Wednesday, March 27, 2013

Losing the Law Business

Logo_financialreviewThe legal industry is changing in ways that very few lawyers understand.  I recently tried to explain these changes to a savvy nonlawyer, non-American audience through an essay I published in the Cayman Financial Review, entitled, "Losing the Law Business"  (original PDF).  I wanted to share this analysis first with an audience that was, frankly, not emotionally or financially wedded to the outcome--hence, they could be objective. Now I want to gauge the U.S. lawyer reaction, so  I am republishing the essay here on The Legal Whiteboard.  

Losing the Law Business, Cayman Financial Review (Jan. 2013)

by William D. Henderson

If you are not a lawyer, you may find this next sentence very good news.  We are entering a period in human history in which we are going to need fewer lawyers, at least the traditionally trained variety.  The world is becoming more interconnected, regulated and complex.  Although regulation and complexity have historically been very good for the lawyer business, something very fundamental is changing.  Clients are increasingly struggling to pay the bills of artisan lawyers who prefer to craft individual, customized solutions for each transaction and each dispute.

In essence, law is facing a productivity imperative.  To cope with globalization, the world needs better, faster, and cheaper legal output.  The artisan trained lawyer just can’t keep up.  To address the productivity imperative – or, more accurately, to turn a profit from this business opportunity—a new generation of legal entrepreneurs has emerged.

Lawyers continue to have a lock on advocacy work and client counseling on legal matters.  But an enormous amount of work that leads up to the courthouse door, or the client counseling moment, is increasingly being “disaggregated” into a series of tasks that does not need to be performed by lawyers.  Indeed, it may be best performed by computer algorithms.  Further, the entire process is amenable to continuous improvement, driving up quality and driving down costs.  This is a job that is likely more suitable for a systems engineer, albeit one with legal expertise, than a traditionally trained lawyer.

Although this change may sound radical, it is actually the logical next step in an evolutionary progression that began in the early 20th century as the practicing bar transitioned from generalist solo practitioners to specialized lawyers working together within law firms.  Now, as clients search out ways to stretch their legal budgets, specialization is losing market share to process-driven solutions, akin to how Henry Ford’s assembly line methods supplanted craft production.

To illustrate this progression, consider the U.S. legal market at the beginning of the post-War period.  At that time, 61% of all lawyers worked as solo practitioners. Not surprisingly, incomes were low.  In 1948, the average lawyer in private practice made $5,200 per year, which was several hundred dollars less than his government lawyer counterpart.   There were private practice lawyers, however, who defied this trend.  Less than 2% of U.S. lawyers worked as partners in law firms of nine partners or more, but these “large” firm lawyers made, on average, five times more than their solo practitioner peers.

Why so much more?  Because the world was becoming more regulated and complex.  And sophisticated, specialized lawyers with deep technical expertise were in short supply.  By combining into a firm, lawyers could specialize in new or existing areas of law, handle bigger and more complex matters, and otherwise coordinate their efforts to better serve clients.  Indeed, the most successful large law firms, such as the New York City firm of Cravath Swaine & Moore, organized themselves so as to optimize the training of junior lawyers in both substantive law and the ability to supervise and delegate (the “Cravath system”).  Fittingly, during the 1930s, the press dubbed these firms “law factories.”  The best junior lawyers eventually became partner; the rest obtained the benefit of excellent experience and training, thus obtaining jobs with clients or partnerships with other law firms.

For the next several decades, firms with significant business clients and a partner-associate training model tended to prosper.  As a measure of longevity of the specialist model, among the largest 100 law firms in the U.S. as measured by gross revenues (the AmLaw 100), the average name partner was born in 1895 and died in 1964 – yet the growth has marched on for another half century.  The period of greatest financial success has occurred during the last three decades.  Between 1978 and 2003, total U.S. legal expenses as a percentage of GDP increased from .4% to 1.8%.  From this growing pie, large firm lawyers where getting the biggest slice.  By the mid-2000s, the profit share of the average partner in an Am Law 100 firm was over $1 million per year.

One obvious drag on the legal industry’s reluctance to embrace innovation is the financial success enjoyed under the old model.  It is hard to convince a group of millionaires that their business model is broken.  A second drag is insularity.  The U.S./U.K system of lawyering is premised on the idea of independence.  In the U.S., ethics rules prohibit lawyers from splitting fees with nonlawyers.  Thus, only lawyers have an equity interest in law firms.  In the U.K. and Australia, in contrast, the ban on fee-splitting has been significantly relaxed, enabling the public listing of law firms and the entry of name-brand companies, such as Tesco (a supermarket retailer), into the consumer legal business.

Ironically, the insularity of the U.S. legal market may have created a more attractive target for capitalists. Among corporate clients, the combination of high law firm profits and low innovation has created discontent among C-suite executives.  They ask their general counsel, “why are legal expenses going up faster than other departments?  What value are we getting for these higher fees?”  The general counsel has no persuasive reply.

Perhaps the best example of new entrepreneurs serving corporate clients is the large number of vendors working in eDiscovery and document review. The explosion in digital data over the last 10 to 15 years has made it untenable to continue using expensive law firm associates for an exhaustive manual review. 

Initially the work went to registry services, which assembled large crews of temporary low-wage “contract” lawyers for large document review projects.  After building a sufficient data infrastructure and security controls, the work flow has gradually expanded to legal process outsourcers (LPOs) in places like India, where a fraction of the wages paid to U.S. contract attorneys could attract highly motivated and able Indian lawyers.  Having achieved sufficient success and scale, the best LPOs are now turning to process engineering, combining this highly motivated and able labor with superior technology and workflow design. 

More recently, new vendors have emerged who specialize in “predictive coding.”  In a case that considered acceptable methods of conducting electronic discovery, a federal judge in New York City reviewed studies comparing the cost and accuracy of computer-based machine algorithms (predictive coding) with manual human review.  Finding that the predictive coding was at least as accurate as manual methods and reduced the number of documents for human review by a factor of 50, the judge ruled that predictive coding was judicially reasonable in many cases involving large numbers of documents.

Although many large U.S. law firms may perceive document review as “commodity” legal work not worthy of their efforts, the new legal vendors getting into this space are remarkably well capitalized.  For example, one of the larger suppliers of contract attorneys is Robert Half, which has 26 locations through the U.S. and Canada.  Its corporate parent, Robert Half International, is publicly traded on the New York Stock Exchange (RHI).  Another company in the contract attorney space is Special Counsel, which has 36 U.S. offices.  Special Counsel is a subsidiary of Adecco Group, which is listed on the SIX Swiss Stock Exchange (ADEN).

In the LPO space, Pangea3, which opened in 2004 with $1.5 million in venture capital, was sold in 2010 to Thomson Reuters (NYSE symbol TRI) for an amount reported to be in the $35M to $40M range. [ed: I later learned from a highly reliable source that the true price was just under $100M.]  The original management team was kept intact, as the company has been growing between 40% and 60% every year since its founding.  The company now employs over 850 lawyers, mostly in India.  Because of its emphasis on process improvement, Pangea3 and other high-end LPOs are obtaining a competitive advantage beyond mere wages.  Thus, LPOs have become a much more attractive option for Indian law graduates.  Another competitor is Huron Consulting Group (NASDAQ symbol HURN), which recently announced a new document review facility in Gurgeon (a booming suburb of Delhi), bringing its total global document review workforce to 1,500 in 17 offices worldwide.  Since 2007, Huron Consulting Group’s annual revenues have nearly doubled, growing from $315 million to $606 million.

The major players in the predictive coding space are also well capitalized.  One of the leaders is Recommind, a privately held company with $15 million in revenues in 2011 and approximately 100 employees in facilities in California, London, Germany and Australia.  Similarly, Kroll Ontrack, which started in the hard disk recovery business nearly 30 years ago, has information management services that include predictive coding as part of its broader eDiscovery services.  Kroll Ontrack is owned by Kroll, Inc., which was recently acquired by Altegrity, an information conglomerate owned by Providence Equity Partners.  Providence Equity is a global private equity firm with over $27 billion under management.

Since 2008, revenues in large U.S.-based law firms have been relatively flat.  A recent article in Managing Partner magazine acknowledged that law firms are losing market share to the LPOs –which broadly includes all the companies mentioned above—as general counsel are increasingly contracting with LPOs directly.  The savings are perceived to be in the 50% range with no diminution in quality.  According to the article, the LPO business is estimated to be a $1 billion per year industry that will double in size over the next two to three years.

Unlike traditional lawyers, the competitive advantage enjoyed by these new entrants is that they have learned how to learn.  If law is like other industries, these companies will move up the value chain and find new ways to satisfy the needs of large corporate legal departments.  Law is not just for lawyers anymore.  This genie is permanently out of its bottle.

March 27, 2013 in Current events, Data on the profession, Innovations in law, Law Firms, Legal Departments, New and Noteworthy, Structural change | Permalink | Comments (1)

Sunday, March 24, 2013

Thank you to an Anonymous Alum

Each year, the instructors in Indiana Law's 1L Legal Professions class coordinate with Indiana Law's Office on Career and Professional Development (OCPD) to run the Career Choices Speakers Series -- 16 lunchtime forums on Thursdays and Fridays throughout the second semester.  It has been an enormous hit with students.  Although our 1Ls are required to attend at least three, a huge proportion of the 1Ls attend over ten.

Below is a photo of this Thursday's pizza run for the session on Direct Service Public Interest Lawyers -- 22 pizzas and the laptop/scanner used for attendance.  Over the course of semester, we will purchase well over 300 pizzas.  Who pays for all of this food and equipment (plus about a dozen dinners for students and alums that occur before and after these events)?  An Indiana Law alumni who profoundly believes in the role of ethics and integrity to achieve personal and professional success in life.  And he has done so quietly, behind the scenes, every year for the last five.

I thought our alum would enjoy seeing the pizza gurney.  Thank you!  You are opening students' eyes and helping them make better decisions, all through relationships with other lawyers.

Careerchoicepizza

[photo credit, 1L Dakota Scheu, via iPhone].  For additional information on this highly effective program, see my prior post, A New Tool for Lawyer Professional Development.

[posted by Bill Henderson]

March 24, 2013 in Current events, Data on legal education, Innovations in legal education | Permalink | Comments (1)

Wednesday, March 13, 2013

ReInvent Law is a Really Big Deal

KatzknakeI was at the ReInvent Law Silicon Valley event last week.  Following up on Jerry's thorough remarks, I can honestly say it was unlike any legal education and lawyer conference I have ever attended (the only thing close is Law Without Walls).  There is a new guard in the legal academy taking shape, and it is led -- truly led -- by Dan Katz and Renee Knake at Michigan State. 

Admittedly, Dan and Renee lean heavily toward my bias.  Most of us law professors talk.  Dan and Renee, in contrast, are doers.  Shortly after becoming assistant professors, they each moved quickly from ideas to action to actually having the audacity to attempt to build new and relevant institutions. Moreover, they both did it untenured--Dan is only in his second year of teaching and Renee just cleared the tenure hurdle earlier this year.  They did all of this without a net. To my mind, they are winning the "Game of Life."  If other junior faculty follow their example, the legal academy is going to truly change.  And right now, that is what we need.

One of my favorite Paul Lippe quotes is this, "In hindsight, the new solutions are all going to look obvious."  ReInvent Law was 40 speakers tied together by a common interest in experimentation. Were all the ideas good?  If history is any guide, and the criteria is moving from concept to implementation to financial and institutional sustainability, the answer is surely no. But it was invigorating to be in a room of doers who are all willing to risk failure.  That is the courage and leadership we need right now.  To me, it looked obvious that we need a place like ReInvent Law where insurgent ideas can be expressed with enthusiasm, even if only a handful or fewer will transform the legal landscape.

I was fortunate to be one of the presenters.  Dan Katz was kind enough to take my picture when I gave my Ted-style talk (all the talks were Ted-style or "Ignite").  If you zoom-in on me, I look ridiculous.  I am no showman.  But you have to admit that the lighting is pretty spectacular.  The green screen, by the way, is the running twitter feed, an idea that I can assure you was not stolen from the ABA or the AALS.

  ReInventLaw

Amidst all these "revolutionary" ideas, I think my presentation was probably the most conservative.  My central claim is that 100 years ago, as the nation struggled to find enough specialized lawyers to deal with the rise of the industrial and administrative state, some brilliant lawyers in cities throughout the U.S. created a "clockworks" approach to lawyer development.  These clockworks filled the enormous skills and knowledge gap.  Firms like Cravath, Swaine & Moore, through their "Cravath System," finished what legal educators started.  (I use the Cravath System as my exemplar because its elegant business logic was written out so meticulously in the firm's 3-volume history.)  

The whole purpose of the clockworks was to create a "better lawyer faster."  This is a quote from volume II.  The company I co-founded, Lawyer Metrics, incorporated it into our trademark -- the value promise is that compelling.  See the slides below.

Here is the Slideshare description:

The original Cravath System circa 1920 demonstrated the power of a "clockworks" approach to lawyer development. The system was a meticulously designed and mechanized way to create specialized lawyers who could service the needs of America's rapidly growing industrial and financial enterprises -- lawyers who were in perennial short supply because the requisite skill set could only be learned by doing. The System endured for a century because it solved the specialized lawyer shortage by making every stakeholder better off -- junior lawyers (received training), partner-owners (large, stable profits), and clients (world class service and value). 

Today's legal employers and legal educators would benefit by revisiting this system's powerful business logic. The clockworks approach to lawyer development still works. The only difference is that the specifications for a great lawyer have changed. Like the original Cravath System, a new clockworks would create a "better lawyer faster." 

[posted by Bill Henderson]

March 13, 2013 in Current events, Data on legal education, Data on the profession, Fun and Learning in the classroom, Innovations in law, Law Firms, Legal Departments, New and Noteworthy, Structural change | Permalink | Comments (0)

Monday, March 11, 2013

Suffolk Law Presents Susskind on "Tomorrow's Lawyers"

Image010Legal futurist Richard Susskind, author of The End of Lawyers? and Tomorrow's Lawyers will headline the launch of Suffolk University Law School's Institute on Law Practice Technology and Innovation on April 18 in Boston, MA.

According to the school's announcement, "Professor Susskind will discuss some of the key concepts from his new book, offering a close look at where the profession is heading and what we'll find there -- a challenging new world for some, and a vibrant future for others."

The program will include a panel discussion on the implications of Susskind's remarks, moderated by Andrew Perlman, Suffolk Law Professor and Chief Reporter for the ABA Commission on Ethics 20/20.  The panelists are Jordan Furlong, Partner at Edge International and Senior Consultant with Stem Legal, Krish Gupta JD '96, Senior VP & Deputy General Counsel at EMC Corp., and Regina Pisa, Chairman of Goodwin Procter LLP.

A reception will follow.  The cost is $75 ($35 for academics and Suffolk alums).  Registration is available online.

[Jeff Lipshaw]

March 11, 2013 | Permalink | Comments (0)

Sunday, March 10, 2013

Thoughts on the Future of Law from ReInvent Law - Silicon Valley

I had the privilege of attending ReInvent Law—Silicon Valley – on Friday, March 8.  Special kudos go to Professors Renee Knake and Daniel Martin Katz from the Michigan State University College of Law and to the Ewing Marion Kauffman Foundation for sponsoring the event and bringing together a significant number of thought leaders who are engaged in thinking about how to use technology to improve the access to and the provision of legal services in the United States and globally.

There were too many presentations to try to summarize everything that was shared during the day. Nonetheless, there were a few themes that showed up throughout the course of the day that merit attention as we think about where the market for legal services might be headed.

First, several people made presentations focused on the increasing importance of data analytics, knowledge management and process management.  These included Josh Becker of Lex Machina (discussing generating economic value from analyzing large volumes of patent litigation data), Kingsley Martin, of KMStandards and Sol Irvine of Yuson & Irvine (both discussing knowledge management relating to contract language to develop more efficient processes for drafting contracts), Karnig Kerkorian and Rudy Minasian of Velawsity (discussing process management tools to help solo practitioners by more efficient), and Sean McGrath of Propylon (discussing temporal data management tools that allow searchers to identity the effective language of regulations or statutes at a specific time) to name just a few.

Second, several people emphasized the need for broader access to legal services at affordable prices and discussed the use of process management and alternative structures to better meet the need for legal services for middle class people and small business owners.  These included Stephanie Kimbro of Burton Law (encouraging unbundling of legal services and greater participation in branded networks), Chas Rampenthal of LegalZoom (imagining what legal services might look like if a major retailer decided to offer legal services), Raj Abhyanker of LegalForce (discussing process management and data management as key to growth of Trademarkia (predecessor to LegalForce)) and Charley Moore of RocketLawyer (discussing the needs of small business owners to have more affordable guidance regarding how to deal with regulatory structures and legal problems). 

Third, related to the access question, there was significant discussion of the constraints of Rule 5.4 and the revolution taking place in the United Kingdom following the authorization of Alternative Business Structures for providing legal services.  Presenters discussing the evolving legal services market in the United Kingdom included Ajaz Ahmed of Legal365.com (discussing a legal services market ripe for disruption from businesses focused on client service) and Andy Dawes of Riverview Law (discussing the growth of its fixed fee model of providing services to corporate clients).

In addition, our own Bill Henderson made a presentation on the training model that might be necessary to better prepare lawyers to be effective in the new normal, with greater emphasis on data analytics, knowledge management and process management in addition to traditional legal knowledge and relationship skills.

One of the most thought provoking presentations for me was the presentation by Colin Rule of Modria regarding the growth of Online Dispute Revolution.  Modria is an outgrowth of the dispute resolution components of EBay and PayPal where 60 million disputes have been resolved in an “extrajudicial” context, with many being resolved only through use of software (without the intervention of other humans).  This prompted me to realize that if one reconceptualizes the access to legal services issue as an access to justice issue, there may be a variety of more efficient ways to offer people access to justice that might completely bypass the current legal system. 

There was much to think about regarding a legal services market that is facing the reality of disruptive innovation.  What the conference highlighted for me is that change is happening and that there are a number of very bright, very thoughtful people who are trying to invent the future by taking advantage of data and technology to find better, more efficient, more affordable ways to provide legal services to a broader array of clients.  Not all of the innovators in attendance at the conference are going to have an economically viable model, but some of them will, and that will mean some of them will be winners, and some of those who continue to do things the traditional way are going to be losers.

[posted by Jerry Organ]

March 10, 2013 in Data on the profession, Innovations in law, Law Firms, New and Noteworthy | Permalink | Comments (0)