While this development should not come as a surprise to anyone, it was interesting to see this morning that ALM (American Law Media) has picked up on this trend.  In an article that appears at http://www.law.com/jsp/nj/PubArticleNJ.jsp?id=1202545285843&slreturn=1 their Dana Olson writes:

Some lawyers call it disaggregation, and it reflects a change in the way the legal industry operates. Small firms are flourishing because clients’ demands have evolved over the years. Rather than relying on one firm and paying for a package of legal needs, clients are turning to different firms, and in some cases to legal support businesses, for different tasks. While the economic downturn certainly encouraged clients to search for more cost-effective legal representation, many clients had already come to think that they were throwing money away by sending all their work to big firms.

For more reasons why this is occurring, and other examples of how it has occurred, I encourage you to check out the rest of the article.

My involvement with disruptive innovation has not been limited to helping my clients be disruptive.  I, too, have been disrupting from the low end.

The core of my practice is assisting technology-intensive businesses negotiate sales, licensing, distribution and purchase agreements.   Our larger clients need help with these matters because their inside counsel don’t have the time or the expertise to handle such matters in an effective manner, or, sometimes, either.  Our smaller clients typically need our help because they don’t have any legal expertise in-house.

Eight and one half years ago – when I formed this firm – both sets of clients usually obtained this type of assistance from traditional law firms.  Like other purveyors of “sustaining technology”, the top law firms’ primary focus was on how best to gain market share in the highest profit segments of their market – in this case, merger and acquisition work, bet-the-company litigation and boutique specialties that command a premium.  (European privacy and data security law, anyone?)   Recognizing the inherently less profitable nature of estate planning, certain real estate work, routine commercial transactions and various other areas, many top firms deployed their limited resources elsewhere.

Other firms continued to offer such services, but for many of them it has not been a great fit.  With the help of firms such as ours, a growing number of clients have concluded that it is not worth hundreds of dollars more an hour to be able to visit a more attractive office, to have one’s attorney be served by a large support staff, or to gain the defensive comfort of purchasing all of its legal services from a branded law firm.  To paraphrase Christensen, many clients have tired of paying more than they want to pay, in order to bear costs that don’t bring them value.[4] Moreover, for some clients the traditional law firm service delivery model has become downright irritating, no matter what the alternatives might be.  Who wants to work with partners who run away from the lower margin work you need them to do, or with associates who will likely leave the firm just about the time that they finally understand your business?

As a result, the “low margin” practice groups that remained in traditional law firms became ripe to lose market share to firms such as ours. The marketplace has noticed and responded.  In one instance, two partners in the Silicon Valley office of a national law firm have launched a successful virtual law firm where they are doing quite well charging their clients a fraction of their former rates.  In another, a well-known Silicon Valley firm has established its own unbranded, low cost affiliate to serve those portions of the market that the mothership cannot serve at a profit.  Hard to disagree with their thinking: making some profit in that market will be better than making none!

If I may, I don’t think that the progress that firms such as ours have made in this segment has simply been the result of our being in the right place at the right time.  We’ve done what it takes to disrupt from the low end: we’ve held our costs to the absolute minimum, shared our cost advantage with our clients, and taken the marketing and sales actions necessary to help prospective clients understand and value what we offer.

That said, I must admit that the growth of firms such as ours has been wind-aided in several respects.  Growing client comfort with the Internet has made it a lot easier for lawyers like me to be just as responsive as my big firm competitors.  It’s also made it easier for me to deliver written work product that possesses production values comparable to that generated by BigFirm’s word-processing staff.  Just as significantly, the Internet has substantially lowered my cost of finding and capitalizing on information that previously might have been inaccessible to me.[5]

On the marketing side of the equation, we have benefited from the Internet’s enablement of the virtual company.  Fifteen years ago operating a legal practice from a home office or an undistinguished business address was a branding negative.  These days firms such as ours don’t give that much thought, as many of our clients are virtual companies and even our more traditional clients have embraced some degree of virtual engagement.  When so many other relationships are predominantly email, telephone and video conference relationships, our clients seem to be just as indifferent about where our office is as they are about where their CFO is calling in from on any day.

Likewise, we’ve benefitted from the economic turmoil of the past four years.  Client brain-storming sessions on how they can drive unnecessary costs out of their business has yielded us several new clients.   The more that the client paid BigFirm last week to complete its private placement, the greater the typical client’s desire to find us.

None of this is to say that there’s no place for commercial transactional lawyers in larger, traditional law firms.  Parceling commercial work out to firms such as ours will never appeal to clients who place a premium on having a single trusted outside counsel manage much or all of their portfolio of legal matters.  Other practice groups within large firms will always generate a good deal of commercial work that the firm would rather capture than hand over to other firms.  Commercial transaction clients sometimes get sued, sometimes need to comply with Yurkistani privacy law.  And, most clients will pay some premium to work with a favorite commercial counsel who remains at a high cost platform.

Fortunately, there’s plenty of room for both of us.  That said, I like our prospects.  I don’t see them disrupting our business model any time soon.

[2] “Foundations for Growth; How to Identify and Build New Business”, MIT Sloan Management Review, Spring 2002, p. 24.

[3] Ibid.

[4] See id. at 26.

[5] Fifteen years ago the leading U.S. expert on the privacy laws of Yurkistan kept most of that knowledge to herself, and marketed her expertise to clients and her partners by word of mouth, writing articles that weren’t widely read and presenting seminars to relatively small groups.  Today she provides an overview of the subject – and possibly substantial detail – two or three places on the Internet.  Often her doing that provides practitioners like me information and insight that I either would not have obtained otherwise, or would only have gained at great cost.  Sometimes my review of her web articles results in my recommending that my client seek her help.  Other times it eliminates the client’s need for further queries, or enables the client to get the assistance it needs from a lower priced privacy expert located in Yurkistan.

Contrary to the impression that the remainder of our website promotes, the firm has a third lawyer, Thomas Suher, who consults with us on a regular basis and is fully available to support our clients.  Tom is an old friend with whom I worked with when he was Lucent’s chief federal government contracting attorney.   Tom is extremely knowledgeable about government contracting, a careful and thoughtful attorney and a very pleasant, kind person.

A little more than a year ago I discovered that two of my clients – 4D Security Solutions and Defense Photonics Group – needed help with their defense and homeland security contracting.  Happily, I was able to convince Tom to provide them that help.  Since then, Tom has been instrumental in assisting DPG in negotiating and closing several government contracts.   Tom is an excellent addition to our team.  Tom’s legal expertise and experience is valuable in virtually all aspects of federal government procurement, including responding to US Government proposals,  contract and higher tier subcontract negotiations with the US Government, advice on critical issue such as protection of intellectual  property, application of onerous government regulations and managing contract and performance risk, compliance issues  and disputes and claims.

We haven’t listed Tom in the “Who We Are” section of our website because, at least up to now, Tom’s objective in working with us has been to serve the firm’s existing clients (and not to build an independent government contracting practice at our firm).  Tom has such a practice in Greensboro, North Carolina, where he lives.  Happily, his largest client is LGS Innovations, the Alcatel-Lucent subsidiary,  here in New Jersey.  (We like that, because it causes Tom to venture north relatively often, providing easy opportunities to meet with and serve our clients as well.)

Tom captained the squash and tennis teams during his undergraduate days at Amherst College.  He then attended the University of North Carolina School of Law.  Following a clerkship with the Chief U.S. District Court Judge for the Middle District of North Carolina, Tom started his career with the AT&T law department.  Tom served in a number of positions supporting AT&T’s sales here and abroad over the ensuing 20 plus years.  One of the highlights of Tom’s time at AT&T was being stationed in Brussels from 1992 through 1995 as AT&T’s chief attorney for European and Middle East operations.  Shortly after Tom’s return to the U.S. at the end of 1995, Tom was one of the attorneys who helped create Lucent, and served as its chief government procurement attorney until his retirement in 2002.  Tom is licensed in New York and North Carolina.

With the economy still weak, the federal government has become a far more attractive prospective customer for many of our clients.  As one friend likes to say, it’s hard to beat a customer who prints money!  On the other hand, selling to the federal government is a game that has to be played on its rules – its often opaque, non-intuitive rules.   We’re quite pleased that Tom is available to reduce the costs and friction of our clients playing by those rules.

Tom can be reached on (336) 275-9910 (which is answered as “the Gordon Law Office”) and at suhertr@bellsouth.net.

That said, all too often I’ve seen small companies be so excited about securing this type of relationship that they agree to terms that do not serve them well.  Here are three mistakes that less experienced small companies often make in negotiating their distribution arrangements:

Pay for a Distributor or Reseller, But Only Get a Sales Agent. Distributors and resellers do more than simply sell their suppliers’ products and services.  Depending upon the nature of the product or service, how it relates to other customer needs, the logistics of delivery, installation, training and post-sale support, distribution partners may deliver substantial value for customers and suppliers in any number of ways.  For example, they may perform system integration functions that enable sales that could not otherwise be made, ensure just-in-time delivery to customers who manage their inventories intensely or permit support service to be provided in isolated areas in an hour rather than in a week.

Where support of this nature is needed, traditional distribution agreements and reseller agreements usually serve the supplier well.  Often, however, these capabilities aren’t needed or won’t be invoked because, in the end, some of these functions can’t be outsourced to a third party.  If that’s the case, and the distribution partner is only supplying a sales force, the supplier should forego a full-blown distribution or reseller agreement in favor of a much simpler sales agency agreement.   Why?  So that the product provider can pay the distribution partner the far lower compensation that sales agents are typically paid.

Failing to Manage These Additional Resources. Admittedly, you can’t actively manage the distribution partner’s sales force, logistics operation and service organization in the same way that you manage your internal counterparts.  That said, you can and should seek to require that the distribution partner’s organizations do the things that you know will make a difference in the sale, delivery and support of your product or service.  For example, your agreement should require the distribution partner’s sales force to have the characteristics (e.g., size, deployment, skills, prior experience, training), objectives (e.g., regarding sales funnel-building activities as well as sales), and responsibilities (e.g., sales event attendance, sales activity minimums, data reporting) that experience has taught you are necessary to achieve your sales goals.  Small companies who don’t thoughtfully negotiate requirements of this nature leave significant value on the table.

Grant an Unearned Exclusive. Distributors often argue persuasively that they will not receive an adequate payback on their investment in establishing distribution of a product or service unless the distributor is granted some geographic or customer segment exclusivity.  While that may be true at the outset of the relationship, it may not remain true after the distributor has made its initial investments to support your product line.  Once the relevant personnel have been trained and are in place, it is by no means a given that distributors cannot achieve strong profitability absent exclusivity. And, whatever the distribution partner’s costs and profits, if the distributor isn’t achieving the results which formed the basis for the exclusive, the distributor’s historic investment in the product line may quickly become beside the point.

Accordingly, if you decide to grant a distribution partner an exclusive, you should allow it to be an unearned exclusive for the shortest period possible.  After that, the exclusive should be terminable unless the distribution partner meets the product provider’s sale and/or sale process goals over designated periods.

*      *     *

For most small companies it is no minor accomplishment to get a distribution deal with a major distribution partner. That said, small companies’ euphoria over landing such a relationship should not distract them from negotiating business terms that will make a difference for them.

© Robert Mark, 2010.

More to come. Alice and I both look forward to using “What’s New” to post occasional comments on significant events and developments.  Rest assured, life’s too short to waste our time or yours with observations that aren’t interesting or useful, so please stay tuned!

The Obligatory Disclaimer. One of the reasons that lawyers are so easy to lampoon is that so many of us caricature ourselves every day of the week (and often twice on Tuesdays).   One of the ways that we do this is by treating the truly simple as hugely complex.  An example relevant here: every article I’ve ever read about blogs written by lawyers discusses at great length the need to ensure that all of the blog’s readers know that its general observations are not legal advice, and should not be relied on as such.

Perhaps the inordinate attention that the legal blogsperts give this reflects our profession’s great insecurity about itself.    Why can’t the legal profession use the small font disclaimer that our clients should “use this drug only as prescribed” that has proven sufficient in the medical and pharmaceutical professions?  Because we have a higher preponderance of “patients” who are willing to self-diagnose and self-prescribe.

While failure to follow our advice usually won’t result in continued malady, permanent injury or death, failure to follow thoughtful legal advice often results in patients taking on unnecessary risk or incurring avoidable cost.  Sadly, those possibilities are not consistently fearsome for everyone.  Thus, even though you probably won’t die if you treat anything we write in this blog as legal advice, please don’t think for a moment that anything that we write in this blog was magically written with you in mind, or provides you any guidance about how you should handle any situation.  This blog will not take into consideration who you are, what your situation is, what your narrow goals are, or what dilemmas your circumstance present.  We hope you take our comments to be interesting and useful, but not advice on how you should conduct yourself or your business.  Let’s not start out confused about that.

–Rob