Introducing the Virtual Law Firm!

Would you hire a virtual law firm? If it only exists in a virtual office? And if it can only communicate with you by using virtual technologies?

Dell Computer once revolutionized the personal computer industry and rose briefly to the #1 spot in sales volume by pioneering the virtual extended enterprise. Did Dell need real factories to produce their products, real stores to showcase them, and real trucks to deliver them to customers? Not at all! Instead, a kid named Steven (“Dude, you got a Dell!”) advertised the brand on television, a toll-free call center collected orders, a chain of independent factories around the world produced and assembled the computers, and Fedex and UPS delivered the goods.

Did it work? For a while, it was the perfect business model. Every customer could order a uniquely customized unit, thus ensuring the receipt of exactly the product that was desired. And every buyer provided a credit number number at the time of each order, thereby eliminating accounts receivable collection concerns and reducing working capital requirements.

So what went wrong? Why is Dell no longer #1? And what’s all this buzz about virtual law firms?

Risky Business

Whenever we analyze risk, it’s helpful to use the fundamental principles of enterprise risk management as defined by COSO’s integrated framework. They’re really quite straightforward; they simply require analysts to focus on the most potentially damaging crises, and then to determine whether the organization is doing everything reasonably possible to prevent and/or mitigate them.

So what can go wrong with an extended enterprise strategy? Interesting, its Achilles Heel may well be a product of what is generally its greatest strength. On the one hand, a virtual enterprise doesn’t need to spend money on factories, stores, or trucks … on “bricks and mortar” infrastructure, if you will. That gives it an incredible cost advantage as long as nothing goes wrong.

But what happens if numerous laptop devices malfunction just days after consumers purchase them? The risk of customer dissatisfaction thus becomes a major concern. Whereas a firm like Apple, with Genius Bars in retail stores, can simply direct customers to visit local shopping malls for service, a virtual enterprise like Dell must struggle to communicate with their irate customers from remote call centers.

In other words, the problem with virtual enterprises isn’t a matter of business management, but rather of risk management. Costly infrastructure is an unnecessary burden when business goals are easily achieved; it’s only when things go wrong that the infrastructure is sorely missed.

The Virtual Private Law Firm

Nevertheless, the alluring benefits of cost elimination and product flexibility are simply too enticing for the concept of the extended enterprise to die. This month’s issue of the ABA Journal, for instance, features an article about Virtual Law Partners, an extended enterprise in the field of legal services.

The article notes that VLP has no physical office. Instead, attorneys use technology to interact with each other and with their clients; any in-person meetings are simply held in private homes. The revenue and cost models are fairly simple as well: 65% of all revenue billed by individual lawyers is paid to them as staff compensation, 20% is paid to the individual who manages the engagement, and 15% is allocated to corporate overhead expenses.

The article doesn’t address VLP’s service mix or growth ambitions in any great detail, but their own corporate website provides a few intriguing elaborations. Apparently, at the moment, the firm’s practice is focused on the receipt of relatively routine outsourced work from the in-house legal departments of major firms. And VLP plans to expand into a “worldwide distributed network.”

In other words, the firm is in the outsourcing business, accepting tasks that (unlike criminal cases, for instance) may not require complex and sensitive face-to-face conversations between attorneys and their clients. Although the firm’s web site touts the strength of its “advanced technology platform,” one might wonder whether its capacity might sag under the strain of intense and continuous interactions with temperamental clients, in much the same way that Dell’s call oriented warranty service might struggle to meet Apple’s Genius Bar standard of customer care.

Strong Headwinds

Before we dismiss virtual legal practices as tiny entities without the infrastructures that are required to handle complex engagements, we might pause a moment and check the atmospheric conditions. Strong headwinds are coursing through the global economy, and they all seem to be blowing in favor of virtual networks.

After all, in the 1950s, General Motors never dreamed that Toyota could ever compete in America via a tiny collection of threadbare dealerships. And throughout the twentieth century, many conservative governments never believed that civic protests could be organized if television stations were tightly regulated. And yet, if Toyota could evolve from Toyopet to Lexus, and if the broadcasting industry could shift from analog signals to YouTube, why couldn’t virtual law practices learn to manage more complex legal projects as well?

Let’s face facts. Daily commutes aren’t getting any faster. Mass transportation options aren’t getting any cheaper. And printers of paper based reference materials aren’t getting any busier. So the ability and need to congregate in any real world location for communication and research purposes is not getting any stronger.

In other words, though virtual law firms may not be ready to take over the profession just yet, the business trends are all moving in their direction. As long as they can manage the risk of failure, they will likely continue to grow.