of either ignorance or prejudice about attorney advertising. There is a strange arrogance/condescension among some attorneys regarding the marketing efforts of other attorneys that I don’t understand. Attorney advertising has been around for more than 30 years. Some attorneys don’t advertise. Some attorneys do advertise. A lot of it depends on the specific practice area and business model and given market, but generally speaking marketing decisions aren’t indicators of competence one way or the other. Attorneys need to get over it. As my yoga instructor would say: “Keep your eyes on your own mat.”
    As far as the “problem” with the ROI of LegalZoom’s advertising, unless my math is wrong, a 12 million dollar profit on a 41 million dollar spend is more than a 25% ROI! Am I missing something here?
    I understand that LegalZoom might be threatening to some. I am not their defender. However, show me a way to get a 25 percent annual return on my investment and I promise I won’t complain that I “have” to do that every year.
    Although what do I know? I’m just a “low end” work comp attorney.

  • Jim My Compensation

    Interesting read. Legal Zoom is soon due to set up shop in the UK and is currently recruiting law firms with which to work. It sounded like they were hot stuff in the US, but I guess not so much as some websites have made out. I wonder how it will go down over here.

  • For centuries there have been lawyers serving both large clients and small. Prior to the information and/or digital age, their knowledge protected the market for even the simplest tasks. And the barriers to entry (tuition and deferal of income) protected the price.

    Now, the information necessary for many relatively simple legal tasks in a variety of practice areas is available for the diligent, smart, and frugal consumer or small business owner to get by without counsel.

    Many industries in many states also get by now without an attorney in most transactions. Example, Michigan residential real estate. Brokers and agents prepare purchase agreements, and title companies procure title work and conduct closings with only incidental attorney input (rubber stamp the deed as the “preparer”).

    So times have changed, at least for the general practicioner. Am Law/Big Law, where our professors told us we should go, has nothing to do with general practice. They sell a different product to a different customer. There are only a few things in common between them. One would be that some of their lawyers went to the same law schools as some of the GP’s. There is some substantive overlap in the bodies of law. Not much else.

    So comparing the revenue of LegalZoom, a startup, with 15 top corporate law firms, is really a false analogy. They are in two different markets. Why compare 1 company with 15 firms anyway? So LegalZoom’s revenues are 15% of the total of 15 firms. That sounds pretty good for an innovative startup. If the 15 have revenue of $1 billion, then their average is only $66 million each. So if you look at it that way, LZ is doing pretty good, in my book.

    As far as being on the prowl, as far as I know, partners at most large firms, and associates trying to become partner, are very much “on the prowl” for work. They just aren’t doing it with advertising. But they focus on it, they spend money on it, they are rewarded for it, and they are punished for not getting it. So why is it a good thing for big firm attorneys to take clients golfing, serve on charitable boards, attend business group meeting, network with professional referral sources, publish articles, speak at seminars, etc. Doesn’t all this cost time and money? Add up the out of pocket and oppurtunity cost of those Am Law firms’ partners’ marketing efforts. When you do, I think you will find the ROI isn’t very good.

    General practice attorneys must be transactional. They must have a revolving door. They must “feed the beast”. Just like their former classmates at the Am Law 15. Whether it is through LZ referrals, or not, this is their place in the market. If their leads come through the word of mouth from their satisfied former clients or LZ, they still must be efficient. They must charge market rates, accounting for whatever competitive advantage they have, such as experience and reputation.

    As far as quality, that’s a subjective term. I’m not sure what it is intended to mean in practice in this context. Spend more time on each file? Explore arcane and unlikely issues and discuss them at length with unsophisticated and uninterested clients? Spend more time in CLE, to increase competence? Be more zealous in representing our clients?

    That all works in a market where you control the supply, and can charge the higher fees to maintain the income necessary for all the quality. But in a highly competitive market, and the loss of barriers to providing many of the formerly protected services, something has to give. And what gives in a free market is price.

    Clients in the volume space want attention and results. They want the matter to be concluded when or before expected, at or lower than the price they expected, and they want to know the progress along the way. To them, that is quality. They don’t want to pay more for things they didn’t ask for and don’t wish to learn to appreciate.

    Most lawyer, having had the wherewithal to get a law license, also have what it takes to switch careers. The economic reality is that they will not simply “increase quality” in the face of falling income. They will, if they choose to continue to practice, increase volume. The technology allows them to be efficient enough to provide services equal or better than before, at a lower cost. They won’t spend more time doing more for each client, for less money. If they don’t do legal work in volume, they will leave the private practice, and work in-house, or not work as an attorney at all.

    This is happening all over the country right now. So once a lawyer’s opportunity to be in the Am Law club has past, if he or she ever had the opportunity, then its either a new occupation, volume, a “niche” (by definition, we can’t all be in one) or starvation. If LZ makes representation more accessible for more consumers, and keeps a few attorney working in their profession, what’s wrong with that?