Thursday, December 6, 2012
Three years ago, in the depths of the economic recession resulting from the mortgage meltdown, the vast majority of major law firms in the country were engaged in significant restructuring, frequently called “downsizing” or more euphemistically “rightsizing.” This was a regular news item in legal publications such as The American Lawyer and on blogs. Each week brought news of a few or several major law firms that were planning to cut staff, cut associates or even cut partners. Indeed, some of the major law firms, such as Howrey and Dewey LeBeouf, ultimately didn’t survive the economic downturn.
While the large firm legal marketplace was in turmoil in 2009 and 2010, law school enrollment and tuition continued to climb, even as law school graduates increasingly were having difficulty finding employment. According to the LSAC Volume Summary, in the last two years, as prospective students have become increasingly aware of the challenging employment outlook for law school graduates, and the increasing cost of law school, the number of applicants to law schools has declined by over 20%, from 87,500 to roughly 68,000. According to the ABA, the number of first-year students has declined by over 8000, a decline of 15%. Assuming an average net tuition of $25,000 per student (a rough estimate of average sticker price tuition less a rough estimate of average scholarship) this decline of roughly 8000 in first-year enrollment means law schools probably are missing roughly $200 million in first-year revenue for the 2012-2013 academic year as compared to the 2010-2011 academic year.
Of course, just as some law firms were more impacted by the economic downturn in 2009 than other law firms, some law schools are more impacted by the decline in first-year enrollment than other law schools. Comparing school-specific enrollment data between 2010 and 2012 for the 140 law schools which have published enrollment data for their entering class in fall 2012, 59 schools – over 40% of those with available enrollment data – have seen a decline of 20% or more in their first-year enrollment, and 15 of those 59 have seen a decline of 30% or more.
For a hypothetical law school with an entering class of 200 students in 2010, a decline of 20% or more in first-year enrollment means a first-year enrollment in 2012 of 160 students or fewer. Again, assuming $25,000 in net tuition per student, that decline of 40 or more first-year students translates to at least $1 million less in first-year revenue in 2012 than in 2010. If the hypothetical law school has seen a decline of 30% or more, that would mean a decline of 60 or more first-year students that translates to at least $1.5 million less in first-year revenue in 2012 than in 2010. If similarly smaller classes are enrolled in 2013 and 2014, this hypothetical law school will be receiving $3 million to $5 million less in revenue in 2014 than it received in 2010.
There are 59 law schools with a decline in first-year enrollment between 2010 and 2012 of at least 20%, 15 of which have seen a decline of 30% or more. With that many law schools feeling significant revenue pressure, one might think we would be hearing regular news stories about layoffs or restructuring or downsizing or rightsizing among law schools, comparable to what we heard about major law firms in 2009-2010. But since the start of 2012, there have been only two news stories on law school layoffs or restructuring -- one in spring of 2012 when the University of California-Hastings School of Law announced that it would shrink its class by 20% and layoff over a dozen staff members (while increasing tuition), and more recently, when the National Law Journal published a story about budget-cutting at Vermont Law School. Notably, neither of these two law schools are among the 59 that have seen a decline of 20% or more in first-year enrollment between 2010 and 2012, as Hastings enrollment is down roughly 17% between 2010 and 2012 and Vermont enrollment is down roughly 18% between 2010 and 2012.
Law schools presently are going through the same revenue shortfalls law firms went through in 2009 and 2010. Enrollment is down significantly and revenue has declined significantly. Law schools have to be engaged in restructuring – in downsizing or rightsizing. My colleague, Mark Osler, engaged in a thought-exercise about how law schools might do this a couple of months ago on the Law School Innovation blog. But almost no one is reporting on what is actually happening at the dozens of law schools trying to deal with significant budgetary distress.
In the coming months or in the next year or two, law schools will be leaner – with fewer staff and possibly fewer faculty (if early retirement options are put on the table or if untenured faculty are released). And quite possibly, some law schools may close. While a law school being forced to close likely will be news, it appears that law school restructuring generally is less newsworthy than law firm restructuring.
As a result, we are experiencing a stealth restructuring in legal education. Please don’t tell anyone.
[posted by Jerry Organ]
Wednesday, December 5, 2012
I have been reading about predictive coding for a few months now, and that is my conclusion. Predictive coding is the use of computer algorithms and machine learning to conduct the review of electronically stored information (ESI). For a useful primer, see Frederick Kopec, Predictive Coding in eDiscovery or Predictive Coding for Dummies (remarkably, there are two editions, one by Symantec and the other by Recommind, see Legal Tech Insider, A Tale of Two Predictive Coding Books).
From the client perspective, predictive coding is at least as good as first-level human review (typically junior attorneys screening for relevance and privilege) but dramatically less expensive. And note, whatever efficiency and accuracy benefits predictive coding has today, it will only improve in the months and years to come. It contrast, our processing capacity as humans is, well, static.
The big players in the space are Kroll Ontrack and Recommind. These are not insignificant companies. Kroll Ontrack started as a hard disk recovery service and evolved into the e-discovery and information management services. It now employs 1,500 workers in eleven U.S. and nineteen foreign locations around the world. In 2010, Kroll Ontrack had revenues of $250 million. A few layers up, it is owned by the Private Equity giant Providence Equity Partners.
Recommind has approximately $15 million in annual revenues and approximately 100 employees spread over facilities in Massachusetts, California, London, Germany, and Australia. According to this June 2012 story at the CIO Agenda at Computer Business Review, Recommind is gearing up to go public.
Howard Sklar, Senior Corporate Counsel for Recommind, just posted an essay entitled, Legal Acceptance of Predictive Coding: A Journey in Three Parts. The parts are: (1) acceptance that predictive coding reasonable, (2) arguments that it is better and thus must be used in this case, (3) sua sponte judicial order that it be used. The fourth part, still to come argues Sklar, is a state bar ethics watchdog issuing a ruling that failure to use predictive coding is unethical.
Here is an excerpt from Sklar's post:
There’s a certain trajectory for technology adoption. Early adopters, mainstream acceptance, laggards. But, slow or fast, adoption occurs. The law is the same way, in its own fashion. But the legal acceptance of predictive coding has had a path that’s unorthodox. From the legal perspective, predictive coding has gone through three cycles, not entirely as expected.
In cycle one, companies began using predictive coding. The efficiencies are compelling. Better end results in less time at a cost savings. An ability to better find and understand the facts embedded—sometimes hidden—in your documents. These things are crucial in today’s corporate world. Law firms were slower, but generally followed their clients into predictive coding, and soon saw the benefits first hand.
Other vendors—usually the first to adopt new technology—were laggards. They fought the adoption of predictive coding as long as they could, mainly because they didn’t have the capability to do it themselves. Eighteen months ago, the most frequent question I would get at conferences was “has there been a court case approving the use of predictive coding?” In the “ridicule it and it will go away” marketing approach, they were hoping to scare corporations and law firms away from the benefits corporations could achieve.
Then came Da Silva Moore and Global Aerospace [which, against the objections of one of the litigants, ruled that predictive coding was a judicially reasonable method of conducting discovery.] ...
During this period, other vendors stopped criticizing predictive coding and started marketing it—sometimes with the capability, sometimes without. ...
After waiting for the first decision approving the use of predictive coding, we went to stage two faster than anyone had thought possible: not whether you can use predictive coding, but whether you must use it. This was the argument in the Kleen Products case. The defendants had completed their review, and the plaintiffs’ argued that the review was defective because predictive coding wasn’t used. Eventually, the parties cooperated to end that dispute, but the argument had been made. ...
We’re now in stage three: a court has sua sponte ordered the use predictive coding. And not just any court, the Delaware Chancellery Court, one of the most important corporate courts in the nation.
In the future, we’ll enter stage four: the decision by a state bar’s ethics watchdog that failure to use predictive coding is ethically questionable, if not unethical. After all, purposefully using a less-efficient, less accurate, more expensive option is problematic. I think that’s probably 18 months away. But given how fast we’ve gone through the first three states, stage four may come next week.
[posted by Bill Henderson]
Sunday, December 2, 2012