The Legal Whiteboard

Straight Talk on the Woes of BigLaw, by Bruce MacEwen

By Bruce MacEwen, of Adam Smith, Esq., a well known blog on law firm economics.  What Bruce is talking about is going to have major fallout for legal education.

[posted by Bill Henderson]

Hilarious Video on the Billable Hour

From our UK colleagues, specifically the lawyers at Riverview Law, which is a new-breed British law firm that does things exclusively on the flat fee model.  Check it out:

Riverview's advantage may be more than its ability to produce funny videos that ricochet into the inboxes of inhouse lawyers. (I was alerted to this video via Twitter from Patrick Lamb, one of the ABA New Normal guys and a principal at Valorem Law, a Chicago-based flat-fee shop.  Pat recieved his link from a client.)

Lawyers from Riverview Law were at the Legal Tech Camp that I have discussed in prior posts (here and here).  To my mind, Riverview's greatest advantage is focus -- they want to do the same work as other corporate law firms at the same quality level or higher, but also at a signficantly lower, fixed fee price.  The firm appears to work backwards from the price to make process-design and sourcing decisions.  The result, plain and simple, is innovation. Long term, that is the only way they can make money. 

Here is how they explain just one of their services, called Legal Advisory Outsourcing -- again, in a well produced video.

If you think Riverview Law is no big deal, this may get your attention.  The flat-fee shop is partially owned by the mega law firm DLA Piper.   Earlier this year, they opend an office in New York City.

[posted by Bill Henderson]

Drop in the Big Law Median Salary is only Half the Story

NALP just announced that the median salary for first year associates in Big Law has dropped from $160K to $145K.  I think that is very significant.  We are now back to to the entry level price point of 2007.

But to my mind, there is much bigger story here.  In 2011, firms of 500+ attorneys hired 2,856 entry level lawyers.  In 2007, that figure was 4,745.  So, after five years, Big Law is paying the same wage but hiring 40% fewer lawyers.  Compare 2007 NALP Nat'l Summary with 2011 NALP Nat'l Summary. 

Here is another important piece of NALP data, generated from the print versions of the July 2012 NALP Bulletin.  It shows the percentage of entry level law jobs that are private practice.

Two takeaways here: (1) there is a longterm trendline showing a declining number of private practice jobs--and that is the economic engine that enables law schools to exist at current tuition levels, and (2) the cliff-like dropoff in 2010 and 2011 is likely Big Law, and that hurts.

[posted by Bill Henderson]

The Eds and Meds Sector

There is a fascinating story at newgeography which looks at trends in the education ("Eds") and medical ("Meds") sectors. 

Newgeography focuses on trends in urban affairs and economic geography.  Eds and Meds are of interest to this group because these two sectors have been such a critical part of maintaining or restoring many regions' economic vitality.  Why?  Universities and hospitals generally pay high wages, don't lay people off, and are perceived as long term drivers of growth because more degrees and longer life spans are two trends that will probably continue. 

But the author, Aaron Renn, presents compelling trend data suggesting that America can no longer to afford extra large helpings of Eds and Meds.  As shown in the chart below, these sectors have been growing faster than virtually all other sectors for a long, long time.

Renn points out the healthcare is on its way to consuming 20% of our GDP by the year 2021.  And the growth in the higher education sector has been substantially fueled by student loans.  Unfortunately, even college grads are subject to the pressures of outsourcing and competition with very able professionals from around the globe.  So the ability to repay all that debt can't be taken for granted.  What can't go on forever, won't.

Here is another chart presented by Renn, this one presenting the rates of inflation occuring in Eds and Meds sectors as compared to the overall CPI:

There is an opportunity here.  I would be extremely bullish on innovations that produce productivity gains in the Eds and Meds sectors.  I recently listened to this HBR Ideocast discussion with Robert Kaplan, the Harvard Business School professor best know for developing the Balanced Scorecard.  Kaplan is now turning his considerable intellect toward the problem of cost-containment in healthcare. 

What the key insight?  Measuring how much patient treatment actually costs--to date, there has been almost no sophisticated cost accounting in healthcare.  Most of the brainpower has gone to dealing with (and maximizing) third party reimbursements.  Under Kaplan's system, fortunately, we can actually identify the points in the system that cost way too much and thus begin the reengineering process.

The same thing may soon be happening in higher ed.  Another Harvard Business School professor, Clayton Christiansen, who authored the renowed business book, The Innovator's Dilemma, recently co-authored a letter that called for colleges and universities to quit chasing prestige and start focusing on innovations that improve educational quality without increasing price.  Remarkably, the letter was included in a mass mailing by the American Council of Trustees and Alumni -- going to 13,000 trustees!  See Inside Higher Ed, Distruption's Strange Bedfellow, July 12, 2102.  Another Insider Higher Ed story suggests that this may be the true faultline driving the University of Virginia controversy.  See Disruptive Innovation: Rhetoric or Reality?, June 26, 2012.

The world appears to be changing, even in Eds and Meds sector.

[posted by Bill Henderson]

Why Are We Afraid of the Future of Law?

Below is my most recent column in the National Jurist [PDF version].  Although 100% targeted at law students, I think lawyers and law professors might find this topic interesting. [Bill Henderson]

Richard Susskind is a famous British lawyer and technology consultant who travels the world giving speeches on how the legal industry is on the brink of a fundamental transformation.  Because his topic is change, Susskind’s ideas are quite controversial among lawyers.  But as a futurist, he has a pretty good track record. 

Back in 1996, in his book The Future of Law, Susskind predicted that e-mail would someday become the dominant method for lawyers and clients communicate with each other.  Because the Web was still a novelty limited to universities and computer aficionados, Susskind’s comments were viewed as reckless and unprofessional—lawyers would never rely on such an insecure method to communicate with clients.  Yet, 16 years later, lawyers are daily lives are comprised of an endless stream of emails coming over their desktops, laptops and smart phones. 

In June of this year, I attended the LawTech Camp in London, which is an event that attracted a wide array of entrepreneurs and lawyers who are figuring out ways to use technology to improve the delivery of legal services and products.  There were three major themes that underlie many of these innovations. 

One is ability of machine algorithms to replace people, particularly when it comes to finding information.  For nearly all of the 20^th century, a substantial part of lawyer’s job was to know where to find the answer to the client’s legal problem.  A Google search can now find many answers faster than traditional legal research methods.  And company’s like Legal Zoom, which are well capitalized by nonlawyers, are selling do-it-yourself solutions for wills, trademarks, forming a corporation, or other legal needs. 

A second theme of the conference was the emergence of a global supply chain in which price sensitive, labor intensive work is increasingly flowing to destinations like India.  There is now sufficient technology infrastructure in place to make the integration and training of Indian lawyers a highly cost-effective decision for many international businesses.  This means that to garner a good living, U.S. and U.K. lawyers need a substantial competitive advantage over Indian-trained lawyers.  Deep expertise in the most complex areas of law is one strategy, but the technologists are constantly trying to find ways to standardize and systemize the expensive work that lawyers would prefer to do by the hour.

A third theme of the conference was the value and importance of developing a deep, trusting relationship with your client.  This part has more to do with our humanity than our technology.  It means investing our own time to understand our clients’ business and doing a better job seeing the world through their eyes.  This gives us the best opportunity to use our legal expertise to solve their legal problem in a way that makes us indispensable.  Thus, as our client grows, we have the opportunity to grow with them.

Fittingly, the keynote speaker for the LawTech Camp was Richard Susskind.  Many of the innovations and trends being discussed throughout the day were identified by Richard Susskind in his 2008 book, The End of Lawyers?  Richard had earned the right to be taken more seriously than various other commentators on the legal industry.

For the last two decades, Susskind’s work has required him to stand in front of skeptical, disbelieving, recalcitrant audiences and telling them things they don’t what to hear—some variant of “we need to change and adapt to survive.”  Over the years, I have heard Susskind speak several times, and I can vouch for the attitudes he inevitably encounters.

Yet, I was quite dismayed when I heard Richard say, “I talk to many audiences, nearly all of them skeptical and conservative.  And consistently, the most conservative audiences are law students.”  That’s right, law partners, in-house lawyers, associates, law professors, and bar association officials, as disbelieving as they might be, are all more prepared to hear Susskind’s message.

This raises a critically important question – why?  Susskind suggests that many young people entered law school with an image of their future careers based on idealism and pop culture.  If their careers are going to dramatically different than these preconceptions, surely their professors would have told them.  (New flash: few law professors track the changing structure and economics of the legal profession; they tend to be specialists in narrow areas of substantive law.)  So law students are the least emotionally braced for a different future—one a lot more challenging and uncertain than they imaged.

As a law professor who routinely presents evidence of a changing legal marketplace, including Susskind’s work, to 1L students, I can personally attest to the student blowback.  The students find this information “depressing”—at least initially.  Yet, my students tend to differ from older audiences in how quickly they reconcile themselves to this new fact-based reality.  Although their idealized version of the legal profession is tarnished, they also see the opportunities to create something that is new and important that resonates with their values. 

As my experience at the LawTech Camp makes clear, there is tremendous creative ferment taking hold in many corners of the legal profession, albeit the safe and established legal brands are not leading the way.  So that is our dilemma—in the year 2012, there is no conservative path that will take most law students to where they want to go. Every option has risk. 

My advice?  Invest time understanding the intersection between law and technology. Read Susskind’s books.  Subscribe (via email or RSS feeds) to the many publications in the Law.com network, including the Law Technology News, and the ABA Daily Journal (most content is free).  Some terrific blog include Law21, Strategic Legal Technology, 3 Geeks and a Law Blog, or The Legal Whiteboard (my own blog).  Identify some of the new, innovative companies and ask for informational interviews—don’t be shy.  These companies will be flattered.  And remember the advice followed by countless successful people: “luck is when opportunity meets preparation.”

Federal Funding of Higher Education--A Bubble that is Going to Burst

NPR's Planet Money has a story on interplay between higher college and university tuition and changes in financial aid.  As shown in the graphic below (from the College Board), the federal government is assuming a larger role in finaning higher education. Every other source of funding is shrinking its a proportionate contribution to financial aid.  Despite favorable bankruptcy laws enacted in 2005, the federal takeover of higher ed financing has almost completely muscled out the private lenders.

Coincidentally, a colleague forwarded to me a pointed commentary from zerohedge.com, which suggests that recent comments by Ben Bernanke portend serious financial instability.  In 2007, Bernanke said:

"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained" - March 28, 2007.

Two days ago, Bernanke said:

"I don’t think student loans are a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government" - August 7, 2012

Now take a look at the federal government's holding of consumer debt (overwhelmingly student debt that has piled up since the 2010 legislation). See Henderson & Zahorsky, The Law School Bubble, ABA Journal (Jan. 2012).

Student loans are viewed as "assets" by the federal government ... until they become uncollectable, in which case the value of the assets eventually has to be adjusted through write-downs, just like mortgages in the mortgage crisis.  Extensive use of Income-Based Repayment makes it possible for a student loan to be simultaneously uncollectable but not in default.

Folks, I am an unapologetic New Deal Democrat.  But the current "system" of federal higher education financing is near perfect insanity.  We set tuition and, no questions asked, the federal government writes us checks in exact proportion to students' willingness to sign loan papers.  For young people who have never worked, it is all like Monopoly money. 

The only way the math works is if the real earnings go up en masse for virtually all college and professional school graduates.  In a rapidly globalizing world in which our students are competing against Chinese and Indian professionals, the assumption of mass rising real incomes is implausible.  See, e.g., views of economist Alan Blinder in this NPR article.

Right now we--higher ed and the nation as a whole--are maintaining the illusion of prosperity through debt financing heaped on naive young people.  This is immoral in the extreme.  Moreover, in the long run, it is economic and political ruination.

The only long term solution is cost containment imposed on higher ed by reforming the terms of federal financing.  The financing has to incentivize educational productivity -- i.e., fewer tuition dollars expended to obtain better skills and learning as measured by marketplace earnings and innovation.  No more $100,000 checks from the federal government for sorting students by standardized test scores.  Our graduates will actually have to think, collaborate, communicate and problem-solve at a very high level.  How many of my fellow law professors grasp the depth of our problems?  Not enough.

[Posted by Bill Henderson]

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.

As 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.  

Huron 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."  As 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]

UK's Legal Services Board Releases Study on Individual Legal Consumer Market

With the passage of the Legal Services Act 2007, the UK began the process of liberalizing its market for legal services.  The UK legal market and all of legal education is now regulated by the Legal Services Board, which is presided over by a nonlawyer civil servant named Chris Kenney.  

The LSB's regulatory objectives are set out in Section 1 of the Act. They include: "(a) protecting and promoting the public interest";  "(c) improving access to justice"; "(d) protecting and promoting the interests of consumers"; "(e) promoting competition in the provision of services within subsection (2)"; and "(g) increasing public understanding of the citizen's legal rights and duties[.]"

One of the fruits of the new LSB regime is this just released empirical study on how British citizens evaluate and make decisions about their own legal needs. In a nutshell, they often go in alone without the benefit of a lawyer. Further, only about 20% of this unmet legal need fall in the domain of "reserved legal activities," which require a licensed legal professional.

Although the report does not come out and says this, the implication of the myriad statistics is that the British consumer market is ripe for commodification through technology and mass distribution channels.  When confronted with a legal need, face-to-face counseling with a skilled professional may be the ideal, but that is far from the reality for most British citizens.

[posted by Bill Henderson]

"The Toppling of Top-Tier Lawyer Jobs"

That is the title of a just-posted essay by Catherine Rampell at the NY Times Economix Blog.  She studies several years of the bi-modal distribution.  It is refreshing to have a capable journalist review the data and marvel at the strange ways of our industry.  

[posted by Bill Henderson]

A Picture of the Melting Right Mode

I created the graphic below to depict the shrinking right mode of the bi-modal distribution since its 2007 high water mark (measured in February 2008). 

[Note: The difference between the mean and adjusted mean in the 2011 distribution is due to the fact that law grads who fail to report their salaries tend to have have less lucrative employment; so NALP makes a prudent statistical correction --basically a weighted average based on practice settings.]

From a labor market perspective, the class of 2007 entry level salary distribution was extraordinary and anomalous.  Why?  Because we can safely assume that legal ability, however it might be defined, is normally distributed, not bi-modal.  So when such a distribution appears in a real labor market, something is significantly out of kilter. 

Why did the entry level market become bi-modal? As the legal economy boomed from the mid-90s through the mid-00s, many large law firms (NLJ 250, AmLaw 200) were trying to make the jump from regional dominant brands to national law firms.  For decades, going back to the early to mid-20th century, these firms followed a simple formula: hire the best and brightest from the nation's elite law schools. As they continued to enjoy growth, they reflexively followed that same formula.  Yet, by 2000s, the demand for elite law graduates finally outstripped supply. 

This micro-level logic ("let's not tinker with our business model") produced a macro-level bidding war.  This is how the right mode came to be.  Yet, because it was a macro-level phenomenon, clients, led by industry groups such as the Association of Corporate Counsel (ACC), reacted by saying, "Don't put any junior level lawyers on my matters --they are overpriced."  Outsourcing and e-discovery vendors have also eaten into the work that used to go to entry level lawyers.  So the volume of BigLaw hiring has collapsed, hence the melting of the right mode. For a more detailed overview, see NALP, Salary Distribution Curve.

Long Term Structural Change in Big Law

That said, it is not just the entry level market that is under stress -- the fundamental economics of Big Law are also changing.  Consider the chart below (from Henderson, Rise and Fall, Am Law June 2012), which shows that revenues per lawyer at AmLaw 100 firms has gone flat and moved sideways since 2007, breaking a pattern of steady growth that dates back to the pre-Am Law 100 days.

Stagnant revenue is a source of enormous worry for law firm managers.  Without higher profits to distribute--and growing the top line is the usual profitability fomula--their biggest producers might leave, causing a run on the bank ala Dewey, Howrey, Wolf Block, etc.  So the dominant strategy now has nothing to do with entry level hiring.  Rather, the goal is to keep and acquire lateral partners with portable books of business.  After all, clients aren't protesting the value of most senior level lawyers. And seniors lawyers are plentiful, thanks to the excellent health of baby boom lawyers and the poor health of their retirement accounts. 

This strategy may work fine for this fiscal year, but over the middle to long term, BigLaw is going to get older and dumber.  Further, this dynamic produces substantial ripple effects on legal education -- albeit ripple effects that feel like tremors.

Endgame

The long term solution -- for both law firms and law schools -- is for the price of entry level talent to come down to the point where young lawyers are more cost-effective to train.  And that price point is not $160,000.  This inflated pay scale (which has supported ever higher tuitions at law schools) only persists because large firms are deathly afraid of adjusting their salary scales and being labeled second rate.  So the solution is keep the entry pay high but hire very few law school graduates.  This is not a farsighted or innovative business strategy.

It's been 100 years since law firms engaged in sophisticated business thinking. And that last great idea was the Cravath System, which was method of workplace organization that performed expert client work while simultaneously developing more and better human capital.  See Henderson, Three Generations of Lawyers: Generalista, Specialists, Project Managers.   According to the Cravath Swaine & Moore firm history, published in 1948, the whole point of the Cravath System was to make "a better lawyer faster." 

I think the next great model for a legal service organization (law firm may not be the right term) likewise will be based on the idea that there is a large return to be had by investing in young lawyers. As my friend Paul Lippe likes to say, "When it appears, it will look obvious."

[posted by Bill Henderson]

Yale's Ph.D. in Law - The Copernican View

Posted by Jeff Lipshaw

The Yale Law School's announcement that it will award a Ph.D. in Law has agitated electrons around the blogosphere, provoking approval, disdain, speculation, and derision.  My view is closest to Dan Filler's "meh."

The following, as rationale for the program, strikes me as a view of the legal academy that assumes Yale and its equivalents are at the center and everything revolves around them:

“It’s becoming increasingly hard to transition directly from law practice to teaching,” [Dean Bob Post] said. He explained that to secure entry-level appointments at law schools, candidates are now expected to present a relatively mature scholarly profile; they need a defined research agenda and a substantial portfolio of writing.

It's probably fair to expect that Yale won't be the only school offering a Ph.D. in law, but my guess is that it's not going to change the landscape or the contours of the "Failing Law Schools" debate (of which Brian Tamanaha's book is the most thorough catalog) too much.  

This is hardly a scientific study, but I just scrolled down part of the first column of the Stanford Law School faculty directory, and the law degrees (J.D. and otherwise) read something like:  Berkeley, Yale, Yale, Harvard, Yale, Stanford, Northwestern, Chicago, Yale, Harvard, Yale, Yale, Northwestern, Harvard, Stanford, Berkeley.  Somehow I don't see the Yale Ph.D. in Law causing a seismic shift at Stanford or its peers.

Nor do I see a big trend toward Yale Ph.D.s in Law doing a lot of teaching of civ pro at fourth tier schools.

Nor do I see enough volume, given the time commitment, to having a significant impact on the supply of entry-level law professors at mid-range schools.  There are 800-1,000 FAR entries a year, and 100-150 new hires a year.  How many of those 100-150 are going to be taken by candidates who wouldn't otherwise be in the pool?  Indeed, my guess is that, if anything, the program[s] will cannibalize other Ph.D. programs, and perhaps a few of the existing VAP programs or other paths to the legal professoriat.  (That's a supply-side analysis.  On the demand side, were I the dean of a non-elite school, I'd be wary of having a faculty dominated by Ph.D.s in Law in terms of intellectual diversity and for its effect on my relationships with other constituencies, like the alumni base.)

The real question, it seems to me, is whether this portends the Great Schism, the differentiated legal education system - "research-oriented law schools [co-existing] alongside law schools that focus on training good lawyers at a reasonable cost" - that Brian Tamanaha advocates.  (Failing Law Schools, pp. 172-76.)

Again, call me a skeptic.  Apart from issues of pure contraction (i.e., schools get smaller, by hook, crook, implosion, or design), the vast majority of non-elite but solid schools won't have the luxury either of being the Department of Legal Studies populated by Yale Ph.D.s or bare bones practitioner training centers.  

As I have argued in the past, those middle-range schools are going to have to find a way to accommodate the scholarly career path of the faculty with the desire of the overwhelming majority of students and alums for practical professional training.  Which means that faculty members (as I believe most do now) will have to be committed to both scholarly thinking and first-rate teaching, even if they do not always overlap.  And academic leadership will have to be committed to articulating to non-academic constituencies both the nature of a legal academic career and why it can live in harmony (even if not complete overlap) with the obligations of a professional school instructor.

A "Complicated Marxist"

The Big Think just posted a wonderful video of Slovenian philosopher Slavoj Zizek, who describes himself as a "complicated Marxist" because he holds in his mind simultaneously the virtues of individual capitalists with the problems of domination and inequality that are endemic to the capitalist system.  

I am posting the Zizek interview here because many of the problems currently afflicting legal education and the legal industry that I write about here are, more formidably, mere symptoms of broader problems that flow from a rapidly globalizing world economy--a topic so complex that we seldom acknowledge it.  That said, Frank Pasquale, in a post called "Jobless Futures," does an admirable job of cataloging our collective confusion. 

Zizek suggests that the solution to engage in serious thinking rather than misguided, ill-conceived activism.  Ah, now this should be the competitive advantage of a university-based graduate-level law degree--in addition to practical lawyering skills, we should be practicing with our students the science and art of critical thinking.  The best lawyers sidestep ideology and can think through issues on par with Zizek, whom we don't have to wholly agree with to admire.

[posted by Bill Henderson]

Which law schools lose the most when applicants decline?

This is a simple question of great practical importance to many law schools, yet very few law school administrators understand how to answer it.  Who would have thought that clarity would be supplied free-of-charge by an underemployed recent law school graduate? 

But that is what is happening now, in "Tough Choices Ahead for Some High-Ranked Law Schools," an Am Law Daily essay written by Matt Leichter, one of the silver linings of the declining legal job market -- and there aren't too many.  Matt is a J.D.-M.A. in law and international affairs from Marquette University who passed the New York bar in 2008, finished his masters work in 2009, and then moved to the Big Apple as the bottom was falling out of the entry level market.  Unable to find conventional legal employment, Matt started doing freelance writing on law-related topics. 

With plenty of time on his hands, Matt turned his graduate-level quantitative skills to the task of analyzing a law school education market that seemed unsustainable.  Matt first put his analyses on display at the Law School Tuition Bubble.  His writings eventually attracted the attention of The American Lawyer, which has now published several of his data-driven essays.

Here is what sets Matt apart. 

• He digs very deep for facts and, in turn, uses one of his biggest asset --time -- to build datasets that answer important and relevant questions
• He is non-ideological.  Just facts and factual analysis.
• He writes about complex technical stuff in an accessible, credible way

Matt has all the core skills of a truly great lawyer.  Finding no takers, the entire legal education establishment benefits by Matt channeling his time, energy, and considerable intellect into relevant topics crying out for dispassionate analysis.

His "Tough Choices" essay is a real gem.  Here is the bottomline:  This year's applicant cycle likely will deliver its greatest blow to US News Tier 1 schools who generally admit students who were angling to get into even higher ranked schools.  This inference can be teased out of the ratio of applicants to offers (selectivity), and offers to matriculants (yield).  

To conduct this analysis, Matt had to cull data, school-by-school, from several years of the ABA-LSAC Official Guide to Law Schools (aka "the Phonebook"). But it enables him to produce the chart below:

What this chart says is that admissions officers have to read more applications and make more offers to fill their entering classes.  Based on the data in Matt's chart, in 2004, for all ABA-accredited law schools, there was a 24% acceptance rate, and a 31% yield from those offers.  In 2010, the acceptance rate went up to 31% (schools were being less selective) and the yield went down to 25% (fewer showed up to enroll). 

Applicant volume may be declining, but the trends above suggest that there is a lot more "competitive shopping" going on. Why? Because information costs are going down and prospective students are adapting.  And this year is bound to be the most aggressive year ever.  According to this NLJ story, It's a Buyers' Market for Law School, virtually every student is now negotiating for scholarship money.

Declining applicant volume, shifting yields, and highly informed consumers make it very difficult for law school administrators to lock in their LSAT and UGPA numbers, which schools generally fixate on because of U.S. News ranking.  This produces pain in one of three ways:

1. The school shrinks the entering class (announced by at least 10 schools), which severely tightens the budget
2. The school buys its class through financial aid, which blows a hole in the budget (happening here)
3. The school significantly relaxes the LSAT and UGPA and braces for a drop in the rankings because its peers are pursuing strategies #1 or #2.

#1 and #2 may seem like the prudent course, but a central university won't (more likely can't) provide a financial backstop for more than a year or two, if that.  If the admissions environment does not change dramatically, which seems unlikely, some combination of layoffs, rankings drop, or closures will have to be put on the table.

Matt's ingenuity is on full display when he demonstrates, with data, the profile of the most vulnerable schools -- and its a far cry from the bottom portion of the U.S. News rankings. 

• Low accept/high yield (think Yale and Stanford) are safe. 
• High accept/high yield are also fine.  They are nonprestigious but have strong regional niches or missions. Tier 3 or 4 designation means nothing.
• Low accept/low yield crowd -- a bunch of Tier 1 schools -- are vulnerable to significant rankings volatility.  If they drop, next year's applicant volume will be affected, making it very difficult to rebound.
• High accept/low yield are the most likely to close.

Until August and September, when the wait lists finally clear, nobody really know the depth of market shift.  Only then can the budget holes be finalized.  Deans will then have candid conversations with their central administrations to answer the question, "Is this downward trend permanent?"

[posted by Bill Henderson]

What is the "Ignite" Format of Presentation?

Ignite rules are simple:  a talk with 20 PowerPoints that advance automatically every 20 seconds.  Six minutes to make your point.  It you don't know your material, it's a disaster.  If you are prepared and you understand how to connect with your audience, you educate and inspire -- in a word, you ignite the audience.

Below is an example of Ignite done very well, by Michael Bossone (Miami Law, co-founder of Law Without Wall).  This presentation just got a rousing ovation at the Law Tech Boot Camp in London.  I saw it happen live.  It was awesome.

Kudos to Dan Katz, Renee Newman Knake, and Michigan State Law for putting together a program chock full of substance on the application of technology to the law. 

[posted by Bill Henderson]

These Data Will Fundamentally Reshape the Legal Education Industry

Just a few days ago, the ABA Section on Legal Education and Admission to the Bar posted on its website, in downloadable spreadsheet format, the employment outcomes for the Class of 2011 (here). In a few short years, these data are going to fundamental reshape our industry.  The changes will make the industry better and stronger, but the journey to this better place is going to painful and disorienting for all law schools—that’s right, even the elite national law schools will be affected.

This is worth explaining in very simple and concrete terms.  The Class of 2011 employment data consists of 134 variables on 200 ABA-accredited law schools-- 26,800 discrete data points, which is enough fill a phonebook.  For a long time, the policy of the ABA was to do just that – publish a phonebook of data in the form of the ABA-LSAC Official Guide to Law Schools.  Well, decisions on where to attend law school are not free.  They require time and effort.  When a prospective student has to wade through a phonebook to assemble relevant data to make important decisions, many (most) will forgo the exercise altogether. 

This has two very important effects:

1. The quality of enrollment decisions goes down because, from the student perspective, the costs are too high.  That’s error #1.  But it is forgivable—decisionmaking is a skill taught in a top-notch legal program, not a prerequisite for applying.
2. To simplify their decisions, students gravitate to U.S. News ranking, which is a compact 4-page table that contains easy-to-understand comparative data. 

Yes, the U.S. News has serious flaws; and every year, overreliance on them produces tragic consequences in the form of excessive student debt.   Now, with the ABA employment "phonebook" in spreadsheet format, those a with modicum statistical skills and an internet connection can analyze, simplify and publish relevant statistics that will better inform the decision to attend law school. 

Consider the chart below:

When I created this simple pie chart, I started with a simple premise: If I am applying to law school, my minimum hope is that nine months after graduation I will be able to obtain a full-time, permanent professional job.  The phonebook has three columns of data that speak to this hope:

1. Bar Passaged Required Jobs, FTLT (i.e., Full-time, Long-Term)
2. JD-Advantage Jobs, FTLT
3. Professional Jobs, FTLT. 

All the other myriad data columns, parsing things by part-time, short-term, non-professional, unemployed, unknown, etc., do not meet the minimum hope.  So they are lumped together as “Other Outcomes.”  Clearly, for 1/3 of the Class of 2001, their full-time, permanent professional ambitions have not yet materialized. 

A reasonable next question is how these figures vary by U.S. News rank. The answer is reflected in the chart below.

Some observations:

• Least surprising. The outcomes are better at “national law school”--almost 90% are FTLT professional jobs.  I used the T14 cutoff because the composition of this group has not changed in two decades of U.S. News rankings. Few people would disagree that these schools have strong pull among legal employers.

• Most surprising.  There is a whole lot of Purple--i.e., “Other Outcomes”--throughout Tiers 1, 2, 3, and 4.  For over 90% of law schools, this is a very challenging legal market.  

• Biggest reality check.  The JD-Advantaged and Professional jobs appear to be, on balance, less desirable than those requiring bar passage. They increase nearly three times in relative proportion as we move from T14 to Tier 1 to Tier 2.  Many are likely compromise jobs—not as good as practicing law, but better than non-professional alternatives.

With these relative benchmarks in place, a prospective law student can look for law schools that are outperforming their U.S. News rankings.  And there are quite few. 

For example, in Tier 4, St. Mary’s (Texas) has 78.3% Bar Passage Required placement; Mississippi College’s figure is 75.3%; and Campbell (NC) is 71.4%.  These schools aren’t feeding BigLaw, but their graduates appear to be full-time practicing lawyer nine months after graduation.  What accounts for their success? Most of their graduates are probably in cities and towns far away from corporate practice.  Nonetheless, these schools have a clear niche they are filling.

In contrast, there are 20 schools in Tiers 1 and 2 that have less than 50% Bar Passage Required jobs.  What do they have in common?  Many are in big cities in the Northeast and Mid-Atlantic or California--large urban markets that are attractive for young professionals.  It is likely that too many young lawyers are chasing after a finite set of legal jobs.  It is worth noting, however, that these same schools also have rates of placements in JD Advantage and Professional jobs that are higher than other law schools at statistically significant levels. 

So many young law graduates are voting with their feet.  Better to stay in the city as a non-lawyer professional than to move to the South to be country lawyer doing small firm practice.  Although I suspect a large proportion of these grads will fare quite well, it is important to keep in mind that JD-Advantaged and Professional jobs are not a panacea—they are also in short-supply.  At most schools in Tiers 1, 2, 3, and 4, between 30% and 42% of graduates are either unemployed and underemployed in jobs that are either nonprofessional, part-time, or short-term.   Indeed, 4.3% (1,874) of all jobs for the Class of 2011 were funded by the law schools themselves!

As I have said previously (here and here), the current legal job market reflects a structural change in the legal sector—these numbers aren’t going to turn around in a year or two.

So what is going to happen?  Notwithstanding the heady optimism of the “Kaplan kids”, the ABA employment data, thanks to the blogosphere, is going to reduce information costs, making it easier for prospective law students to determine whether law school is a good investment.  The needle is going to move, just not as fast as a Chicago School economist might predict.

Further, expect students to aggressively negotiate for scholarship money.   Whether schools become more generous in merit aid, admit fewer students, or both, all signs point to shrinking budgets for law schools.

The utter transparency of a changing and stagnant legal market has potentially more dire consequences for law schools.  The lifeblood of the entire legal education establishment, including elite law schools, is federal student loans.  Our students get the same generous terms as graduates of medical and dental schools, who are not struggling to make six figure incomes.  The graphs above suggest that a large proportion of our students will be on Income-Based Repayment (IBR), which is – functionally – insurance in the event a high income fails to materialize in the years following graduation.  The downside risk of that insurance – lack of repayment of expected principal and interest—is borne by U.S. taxpayers. 

Right now, it is possible to estimate the size and probability of this downside risk. All the Federal Government has to do is add-up the shortfall between the repayment of principal and interest in normal repayment versus the monies actually being collected.  What percentage of graduates are on IBR?  What portion of their current principal and interest are they able to pay?  These are simple numbers that some enterprising journalist will eventually request. Further, they are legitmate public policy questions that we, the legal academy, should face long before the journalists get there.

Lawyers and law schools are not a favored interest group on Capitol Hill.  We need to plan for the extremely high probability that the financing of law schools will be dramatically altered in the years to come.  The longer we wait, the more painful and disastrous the transition.  Every law school will need a damn good story to justify continued federal loans.  And right now, many of us lack that story – being in Tier 1 or T14 (where debt loads tend to be the highest) won't mean anything if the math falls short.

In summary, our ivory tower is crumbling.  With the ABA putting the employment data in downloadable format on its website, law schools will have to do something completely new and scary to us—we are going to have to compete to keep our jobs and stay in business.  The litmus test is going to be the ability of our graduates to obtain remunerative professional work in a highly competitive global economy.   This is very serious work.

[Posted by Bill Henderson]

More Complex Than Greed

That is the title of an essay I just published at The Am Law Daily.  It is on the demise of Dewey & LeBoeuf, which officially filed for bankruptcy yesterday.  I wrote the essay because I think the lessons drawn from the Dewey collapse are all-too-likely to follow the "lawyers are greedy" storyline.  This problem is bigger than our collective flaws as lawyers and as people.  Below are the first two graphs:

Dewey & LeBoeuf, an amalgam of two storied New York City law firms that merged in 2007, has died.  Understandably, this has prompted a lot of soul-searching among lawyers.  One storyline that will attract many followers is that large law firm lawyers, long viewed as the profession's elite class, have lost their way, betraying their professional ideals in the pursuit of money and glory. This narrative reinforces that lawyer-joke mentality that lawyers just need to be become better people.

And that narrative is wrong. Yes, we all need to become better people, but that still won't begin to cure the larger structural problem affecting large U.S. law firms. At its core, Dewey's collapse has less to do with individual moral failings than with aging organizational structures that worked remarkably well for over a century yet, but for a variety of reasons, now inhibit law firms' ability to adapt to a changing legal marketplace. 

Full story here ...

[Posted by Bill Henderson]

What is the Answer to High Student Debt?

This question is coming up a lot these days, but the nation's best minds are swinging and missing.

• The New York Times asked it today, and suggested that "full disclosure" is the answer.  That is just crazy -- students are going to college or graduate school so they have the skills and knowledge to do complex things like conduct a reliable cost-benefit analysis. 

• In the column in The New Yorker titled "The Cost of College," Nichlas Lehman, Dean of the Columbia School of Journalism, wonders whether higher education is suffering from a pricing bubble. Then, remarkably, he goes on declare that "higher education is actually underpriced .... in the top-tier schools" because "price is determined by what people are willing to pay." [Yes, and the highest bid will be accepted right before the bubble bursts.]  Regardless, Lehman is pleased that both Obama and Romney will try to keep interest rates low on undergraduate Stafford loans -- which just kicks the can down the road without imposing any pricing pressure on colleges or universities. 

• In contrast to Lehman's conclusion that top-tier schools are a bargain, in the Washington Post, Jennifer Rubin consults with two policy wonks from conservative think tanks who argue that institutions like Harvard are gouging students due to misguided federal subsidies and tax policies that shelter massive multi-billion dollar endowments.  This analysis is long on blame but short on solutions.

• As noted in my prior post, entrepenuer Peter Thiel is offering $100K fellowships for students to "stop" their formal education to pursue ideas that may contribute to viable new businesses.  Love the idea, but it is a tiny niche solution. 

My own belief is that educational quality is the next great frontier. If we can put a man on the moon in the 1960s, surely with four years and $120K we can turn a reasonably able and motivated 22 year old into a critical thinker who can reliably communicate, collaborate, gather facts, assess data, lead, follow, and approach problems with both empathy and objectivity.  Further, improving quality changes the debate from "how much does higher education cost?" to "how much is higher education worth?"  And if the worth is sufficiently high, both public and private employers would be willing to subsidize it in exchange for preferred access to graduates.  

The only barrier is institutional focus.  To make this happen, a university has to take an "Apollo Project" approach that focuses purely on education.  After figuring out the "how high" and "how fast" possibilities, an institution could then focus on controlling costs through process improvements and building modules.  First quality (worth), then cost.  This is not trade school education; this is about fully exploring human potential.

The first university to break into this space will have a profoundly disruptive effect the rest of higher education. The future of higher education is education. 

[posted by Bill Henderson]

$100,000 Scholarships to "Stop" College

Entrepreneur Peter Thiel (Stanford Law '92) is financing twenty $100,000 scholarships for young people who agree to "stop" their formal education for two years to pursue or join a real world project broadly related to some aspect of business, innovation or technology. See Thiel Foundation's "The 20 Under 20 Fellowships."

Thiel is a former federal judicial clerk turned  securities trader turned entrepreneur (founded PayPal) turned hedge fund manager/venture capitalist (he bet big on Facebook and won).  Thiel believes  that the key skills for innovation are not taught very well in universities.  Further, because Thiel believes we are in the midst of a serious higher education bubble, he argues that the debt incurred by students only hobbles their ability to pursue activities that would redound to the benefit of the U.S. economy.  Thus, as a nation, we are stuck in a very unhealthy spot.

Thiel shares his unorthodox views with Morley Safer on tonight's 60 minutes.  In the meantime, below is a preview of Thiel's views on higher education courtesy of the The Big Think.

Review of Failing Law Schools, by Brian Tamanaha (Part I)

[Update: I edited the review below to remove three paragraphs from my analysis.  It was a metaphor that was not key to my review of Brian's book yet could be fairly viewed as insulting to readers I both respect and hoped to persuade.  I am sorry about that. It was a substantial change, so I am acknowledging it here. wdh.]

Many legal academics are going to dismiss Brian Tamanaha's book, Failing Law Schools, without ever reading a page.  A larger number may simply ignore it.  That is ironic, because this is the response one would expect if Tamanaha's account of a corrupt, self-indulgence academic culture were true. 

I have lived inside this culture since I joined the academy in 2002. And I can attest that very few people inside the academy believe that we are living the high life on the backs of our students. But in the year 2012, that perception does not matter very much.  Rather, the perception that matters is the one from the outside looking in. 

Over the last eighteen months or so, The New York Times, The Wall Street Journal, The Washington Post, The Atlantic, the legal press and countless blogs (many written by unhappy students) have relentlessly hammered away at law schools.

The  lay public, including most practicing lawyers, are looking for a definitive account that can explain the legal education's maelstrom.  Tamanaha's account is a veritable Brandeis Brief on what went wrong, chocked full of facts and history and persuasive analysis. 

It begins with a deal between the ABA and AALS to join forces to persuade the state bars to restrict entry to ABA accredited law schools (the ABA's goal) and thereby to elevate the stature of the legal professoriate (the AALS's goal).  Once this deal was struck -- in the early 20th century -- pretty much every change accrued to the benefit of the law faculties: higher salaries, lower teaching loads, the advent of administrators to lighten the burden of governance, and more freedom to pursue scholarly interests.  When U.S. News & World Report ranking appear in the early 1990s, the law schools are forced to make choices.  And our collective behavior suggests that vanity and prestige are all-too-likely to trump important principles like student diversity or honesty in reporting data.

For us law professors, here is our conundrum. From the outside looking in, things look bad, even corrupt.  Yet we don't feel we have done anything wrong.  We are certain that we lack the intent to cheat or defraud.  But that, unfortunately, is error #1.  As we all know, establishing intent is always a matter of circumstantial evidence.  So let's review that evidence from the perspective of the neutral fact finder.

Life is objectively good for us:  We have high salaries, social prestige, lots of travel, job security, and near absolute freedom to organize our time outside the three to six hours a week we teach, 30 weeks a years.  Against this backdrop, there is consensus among legal employers that we are not very good at practical training including, in the eyes of many, basic legal writing.  Moreover, the overproduction of lawyers creates problems for the legal profession as a whole.  Similarly, our students  are saddled with enormous debt and nothing we are doing curricularly seems geared to solving their burgeoning unemployment  or underemployment problem.  The federal government finances this "system."  And through Income-Based Repayment programs, the U.S. taxpayers are backstopping our high costs.

Because law faculty seems to be getting the long end of the bargain here, our subjective feelings of honesty and rectitude are unlikely to be viewed by many students, practicing lawyers, or the broader public as credible.  In fact, they may be viewed as insincere or out of touch.  How did things get so badly out of kilter? 

But for Tamanaha, some pesky journalists, angry students, and the ticking time-bomb of law students debt, I am confident that we law professors could coast along on our present track for another several decades.  As an insider, I can honestly testify that we believe--sincerely beheve--that we care about our students, the quality of their education, their debt loads, and their future job prospects.  But  looking at the same set of facts, history will draw its own conclusions. And Tamanaha, akin to a lawyer building a case, offers up a very compelling narrative that the dispassionate observer is likely to find convincing. 

Other bloggers and news outlets have commented on Tamanaha's book, often drawing very different conclusions. Compare Brian Leiter's Law School Updates and Orin Kerr at Volokh Conspiracy (Tamanaha's argument has merit, particularly when he suggests that lower ranked law schools should consider changing their models), with Scott Greenfield at Simple Justice (here and here) (Tamanaha describes an insular, out-of-touch professoriate from the top down that distains the input of practicing lawyers) and the Chronicle of Higher Education (subscription req'd)  (describing Tamanaha's thesis, "Law schools are bloated with too many underworked, overpaid professors whose salaries are supported by tuition increases that are making law school a losing bet for many students").

What are the proper inferences to draw? 

In late 2011, I reviewed a copy of Tamanaha's book as part of the peer-review process for University of Chicago Press.  My primary advice to Brian, communicated directly to him as well as his editors, was "to condemn the sin, not the sinner."  Legal academics may seem culpable for privileging their interests ahead of students, I said, but these are the same folks who need to be relied upon to fix the problem. (The alternative is that nearly all of U.S. legal education will collapse under the weight of high costs and fewer entry level legal jobs; and on many days, I think the latter is just as likely as the former.)  

Frankly, I don't know if my "condemn the sin, not the sinner" recommendation was good advice.  In order to change, the legal academy may need more pressure brought to bear from outside forces. This may happen if the legal academy is painted as more selfish, insular, elitist and out of touch than we already look now.  Congress and the Department of Education hold the ultimate trump card, and Tamanaha's book provides the essential supporting evidence for radical action.  If and when this happens, law faculties will be forced to pick sides.  

History is now playing out right before our eyes.  I believe there is a good chance that Brian Tamanaha's book will be viewed--by history at least--as a great act of courage.  The implication, of course, is that the rest of us will look foolish.

Brian discusses the bleak employment prospects of law schools, but (through no fault of his own) understates the nature of the structural change that is occuring in the U.S. and global market for legal services.  In Part II, I will write about some logical next steps for law schools looking to get ahead of the coming tsunami. 

[posted by Bill Henderson]

LegalZoom Files for IPO

LegalZoom plans to go public.  According to the company's Form S-1 registration statement, which was just filed with the SEC, the company had $156M in revenues in 2011, with profits of $12 million. Here is the first line of the prospectus: 

We believe that everyone deserves access to quality legal services so they can benefit from the full protection of the law. Our mission is to be the trusted destination where small businesses and consumers address their important legal needs and to be our customers' legal partner for life.

Well, LegalZoom seems to be making progress. 

We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of our surveyed customers said they would recommend LegalZoom to their friends and family, our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formed using our online legal platform. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depth of the services we provide to our customers.

I recently rented a car on a business trip.  The radio was tuned to the Jim Rome Show, a national sports radio talk show that is carried by more then 200 stations nationwide.  During my two hour drive, I heard at least four LegalZoom radio commercials.

What is LegalZoom's long term play?  Based on the S-1, it is to use its trusted brand to build a network of "legal subscribers" who obtain legal advice from licensed attorneys.  As LegalZoom says,

We are not a law firm, and we do not provide legal advice. We provide self-help legal documents at our customers' specific direction and teneral information on legal issues generally encountered. Independent, licensed attorneys participate in our attorney network to provide services to our customers through our legal plans.

LegalZoom is seeking $120M for general corporate purposes.  Sheppard Mullin and Latham & Watkins are listed on the S-1 registration statement.  Think LegalZoom is no big deal?  If so, I would encourage you to read my previous post.

[posted by Bill Henderson]