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Firms of the Future

While the topic of the following article varies from our usual subject matter, "Firms of the Future" has been so extensively reprinted that we thought it merited inclusion in the Technology Law Bulletin. Originally written by one of our partners by invitation for the San Francisco Recorder, the legal journal for Silicon Valley, it has also appeared in the October, 1996 issue of Intellectual Property, The Magazine of Law and Policy for High Technology , and in the June 24, 1996 edition of the Washington Legal Times, under the title "Quiet Revolution in Business Law."

FIRMS OF THE FUTURE

by Andrew Updegrove

From time immemorial, most entrepreneurs have sought the counsel of traditional lawyers in traditional practice to assist them in launching new ventures. Most Fortune 500 companies scheduled a visit with a mainstream business lawyer to seek strategic counsel and legal assistance early on, and scheduled many, many more such visits during subsequent expansion. Now, as then, obtaining legal counsel early is essential to launching a successful enterprise. But which firms will the best and brightest entrepreneurs turn to in the future? It's a question that should make all firms stop and think.

The explosion of the World Wide Web may divert more of these initial visits to the technologically savvy law firm -- regardless of size. While technology has heretofore been but the tail on the dog of most business law practices (outside of technology centers such as Boston and Silicon Valley, at least), the rise of the Web threatens to make it nearly the whole pet in years to come. Firms that have viewed technology as an exclusively boutique practice might be surprised to find that the boutiques are becoming the full-service firms for the rapid-growth Internet sector, while the mainstream firms are left with an eroding base of business.

A NEW BREED

Beginning in serious numbers in the 1970s, a new type of business client arrived on the scene; the high-tech entrepreneur. The success of a number of computer industry start-ups founded during or prior to the 1970s fostered the concept of the fast-growth, venture-backed enterprise that could burst from the nest, unhampered by normal capital formation restraints, to seize new opportunities before potential competitors were aware that these opportunities existed. By the end of that decade, not only had the venture capital industry radically expanded to assist and benefit from the explosion of such entrepreneurial activity, but the venture-backed concept had been applied to non-high-tech areas of opportunity as well.

At first, these entrepreneurs sought legal assistance at traditional firms, and the more nimble of the traditional firms adapted to serve their needs. Soon, however, firms such as Wilson, Sonsini, Goodrich & Rosati on the West Coast and Testa, Hurwitz & Thibeault on the East Coast were founded to serve the special needs of both venture capitalists and entrepreneurs alike. The service and fee structures of these firms, which were based on big-firm models, have worked for venture-backed companies for over 20 years.

However, during the late 1980s and early 1990s a quiet revolution has been afoot: the continued burgeoning of small software startups, much more often bootstrapped than venture-backed. Due to their modest capital and legal needs, these companies were often ignored by law firms seeking the more lucrative venture-backed company work.

The large, traditional firms with high-tech skills and the traditional high-tech boutiques (now big firms in their own right) have the skills to serve these clients. But the financial and staffing structures in these two groups are not well adapted to serve them. Not surprisingly, a new breed of boutique firm has evolved (ours was founded in 1986) with both a rate scale and an internal structure able to serve both the boot-strapped as well as the venture-backed entrepreneur. Like the boutiques that were founded in the 1970s, these new firms offer the same range of services as the traditional firms to their entrepreneurial client base, but are better able to adapt the provision of services to cash-constrained as well as cash-rich clients.

Now, a profound revolution on the business front bodes ill for the traditional firms, and has already resulted in burgeoning business for the boutiques, both old and new. That revolution is occasioned by the advent of the much-touted World Wide Web, but results from a dynamic that has not yet received significant attention.

INTERNET OR BUST

First and foremost, the Web has the potential to become a vast marketplace -- for information, goods and services. It also has the potential to be an unparalleled distribution channel for information, both commercial and educational. At the same time, access to the Web (at both the vendor as well as the customer level) is already available through off-the-shelf software and a rapidly proliferating supply of consultants who can help a venture establish itself on the Web at modest cost in a matter of months.

The entrepreneurs of today, whether selling shoes, games or information, or seeking to launch trade shows or newsletters, are looking to the Web as the fastest, cheapest, broadest method of reaching a nationwide (and even worldwide) customer base at a fraction of the traditional costs of infrastructure, sales force, marketing and design that their predecessors faced. Print media, exhibition halls, and other tangible venues increasingly are becoming irrelevant to the sales and distribution process. The enterprises that are being launched to take advantage of this opportunity are often traditional, at least in the sense that they are simply vendors of products and services. It is primarily the delivery vehicle that is novel -- but that vehicle is as readily available as paper, ink, envelopes and postage. Notwithstanding this old-wine-in-new-bottles reality, it is not the traditional law firm that the entrepreneurs (and even the existing businesses that wish to diversify on the Net) go to when they seek to launch a new Internet business, but to the firms seen to possess the highest degree of software expertise.

The legal high-tech veneer of many of these enterprises is in fact thin. On the other hand, the "business smarts" component of necessary strategic planning is critical, as is familiarity with a discrete set of fast-emerging legal issues, such as the use and protection of domain names. As always, the lawyer that can provide guru-level business/legal advice will attract the lion's share of the business, while those who can only do a workmanlike job on a license agreement will be passed by. Since this higher level of wisdom is likely only to be found in the high-tech firms, those firms will get the business.

The real significance of the Web for traditional law firms is that clients who would normally have flowed to the full-service firms will instead flow to the firms, boutique and otherwise, commonly perceived to be experts in high-tech matters. Thus, instead of regarding technology as simply another practice area that might be worth developing, technology will become a "must-have" area of practice -- and not merely to build future business, but to prevent the erosion of existing client bases.

Simply put, once traditional goods and services are sold more frequently on the Web than through catalogs and strip malls, the traditional firms will be seen as the narrow boutiques, and the high-tech boutique will be seen as the full-service firm.

Though hardly in danger of seeing their practices disappear, many (and perhaps most) traditional firms are ill-positioned to suffer even a mild decline in business. And that, indeed, is something to make traditional law firms stop and think.

Details

PUBLICATION: The San Francisco Recorder

DATE: 06/12/1996

AUTHOR: Andy Updegrove

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