Wednesday, November 27, 2013

The Sleeping Giant -- Hope and Purpose for Law Students

KatzjpgIf you have the courage and curiosity to understand the breadth and depth of the changes taking shape in the legal market, then I would encourage you to use some of your Thanksgiving break to read "Recalculate the Future of Law," which is Insight Lab's interview with MSU Law Professor Dan Katz.    

It is all-too-easy to believe that innovation occurs in the wake of a great idea, but that is not quite right.  Innovation is also about timing and understanding how human institutions are held together and change and evolve.  If the innovator has the benefit of timing and understands how human institutions actually work, an effective adoption strategy is possible.  

Fortunately, for Dan Katz, all of these factors appear to be in alignment. Katz is acutely aware of his timing and the myriad of factors that enable innovation to take hold.  He is also young (35 years old) and has the courage to place very large bets -- the largest bet being that he is not waiting to get tenure before starting his life's work.  He is doing it now in his third year of teaching.  

But to mind, there is some additional secret sauce.  What makes Katz so disruptive is his 100% personal commitment to the growth and potential of his students. He is awaking the sleeping giant -- hope and a sense of purpose for young people.  Specificially law students.  If you are in his ReInvent Law Labratory, you see a different legal landscape with a whole lot more options. But to tap into that hope, Dan makes you do the work.  You have to challenge yourself.  And you have to shed the bullshit phobia over basic math. He is building a community of interest that has the potential to morph into a movement driven by young lawyers and law graduates.  For more on Katz's unusual bio, see "This is just an education design problem," LWB, Sept 23, 2013.  

 The interviewer over at Insight Labs got pretty close to the full, uneditted Dan. If you want to learn about the underinvestment problem that is undermining BigLaw, the crucial role of start-ups in the emerging field of legal R&D, how the next generation of law students can do well and do good, or the real hazards of the $1 Million JD debate, give it a full read.

November 27, 2013 in Blog posts worth reading, Current events, Fun and Learning in the classroom, Innovations in law, Innovations in legal education, New and Noteworthy, Structural change | Permalink | Comments (2)

Sunday, November 24, 2013

"Ten Years After—Where We Have Been and Where We Are Going"

MonicaBayThat is the title of a panel at the Annual Georgetown Advanced E-Discovery Institute conference.  In an article in Law Technology News, Monica Bay does a wonderful job summarizing what appears to have been a lively, thought-provoking discussion. I can't do better than Monica, but I so want to highlight some of quotes that really caught my eye:

[DC Federal Magistrate Judge] Facciola served as moderator, and threw the first question at Butterfield [partner at Hausfeld], who dove right into a discussion of the explosion of data creation, citing a laundry list of impressive facts, including that "every minute of every day Google receives two million queries ... 571 websites are created every minute ... and more than 200 million emails are sent every minute. We are communicating in ways that didn't exist 20 years ago," he said. ... 

Facciola asked Butterfield if he was troubled by the outsourcing of e-discovery to nonlawyers and/or machines. "I do see the tension because lawyers must certify the work," Butterfield acknowledged. ... 

Facciola then turned to [SDNY District Court Judge Shria] Scheindlin, who shifted the focus to the courts. "All cases are now e-discovery cases," she asserted. "Even the littlest cases have e-discovery, everyone has to know how to do it," she said. ... 

Scheindlin said we are entering an era of a divide between the "technology haves and technology have-nots," and noted that small firms may not be able to afford the start-up costs that e-discovery requires. She reminded the audience that not every litigant can afford a lawyer. "Twenty-five percent of my cases are pro se," she said. ... 

Facciola then posed the question of whether lawyers as a group welcome technology and change.

"I think the reality is that most lawyers are not innovators and are afraid of technology," offered Redgrave. "There is a reality that to have continued value, lawyers need to understand technology. ... " 

Asked Facciola: "Is this 'Star Trek'?" Scheindlin jumped in: "Of course trials will change—the question is, will we have trials anymore?" Scheindlin noted that routine technology, such as GPS, cellphones, Facebook and other location tools are changing our daily reality to the point where it's increasingly easy to prove facts. "There are no conversations any more, it's emails and texts. We will know where folks are," she said. ...  Technology is making it so we always know where people are; thus no need for alibi witnesses."  ...

Finally, lawyers need to abandon the "gladiator" role that is imprinted in law school, the panelists asserted, taking strong pokes at the current status of law schools.

"Do I think legal education is keeping up [with technology and cooperation]? Absolutely not.... 

Scheindlin warned academia that they need to get with the reality. "I think the notion of a two-year law school is coming, with the third year clerking." But, she qualified, "I wouldn't be surprised if law schools turn around. The younger generation is more tech savvy than we are. Many lawyers are technophobic, but the next generation is growing up with technology."

That was quite a provocative exchange, and not by legal futurists, but judges and practicing lawyers presiding over cases in federal court. 

Related post:

November 24, 2013 in Blog posts worth reading, Current events, New and Noteworthy, Structural change | Permalink | Comments (0)

Understanding Trends in Demographics of Law Students – Part Three

Why the Difference in Response to Market Signals?

In Part One, I analyzed how analysis of changes in applicants from LSAC’s Top 240 Feeder Schools demonstrates that graduates of more elite colleges and universities have abandoned legal education at a rate greater than graduates of less elite colleges and universities. 

In Part Two, I analyzed how the pool of applicants to law school has shifted with a greater decrease among applicants with high LSATs than among applicants with low LSATs resulting in a corresponding  increase in the number and percentage of matriculants with LSATs of <150.

What might explain why applicants to law school are down more significantly among graduates of more elite colleges and universities than among graduates of less elite colleges and universities?  What might explain why applicants to law school are down more significantly among those with LSATs of 165+ than among those with LSATs of <150?  Is there some relationship between these data points?

There likely is some relationship between these data points.  Many of the more elite schools in the LSAC’s list of the Top 240 Feeder Schools have historically been schools whose graduates on average have higher LSAT scores compared with graduates from less elite schools.  The LSAC’s 1995 publication, Legal Education at the Close of the Twentieth Century:  Descriptions and Analyses of Students, Financing, and Professional Expectations and Attitudes, authored by Linda F. Wightman, discusses the characteristics of the population of students who entered law school in the fall of 1991.  Roughly 31% of the students scoring in the top quarter in terms of LSAT came from very highly selective undergraduate schools, roughly 31% from highly selective undergraduate schools, and only 17% from the least selective undergraduate schools.  Id. at page 38, Table 20. Thus, it is very likely that these two data points are related – that the greater decline among applicants from more elite colleges and universities is correlated directly with the greater decline among applicants with LSAT scores of 165+.

I want to offer three possible explanations for this differential response to market signals among different populations of prospective law students.  The first two focus on the possibility that market signals are communicated differently to different populations.  The third focuses on how different populations of prospective law students simply might respond to the same market signals in markedly different ways.

Different Pre-Law Advising Resources May Mean Market Signals Penetrate Some Populations of Prospective Law Students More Deeply Than Other Populations of Prospective Law Students.  Focusing first on the nature of the feeder schools, one possibility is that access to pre-law advising resources differs across these different categories of feeder schools resulting in different messages being communicated to applicants from less elite colleges and universities than to applicants from more elite colleges and universities regarding the cost of legal education and the diminished employment prospects for law school graduates in recent years.  Perhaps there are more robust pre-law advising programs among the elite colleges and universities than among the less elite colleges and universities, with pre-law advisors who really have their finger on the pulse of what is happening in legal education and the legal employment market.  Perhaps these more robust pre-law advising programs are engaging in programming and advising that communicates more effectively to prospective law students the significant costs of legal education and the ways in which the challenging employment reality for law graduates in recent years makes the significant cost problematic.  As a result, perhaps larger percentages of prospective law students at more elite colleges and universities are getting more information about the increasing costs and diminished employment prospects for law graduates and are deciding to wait to apply to law school or are deciding to pursue a different career completely. 

Alternatively, pre-law advisors may have different responses to market signals in thinking about their role in advising students.  Perhaps pre-law advisors at more elite colleges and universities are more directive about discouraging students from considering law school while pre-law advisors at less elite colleges and universities are more inclined simply to support student interest in pursuing law school.

There clearly are disparate allocations of resources to pre-law advising across various colleges and universities, different levels of engagement among pre-law advisors and different perspectives on how directive one should be in advising students considering law school.  That said, I am not sure these differences necessarily can be delineated in relation to the extent to which a college or university is considered an elite college or university or a less elite college or university.  Moreover, with so much information now available on the internet, it is not clear that pre-law advisors are the primary source of information for prospective law students. 

These hypotheses would benefit from being explored empirically.  What are the relative pre-law advising resources at the schools down more than 30% in applicants between 2010 and 2012 relative to the pre-law advising resources at the schools down less than 10%? Are pre-law advisors at the colleges and universities down more than 30% in applicants between 2010 and 2012 more inclined to affirmatively discourage students from considering law school than pre-law advisors at  colleges and universities down less than 10%?  Were prospective students at these two categories of schools really receiving different messages about the employment situation for law graduates and the cost of law school?

Different Social Network Signals and Influences --- Another possibility might involve social network signals and influences.  Significant empirical data indicates that on average different socio-economic populations attend different types of colleges and universities.  Among those entering law school in fall 1991 from very highly selective undergraduate schools, nearly three times as many were from families from upper socio-economic status as from lower-middle socio-economic status.  Legal Education at the Close of the Twentieth Century:  Descriptions and Analyses of Students, Financing, and Professional Expectations and Attitudes, at page 38, Table 20.  By contrast, among those entering law school in fall 1991 from the least selective undergraduate schools, nearly twice as many were from lower-middle socio-economic status as from upper socio-economic status.  Id. Similarly, there is fairly significant empirical data indicating that different socio-economic populations generally attend different tiers of law schools with more of the socio-economically elite at higher-ranked law schools and fewer of the socio-economically elite at lower-ranked low schools.  Id. at pages 30-31,  Table 15 and Figure 7; Richard H. Sander and Jane R. Bambauer, The Secret of My Success:  How Status, Eliteness and School Performance Shape Legal Careers, 9 J. Empirical Legal Stud. 893, Table 2 (2012)(analysis of the After the JD dataset looking at a representative sample of law school graduates who took the bar in 2000). 

Given this background, it would seem plausible that graduates of more elite colleges and universities on average represent more of an upper-income socio-economic population who may know more lawyers than graduates of less elite colleges and universities who may on average represent more of a middle class socio-economic population.  The parents of graduates of more elite colleges and universities may be more likely to be lawyers and/or have friends who are lawyers.  Thus, it is possible that graduates of more elite colleges and universities may be more likely to have received negative signals about the rising cost of legal education and the diminished employment prospects for law school graduates in recent years from family and friends than did their peers from less elite colleges and universities.  This hypothesis also would benefit from being explored empirically.

Different Decision Matrices Based on Socio-Economic Status and Opportunity – Another possibility is that regardless of whether students across different types of feeder schools really are getting different messages about the costs of legal education and the challenging employment prospects for law school graduates, they simply may be making different decisions in response to that information.  This hypothesis builds on the possibility that different populations of prospective law students may have different motivations for considering law school or may evaluate the value of a legal education using different parameters given different sets of options that might be available to them.  It is possible that the market signals regarding employment of law graduates are more nuanced than we might generally appreciate.  

For example, it may be that graduates of elite colleges and universities, who also tend to be among the socio-economic elite, have a variety of employment options coming out of college that are more attractive than law school at the moment given the diminished job prospects for law graduates in recent years.  If these students generally value a law degree primarily because of the status associated with acquiring a “prestigious” job in a big firm upon graduating from law school, than the significant decline in big firm jobs might frame their analysis of the value-proposition of law school.  Changes in the legal employment marketplace, particularly significant declines in the number of positions with “prestigious” big firms, may have made the legal profession less attractive to the socio-economic elite, who may be able to pursue job opportunities in finance, investment banking, consulting, or technology, or meaningful public interest opportunities such as Teach for America, that are viewed favorably within their social network. 

By contrast, for graduates of less elite colleges and universities, who are generally not from the socio-economic elite, fewer opportunities may be available in finance, investment banking, consulting, and technology.  In addition, they may lack the financial flexibility to make Teach for America or other public interest opportunities viable.  Moreover, this set of prospective law students may be more motivated simply about becoming a lawyer and acquiring the status that comes with being a lawyer (even if they are not going to become a big firm lawyer, but are simply going to be a family law attorney, or a public defender or a worker’s comp attorney).  This population may be less focused on big firm options and less concerned about the lack of jobs in that niche within the market and may see any position within the legal profession as a path toward financial security and social status, despite the increasing costs of legal education and the diminished employment prospects of law graduates. 

These hypotheses also may merit more empirical assessment.  What are the graduates of more elite colleges and universities choosing to do in greater numbers as significantly smaller numbers apply to law school?  Are there different motivations for pursuing law school among different socio-economic populations?

Regardless of the explanation for the current changes in application patterns, it would appear that the population of law students not only is shrinking, but may be going through a modest demographic transformation, with a somewhat smaller percentage of law students representing the socio-economic elite and a somewhat larger percentage of law students from lower on the socio-economic scale.  First-year students in 2013 may be slightly less “blue blood” and slightly more “blue collar” than they were in 1991.  Whether this is a short-term trend or a longer term reality remains to be seen.  What it might mean for legal education and the legal profession over time also remains to be seen.

November 24, 2013 in Data on legal education, Data on the profession, Scholarship on legal education, Scholarship on the legal profession | Permalink | Comments (0)

Saturday, November 23, 2013

Bringing the Disruption of the Legal Services Market into the Law School Classroom

Is it important to help law students understand the disruptions that are now occurring in the legal industry?  Well, let me ask a more fundamental question.  How can a law professor efficiently obtain better information on these complex and diffuse changes? None of us legal academics are experts in this area, and that's a problem in and of itself.

In the process of struggling with these questions, I decided to carve out 15% of the grade in my Corporations class for team-based profiles of NewLaw companies.  Here is how I described the conundrum in my syllabus:

The legal industry is changing in dramatic ways, including the creation of new legal businesses that rely upon technology and process design to solve legal problems that have traditionally been handled by lawyers. These businesses are often financed and managed by nonlawyers, which some of you may find surprising. ...

Remarkably, very few practicing lawyers grasp the type of industry context described above ...  Yet, the influx of financiers and technologists is likely going to have a dramatic effect on your future legal careers.  These changes are extremely foreign to the substance of traditional legal education – we (the legal professoriate) just don’t understand the breadth and depth of the changes that are now occurring.  Rather than sweep this uncomfortable fact under the rug, let’s do what great lawyers do with their clients.  Let’s learn about the business and the industry so that we understand the context.  Armed with this information, we can make better decisions with regard to our own careers.

Two months ago, I circulated the full assignment to the class, divided the class into teams, and gave students two weeks to select a company.  The only restrictions were no duplicates, so first-come first-serve, and the company had to be a non-law firm business operating, partially or entirely, in the legal industry.  (BTW, JB Ruhl's Law Practice 2050 course at Vanderbilt Law tackles this topic head-on.)

Students made their presentations this past Monday evening (Nov. 18) in Indiana Law's Moot Courtroom.  It was a marathon session that ran nearly four hours.  Because of the novel content, several practicing lawyers showed up to see the presentations. The following companies where profiled:

  • AdvanceLaw.  Privately held company that operates a closed community of legal departments who share information on law firms and individual lawyers in order obtain better quality at a lower cost.  Discussed on the LWB here.
  • Axiom Law.  Venture and private equity-based company that helps legal departments more efficiently manage and source their legal needs. Discussed on the LWB here.
  • Black Hills IP.  Privately held onshoring company that does highly specialized IP-related paralegal work -- their internal motto is "innovate and automate."  Founders were involved in an earlier LPO that sold to CPA Global a few year ago. Discussed on the LWB here.
  • Datacert.  An e-billing platform for legal departments that has added on a large overlay of data analytics so legal departments can more aggressively benchmark and monitor their expenses to outside counsel.
  • Ernst & Young.  Big Four accounting firm that hires an enormous number of law grads each year for its tax and consulting practices.  Very much set up for the tastes and preferences of Millenial professionals including training, work space, and work-life balance.
  • Exemplify.  Start-up company founded by Professor Robert Anderson at Pepperdine Law and his student.  Used super computer technology and inductive computational linguistics to identify the market standard language in a myriad of forms found in the SEC Edgar database. Will speed up negotiations on what is "market"; setting stage for eventual market convergence on standards.
  • Huron Consulting.  Publicly held consulting firm that formed out of the ashes of Arthur Anderson's post-Enron collapse.  Although a business consulting organization, a surprisingly large part of their business is e-discovery through attorneys in U.S. and India.  This group trudged through the company's 10Ks, which was a great educational experiemce for them. Discussed on the LWB here.
  • Integreon.  Venture- and private equity-based LPO that has tried to distinguish itself with its global platform and language capabilities.  The company recently cut a deal with Microsoft to handle a large tranche of their patent portfolio work.
  • KM Standards.  Privately held legal knowledge management company that is trying to deconstruct the logic of contracts into standardized terms to enable autonmation and reduce ambiguity (and thus litigation).  Potentially very disruptive.
  • LegalForce.  Privately held company hoping to recapture the lost consumer and start-up market through a novel storefront strategy.  Financed at least initially through LegalForce's  enormously successful online trademark practice run by the company's founder, Raj Abhjanker.  More trademarks granted by PTO than any other law firm.
  • Manzama.  Privately held company in Bend, Oregon that scrapes the Internet with machine learning technology to filter business intelligence for law firms and other professional service firms track.  Enormously scalable. Daily results presented through a dashboard technology. 
  • Modria.  Online dispute resolution system that enables businesses and governments (mostly municipalities) to avoid costly, in-person legal proceedings to resolve a steady stream of similar disputes that are part of running a business or government. Discussed on the LWB here.
  • Neota Logic.  Privately held company founded by former Davis Polk partner and CIO Michael Mills.  The company specializes in the creation of expert systems that can improve the quality and efficiency of many transactional and compliance related activities.  
  • Pangea3.  LPO with substantial operations in India.  Initially back by venture capital in 2004 but subsequently sold to Thomas Reuters in 2010.  Employs roughly 1,000 lawyers in the US and India.  Discussed on the LWB here.
  • Recommind.  Privately held company that specialized in predictive coding for use in document review and e-discovery.  Founders were graduate students in Artificial Intelligence programs at Stanford and UC Berkeley in early 1990s.  Discussed on the LWB here
  • Stewart Richardson.  A privately held Indianapolis-based deposition services company that has gradually and successfully expanded into a broader array of law firm support services.  Very focused on technology to make the job of clients easier.  

The assignment was an experiment, albeit one that worked very well.  Both students and the visiting lawyers reported surprise at the depth and breadth of the innovations taking holding the legal market.  

Although some of the innovations where clearly eroding the need for traditional legal service jobs, the profiles also revealed the tremendous opportunities for those willing to stretch into the law and technology space.  Many students commented that the evening drove home the point that they need to proactively obtain new skills and knowledge.  Why? Because the emerging market has no secure place for the complacent or mediocre.  Better for them to discover it in the course of an assignment than for me to say and have it fall on deaf ears.

Many thanks to the profiled company, who exhibited enormous generosity in helping my students complete this assignment.   Remarkably, most groups had the benefit of a lengthy conference call with senior leadership.  My only regret is that more practicing lawyers did not attend.  My students, who have have 1L team and presentation experience, brought their "A" game.  I will fix that in the next class, as there is no shortage of NewLaw companies to be profiled. 

November 23, 2013 in Current events, Data on the profession, Fun and Learning in the classroom, Important research, Innovations in legal education, Structural change | Permalink | Comments (1)

Sunday, November 17, 2013

An Update on Milbank's Big Bet

Two years ago, when all other large law firms were slashing expenses to prop up partner profits, Milbank Tweed went in the opposite direction and invested heavily in an executive education program for midlevel associates. The program, called Milbank@Harvard, required all 4th, 5th, 6th, and 7th year associates to spend one week per year at Harvard University taking course work from HLS and HBS professors along with Milbank partners.  At the time, I wrote an in-depth analysis for the Am Law Daily. See Milbank's Big Bet, May 11, 2011.

In the video below, Bloomberg Law provides an update on the program via an interview with David Wolfson, the Milbank partner who oversees the firm's professional development programs.  Here are three takeaways from Lee Pacchia's interview with Wolfson:

  • Two years in and its a big success.  Law firms are innovating these days, but they don't always advertise what they are doing lest their failures become public or their successes get copied.  Why is Milbank talking about this very expensive program?  My best guess is that the firm's bet is paying off.  Thus, the firm is in an ideal position to use the program to differentiate itself in the minds of clients and prospective recruits, including laterals.  In short, this is the branding component of a longer term strategy.  To get his payoff, Milbank started three years ago and invested--back of the envelope calculation--$20 million, which amounts to $150,000 to $200,000 of forgone profits per equity partner. 
  • The skills gaps are primarily in business and leadership.  Wilson criticizes law schools for not doing more in this area, particularly in the collaboration and leadership areas.  But he also acknowledges that the biggest part of hard skills gap, financial literacy and acumen, requires learning in context.  At year four, the associates know what they don't know.  The original Cravath System was a lawyer development machine.  So is Milbank@Harvard, albeit the specifications have been updated.
  • The idea for Milbank@Harvard came from a German partner.  One of the many fruits of globalization is getting an outsider perspective on old problems.  Perhaps U.S. law firm partners are too embedded in the year-to-year AmLaw league tables to see and appreciate the power of a longer-term strategy based on aligning the needs of clients, partners, and associates.  That said, the American brain trust at Milbank was smart enough to listen their German partner.

The video:

In this book, Tomorrow's Lawyers, Richard Susskind predicts that the market for high-end bespoke legal services will consolidate to "20 global elites."  That said, 50 to 100 US and UK firms are hoping to make that cut.  This gradual winnowing process is what is causing all the groaning these days from millionaire BigLaw partners.

Milbank is one of the few firms, however, that is pursuing a unique, public strategy:  (a) attract, develop, and retain mid-level associates who know they need business training, (b) impress clients through improved value in the mid-level ranks, and (c) as I noted in the original Milbank's Big Bet essay, make Milbank the preferred recruitng grounds for in-house legal talent. 

To my mind, that is a compelling and likely winning strategy.

November 17, 2013 in Current events, Data on the profession, Innovations in law, Law Firms, New and Noteworthy | Permalink | Comments (0)

Sunday, November 10, 2013

Is Axiom the Bellwether for Disruption in the Legal Industry?

Axiom-law-logoI think the answer is yes.  For the last several years, I have been an avid watcher of Axiom's growth, but this article in Friday's Houston Business Journal finally convinced me that the top-end of the legal industry is changing and that Axiom is setting the standard for disruption.

On a surface level, many of the facts in the HBJ article are unremarkable.  Axiom opened its Houston office back in May 2012.  Since then, it has grown to 30 lawyers  and expects to add another 15 over the next 12 months.  Yet, during this same period, the boom in the energy sector has caused several national and international law firms to also open offices in Houston, including Reed SmithDentonsKatten Muchin, and K&L Gates

Axiom and large law firms are definitely targeting and servicing the same clientele -- Fortune 100 legal departments. The substance of their work is also very similar -- sophisticated, complex legal work related to disputes, transactions, and compliance.  But in many cases, the solutions offered by Axiom are radically different.

Okay, now a reasonable expectation of any reader is likely to be, "Now explain that difference."   Back in 2010, Axiom's CEO Mark Harris told Law Practice magazine that Axiom was "trying to invent a whole new category of law firm.  When you’re doing that there is no vocabulary [to describe your business model]." 

In my experience, the opaqueness of Axiom's business model actually works to its advantage.  Specifically, it encourages Axiom's primary competitors (large law firms) to put Axiom in a box based on an outdated caricature.  That, in turn, gives Axiom more running room to fully implement the "whole new model."  Let me start with the caricature; then I will do my best to explain what the company actually does. 

The Inaccurate Axiom Caricature

In its early years, Axiom was described by many as a high-end "temp" service for legal departments. See, e.g., Peter Lattman, Axiom: A Different Kind of Legal Practice? WSJ Law Blog, Nov. 27, 2007 (describing Axiom as having developed "a niche as a provider of high-end temp services to blue-chip corporate clients").

The simplified version runs like this.  Lawyers working in large law firms trade-in their partner status, or shot at partnership, for more autonomy and a better work-life balance.  By brokering relationships between legal departments and skilled but disaffected lawyers, Axiom ditches the "class A" overhead and reduces the allocation of legal fees that would otherwise support record law firm profits.

Under this caricatured model, all parties are made better off -- the client (who gets the same quality work, but cheaper), the lawyers (who get off the billable hour trend mill and are able take vacations again), and Axiom (which collects a fee).  The caricatured model also enables large law firms to dismiss the Axiom model on the belief that only a small tranche of legal work is at risk of being siphoned away.  And that work is lower margin and price sensitive -- so-called "commodity" legal work.  Finally, the lawyers leaving for Axiom are not the heavy-hitter equity partners who control client relationships.  Hence, the analysis is complete: Axiom represents zero threat to the BigLaw model.

Yet, if brokering lawyer services was originally the core of Axiom's business, they have subsequently expanded their offerings.  Back in 2007, Axiom was #73 on Inc magazine's list of fastest growing companies, with revenues of $17 million per year and 1000%-plus growth over three years.   Since then, its revenues have grown another ten-fold.  Earlier this year, Axiom took $28 million in outside investment, which it plans to invest in technology. See Mark Harris of Axiom Answers Hard Questions, Legal Whiteboard, Sept. 25, 2013.

With this kind of growth, and the backing of very serious venture capital funds, perhaps its time to check the assumptions surrounding the Axiom caricature.

The "Managed Services" Business Model

Based on my own discussions with Axiom management and several articles on the topic, see, e.g., Adam Smith,  ABA Journal, Strategic Legal Technology Blog, the fastest growing part of Axiom's business is its "Managed Services" practice. 

Part of the managed services practice is analyzing and redesigning workflows so that in-house lawyers have the cost and quality information needed to make better sourcing decisions. Because Axiom is helping to redesign the workflows, including the specifications for sourcing decisions, it is well-positioned to do much of the resulting work -- indeed, unless it can manage both the design and execution of the work flow, Axiom can't warranty the results.

What is the goal of the workflow redesigns?  To reduce legal risk and legal cost at the same time, primarily through process, measurement, and feedback loops.  Virtually the entire law firm and law school universe is stuck in a mental frame that believes that better, faster, and cheaper are in permanent tension with each other.  This is because our mental frame of reference is based on artisan-trained lawyers working in a traditional office environment with Word, email, and a searchable bank of forms and briefs. 

Yet, when systems engineers, information technologists, and project managers because equal members of the team, "better, faster, cheaper" becomes a straightforward problem that can be solved through a four-part continuous process: design, execute, measure, repeat.  

BayneaxiomMuch of the key design and execution work at Axiom is done by nonlawyers who formerly worked for global consulting businesses.  See, e.g., this opening in Axiom (Chicago) for Project Management Director of Managed Contracts

Indeed, the head of Axiom's Houston office is Brian Bayne, a business development professional with an MBA from the University of Dallas.  Before joining Axiom, Bayne worked for IBM.  Here is how Bayne described Axiom to the HBJ:

"The heart of what motivates us as a company is to be seen as an agent of change ... . We want to be a leading voice for transition in the industry. It really is a new way of doing business and offers a completely different value proposition that most law firms are not in a position to do."

Is Axiom a Law Firm?

Over at the E-Lawyering Blog back in April, Richard Granat did a very careful job trying to answer this question, and concluded that the answer was "no." In fact, Axiom is a Delaware C-Corp with nonlawyer investors as equity shareholders. 

So, how is Axiom getting around the Rule 5.4 ban on fee-splitting with nonlawyers?  The answer to this question has a lot to do with the nature of outsourcing and managed services within legal departments.   A general counsel for a corporation controls the legal functions of the company. Because he or she can't do all the work themselves, they hire in-house legal staff and outside counsel.  In recent years, legal departments have also contracted directly with LPOs, particularly on matters related to e-discovery and M&A due diligence. When it comes to non-law firm options, such as LPOs, the general counsel and his or her staff are "supervising" the work within the meaning of the legal ethics rules.

When a general counsel of a corporation uses a managed service provider, such a Axiom, they are diverting a tranche of work they control.  The value of the managed service provider is process expertise plus economies of scale and scope.  Axiom, through a contract with the legal department, manages some of that legal workflow that supports in-house lawyers in their counseling and compliance roles.  Yet, the buyer of the managed services is himself a lawyer, and that lawyer is ultimately responsible for advising the corporation on legal risk. 

On one level, Axiom is a niche business.  As Granat notes, "If you don't have an in-house counsel, then you can't use Axiom's services. Not being a law firm, Axiom cannot provide services to the public (individuals or organizations) directly."  Yet, this niche accounts for a huge proportion of the entire legal services market.  In this American Lawyer article, one of Axiom's venture capital investors, opined "With a worldwide legal market that is a trillion dollars each year, there is plenty of running room to build a successful business."

Ultimately, the value proposition very simple.  As an in-house lawyer, you can educate yourself on the Axiom managed services approach and be comfortable that, through process and measurement, you have a solid handle on this tranche of the company's legal work, likely within budget.  Or you can have the CYA coverage of a brand name law firm and continue to do battle with your CFO over rising legal fees. If you were an investor, which approach you would bet on?

So Axiom can't help you with your divorce, will, or personal injury case.  Don't worry,  Jacoby & Meyers, Legal Zoom, Legal Rocket, and others are trying to tap into that market.  See Legal Futures, Nov 8, 2013.  In the meantime, Axiom may be gunning to be a service provider to your large corporate employer.

The Last Days of a Bloodless Revolution

I am sure that a state bar regulator, taking a very formalistic approach, can take issue with Axiom's construction of Rule 5.4, which prohibits profit-sharing between lawyers and nonlawyers from income generated from the practice of law.  But the purpose behind Rule 5.4 is to preserve lawyer independence so that the quality of the underlying legal advice won't be compromised by the nonlawyer's pursuit of profit.

In the case of Axiom, however, the person making the buying decision is a highly sophisticated lawyer who is struggling to manage his or her organization's legal needs within a budget.  Stated bluntly, the GC of a multinational corporation does not want the kind of consumer protection that a formalistic construction of Rule 5.4 would provide.

A betting person, such as a nonlawyer Axiom investor, would likely conclude that the bar regulators are not going to pick a fight with the largest corporations headquartered in their jurisdiction.  Why would they?  The subtext of economic protectionism would set them up for ridicule in the legal and mainstream press--who, exactly, is being harmed besides the law firms who are losing market share?  And is there a principled basis to distinguish LPOs from managed services? 

Expect to read more about state regulators in the "risk factors" section of Axiom's S-1 registration statement if and when Axiom decides go public.  I think these risks will likely remain hypothetical, but as my friend Ed Reeser is known to say, "That is just my opinion.  I could be wrong."

Truth be told, the nonlawyer revolution in U.S. legal services is occurring right now.  And there is a good possibility that the whole revolution will take place without a single shot ever being fired.

Back to Houston

The HBJ reporter asked a local Houston legal recruiter about the future prospects for Axiom.  The recruiter commented that he was "[n]ot sure how well they will do in Texas, given the conservative nature of the legal business here." 

In my own experience, general counsel in Texas are among the most innovative and entrepreneurial in the country.  The General Counsel Forum was originally founded in Texas as a state-level organization, and it is now rivalling the Association of Corporate Counsel (ACC) in terms of eduational programming for in-house lawyers and sharing best practices and benchmarking.

Lawyers as a group may be conservative, but within that distribution there is a small cadre of innovators and early adopters.  Although most people don't change their behavior in response to abstract ideas, innovators and early adopters are at least drawn to the possibility.  Not every idea will be successful -- indeed, the trial and error of the innovators is often a basis for dismssing them as fringe players.  Yet, when an innovation produces a significant leap forward, the resulting success eventually sets off a widespread diffusion among the broader population.

DiffusionofinnovationThere is a rich sociological literature on this topic, which was pioneered by Everett Rogers in his 1962 book, Diffusion of Innovation.  It turns out that self-interest is often inadequate to overcome inertia and prejudice, at least in the short- to medium-term.  The classic example is hybrid seeds, which have a host of advantages for producing more bountiful, disease-free crops.  Yet, that innovation took decades to take hold among farmers.

Looking for another example?  In the early 1980s, Bill James was publicizing the benefits of his stats-driven approach to baseball.  The advertised benefits were clear -- "you can win more baseball games."  Isn't that what every baseball team wants?  But what's the cost?  "Well, you'll have to change the way your evaluate talent."  For nearly twenty years, the implicit answer of the baseball establishment was "no, that price is too high."   Within the last decade, however, the stats-driven appoach has become commonplace in baseball and in other sports as well. The innovation has become diffuse.

I suspect that Axiom's senior management fully understands these dyanmics.  Looking at the distribution model from Everett Roger's book, if you are trying to sell your unproven innovation, you are literally wasting your time trying to sell to your wares to 85% of the market. Indeed, if you are in the very early stages of innovation, 98% of the potential buyers are likely to be resistant to your pitch. 

Rogerdiffusioninnovationcurve

The problem here is not economics --  its human nature.  This may be hard for many lawyers to believe, but lawyers, including general counsel, are human beings.  And human beings are prone to a series of predictable reactions when presented with various stimuli, such as new ways to perform their work.  Rather than process the merits of the idea, many human beings, including lawyers, will instead gauge the reactions of the market leaders.  If the market leaders react with approbation, the early and late majority become willing to actually engage with the idea. 

What this means is that the merits of a good idea are not enough to ensure its success, at least immediately.  This is a key practical insight that the reformer/innovator class seldom grasps.  Without understanding Roger's Diffusion of Innovation curve, an innovator's success becomes a function of timing and luck -- that is the story of Bill James. 

But if you understand the diffusion process, it is possible to construct a filter that locates the innovator/early adopter class.  And if you study their beliefs and problems, you can more effectively tailor your pitch. This approach saves time and money and holds the team together in the belief that they will ultimately be successful.

So, where is Axiom on the Rogers Diffusion Curve? 

My best guess is the "early adopters" stage, as Axiom has relationships with roughly half of the Fortune 100 and is working hard to widen those relationships with more ambitious projects.  Their goal, as best as I can tell, is to generate a clear proof-of-concept that they have solutions to the risk/cost conundrum that plagues so many legal departments and causes them to blow their budgets.  With sufficient market testimonials, and as in-house lawyers with exposure to Axiom migrate to other legal departments, the broader legal market will begin to tip. 

I find the Axiom story refreshing, primarily because the legal market has fallen under the spell of the fast follower strategy.  In my travels, I often encounter the attitude "Let someone else prove that it can be done differently and better and then we will follow."  When virtually the entire market adopts this worldview, incumbent institutions begin to relish the false starts of others and a general sense of complacency begins to set in.  Frankly, I find this whole dynamic unprofessional is the classical sense of that word -- i.e., at variance with professional standards and conduct.

Axiom, in contrast, is on the brink of demonstrating the benefits of the first mover advantage in law.  This is bound to have the beneficial, balancing effect on the rest of us.

Related posts:

November 10, 2013 in Blog posts worth reading, Current events, Data on the profession, Innovations in law, Law Firms, Legal Departments, New and Noteworthy, Structural change | Permalink | Comments (0)

Friday, November 8, 2013

Clayton Christensen Explains How Disruption Will Occur in Higher Education

InnovativeuniversityClayton Christensen is the Harvard Business School professor who wrote The Innovator's Dilemma, the seminal book on why successful businesses so rarely stay on top over the long term. Although focused on the tech industry -- where product cycles are very short -- Christensen's framework has a much wider application, including legacy industrial enterprises and countries.  In 2011, Christensen published a book called The Innovative University, which applied the Innovator's Dilemma framework to higher education.  

Below is a YouTube video of Christensen explaining his thesis to a conference in Dallas organized around the future of public universities.  His talk is very long by online video standards (80 minutes) but worth the time of anyone who wants to understand the Christensen framework and its application to higher ed.  At approximately minute 45, Christensen specifically mentions law schools.  Below the video is some additional context on Christensen.

Remember that near presidential coup at University of Virginia, which was reported in the New York Times Magazine last fall (link)?   Well, Christensen's ideas had begun to propagate within the university trustee community, thanks in part to a letter than Christensen and Henry Eyring had recently written to the American Council of Trustees and Alumni (ACTA).

As discussed in the New York Times article, the coalition that was animated by Christensen's ideas was ultimately defeated by the palace guards.  But that was the first attempted coup at a major research university, not the last.  As Christensen points out in the video, universities are feeling pressure from innovative models that "compete against nonconsumption."  In other words, lots of people would like the knowledge taught in the great universities, but that demand goes unsatisfied because of selective admissions requirements, tuition, and geography.  

MOACs are the first volley in figuring out this untapped market.  Those that dismiss MOACs as irrelevant are missing the bigger picture of what early stage disruption looks like.

Specifically, according to Christensen, here is the recurring dynamic: the new entrants siphon off work from the bottom-end -- work that the high-end says it does not want anyway.  The cycle repeats itself a few times until, much to the incumbents' surprise, the bottom-end becomes more economically relevant and powerful.  Why does top-end let this happen?  Because the incumbents have come to view success as elite status and high margins, which is an unrealistically high long-term bar unless you are continuously innovating.  Eventually, the so-called high-margin niche becomes insufficient to sustain the enterprise, and giants fall -- see the automotive industry, steel, computer hardware, televisions, consumer electronics, etc.

That said, does the university model of education have a life cycle, or is it above these coarse market considerations?  I think it probably does.

In the year 2013, lots of knowledge is free or incredibly cheap. Next year, even more, and so on for the foreseeable future. As a result, many people are able to become astonishingly  knowledgable and skilled because of the sheer joy of learning and becoming more competent.  It turns out that university credentials are a pretty noisy signal for knowledge and competence -- a small positive correlation, yes, but not much more.  This is an information gap problem.

In terms of sheer productitivity, most employers would prefer the folks who are driven to learn and continuously improve.  Google has already figured this out, as a substantial portion of their high-end workforce has never completed college.  Google employs them for their abilities, not their degrees. 

When opportunity is unbundled from university credentials -- i.e., the  information gap problem described above becomes cost-effective to solve -- the demand for university education as it currently exists (expensive and in limited supply) will go down.  From a social perspective, this is a good thing.  But it means that universities will have to innovate in the years to come in order to justify our tuition and fees.

November 8, 2013 in Blog posts worth reading, Cross industry comparisons, Current events, Important research, New and Noteworthy, Structural change, Video interviews | Permalink | Comments (1)