Friday, August 3, 2012

Connecting the Dots on the Structural Shift in the Legal Market

Over a 3 Geeks, Toby Brown asks, "Is the legal market flat?"  Toby's analysis is especially interesting because of his day job -- he is a strategy professional at an AmLaw 50 firm who focuses on pricing and market analytics.  In that capacity, he has access to the various proprietary databases that track legal spending.  Toby writes, "Although there have been minor ups and downs on this stat (most recently a slight up-tick), the overall demand has been and continues to be predicted as … flat."

But then Toby wonders if the stats are potentially misleading because the databases define the market as BigLaw. If work is leaking out of this market and going to new entrants, flat revenues may mask a reconfiguration of the legal marketplace--one where BigLaw is less dominant.

Pangea3As evidence for this possible trend, Toby links to an article on Pangea3, which is a legal process outsourcing (LPO) owned by Thomson-Reuters (a publicly traded company).  Since its inception in 2003, Pangea3 has grown at "40% to 60%" per year and is "growing even faster" in 2012.  Pangea3 now employs 850 lawyers, mostly in India.

Now think about that: 850 lawyers growing at 50% per year for five years is 6,455 lawyers--by 2017.  And that is just one LPO.  

HuronHuron Consulting Group (NASDAQ: HURN) recently issued a press release announcing a new document review and data operations facility in Gurgeon, India (functionally a booming suburb of India--I've been there).  The press release reads, "The Company offers around-the-clock global discovery support with 1,500 seats at nine locations across the U.S., U.K., and India to address clients’ complex business needs."  MindcrestAs I noted in an earlier post, Mindcrest, with HQ offices in Chicago but facilities in India, is also growing at a breakneck pace.

Toby draws a conclusion: "The simple math of 50% market growth suggests LPOs are taking market share from firms." 

In my estimation, very few lawyers or law professors grasp what is taking place here.  We look at flat revenues in BigLaw and draw the inference that we are in a prolonged recession.  Meanwhile, the legal business is absolutely booming in India, thanks in substantial measure to its integration into the U.S. and U.K. legal supply chain.  Play these trends forward for five more years, and the prolonged recession storyline will no longer be credible. 

And remarkably, the drivers of this change are publicly traded companies or companies funded by venture capital and private equity.

Beyond Toby's observations, I would add the following to the big picture. The ABA Commission on Ethics 20/20 was recently pressured to drop its recommendation for even a very most modest change to the Rule 5.4 prohibition on fee splitting with nonlawyers.  (see here.)  This effort was lead by the Illinois State Bar Association, which wanted to shut down debate on this topic during the August ABA Annual Meeting in Chicago. 

I fear that the U.S. legal profession is looking through the wrong end of the telescope.  In a practical sense, fee spliting only applies to counseling and advocacy.  But the full legal supply chain includes a host of legal products and inputs that Wall Street and Sand Hill Road capitalists are anxious to supply.  This supply chain analysis is especially true when the client is a Fortune 500 corporation.  The policy that drives fee-splitting is consumer protection and a belief that the nonlawyer profit motive will compromise lawyer independence and injure the client.   Yet, organizational clients want innovation and more for less.  And they are finding non-law firm vendors who are filling that need.   The organized bar is powerless to stop these changes. 

[posted by Bill Henderson]

http://lawprofessors.typepad.com/legalwhiteboard/2012/08/connecting-the-dots-on-the-structural-shift-in-the-legal-market.html

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Comments

Bill, the 3 Geeks links is to the ISBA. ???

Posted by: Ricardo Barrera | Aug 5, 2012 9:20:35 AM

Fixed. Ricardo, thanks for bringing it to my attention. Bill H.

Posted by: Bill Henderson | Aug 5, 2012 7:51:27 PM

Good point on how the profession is changing and consistent with the recent HBR article on unbundling legal services to unlock value:

http://hbr.org/2012/07/points-of-law-unbundling-corporate-legal-services-to-unlock-value/ar/5

Posted by: Fred Krebs | Aug 7, 2012 3:53:10 AM

I am coming late to this conversation, but the opposition to modifying Rule 5.4 was driven by fairly radical arguments for outside investment in law firms. That is a separate issue from the rise of LPOs. LPOs are definitely replacing law firms in some lines of work, but the financial effect of that is difficult to measure. For example, if a large law firm would have hired crowds of temporary lawyers or paralegals to review documents and billed their time as an expense, the client may now be saving some amount of money by going to an LPO based in India, but the law firm is not losing any money as a result of that decision. I think LPOs are here to stay and should be; their pricing model is good for clients in many ways. I am, however, bothered by the self-interested clowns who wrote the HBR article that Fred references (and other like them), who seem to think that almost all legal work can be outsourced, supervisory needs are rare, etc.

Posted by: Doug Richmond | Aug 13, 2012 9:23:36 AM

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