The Legal Whiteboard

Losing the Law Business

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

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

by William D. Henderson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ReInvent Law is a Really Big Deal

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

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

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

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

 

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

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

A Clockworks Approach to Lawyer Development from William Henderson

Here is the Slideshare description:

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

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

[posted by Bill Henderson]

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

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

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

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

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

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

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

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

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

[posted by Jerry Organ]

"LPOs Stealing Deal Work from Law Firms"

That is the title of this video interview of  law firm consultant Kent Zimmermann of the Zeughauser Group.  In the interview, Zimmermann relates a story from a recent large law firm retreat in which one of the partners raised her hand and said that one of her major clients in the healthcare industry recently used Axiom in an M&A deal.  Not for due diligence.  They used Axiom for the whole deal.

For what it is worth, I think we have a language / perceptions gap at work here.  At least in the winter of 2013, the phrase "Legal Process Outsourcers" tends to connote masses of low-level attorneys toiling away doing low-level work in India, the Philippines, South Africa or in small or middle market cities in the U.S. -- i.e., a simple labor arbitrage play.  

But Axiom's competitive advantage is in understanding the clients' needs and working backwards to a solution.  The value here is in (a) listening carefully to the client (e.g., "we want the same or better quality but lower and more predictable pricing"), and (b) in designing and building a system that delivers that outcome.

For background on Axiom, read this eyeopening article, "Disruptive Innovation", from The American Lawyer.  Axiom has backing from Sandhill Road venture capital and Wall Steet private equity.  One of their investors is quoted, “Axiom has an opportunity to disrupt an industry that hasn’t materially changed in a century. ... With a worldwide legal market that is a trillion dollars each year, there is plenty of running room to build a successful business."

Water runs downhill.  There is a lot of money to be made by making law more efficient and affordable.  Lawyers need to facilitate this outcome, not obstruct it, as society needs and wants better, more affordable access to legal solutions.  Process-driven legal services and legal products are the future.  Indeed, as the cyberpunk science fiction writer, William Gibson, once quipped, "the future is already here — it's just not very evenly distributed."

For my own views on the incipient revolution that threatens 100 years of established hierarchy, see "Losing the Law Business," Cayman Financial Review (Jan 2013); for the implications for legal education, see Section II.C of A Blueprint for Change.

[posted by Bill Henderson]

A Blueprint for Change

Several months ago I wrote a book review of Brian Tamanaha's important book, Failing Law Schools.  In the last paragraph, I wrote:

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 occurring 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.

I tried to write Part II, but a blog post just was not up to the task.  Further, I sensed that my colleagues were in no mood for half-baked solutions. There has been enormous criticism of legal education on the blogs and in the media, but very little in the way of detailed prescriptions to improve the situation.  I felt an obligation to back off on the criticism and focus on solutions.  So, in essence, Part II of my Tamanaha review became an article.

I just posted to SSRN an article entitled "A Blueprint for Change" forthcoming in the Pepperdine Law Review.  It is both a diagnosis and a proposed solution -- a solution I am actively pursuing. Here is the abstract:

This Article discusses the financial viability of law schools in the face of massive structural changes now occurring within the legal industry. It then offers a blueprint for change – a realistic way for law schools to retool themselves in an attempt to provide our students with high quality professional employment in a rapidly changing world. Because no institution can instantaneously reinvent itself, a key element of my proposal is the “12% solution.” Approximately 12% of faculty members take the lead on building a competency-based curriculum that is designed to accelerate the development of valuable skills and behaviors prized by both legal and nonlegal employers. For a variety of practical reasons, successful implementation of the blueprint requires law schools to band together in consortia. The goal of these initiatives needs to be the creation and implementation of a world-class professional education in which our graduates consistently and measurably outperform graduates from traditional J.D. programs.

I have a large backlog of shorter articles and analyses that I have not posted because I wanted my own detailed solution in the public domain.   I hope to tie all of these ideas together over the coming weeks.

Thank you, Brian Tamanaha, for writing an book that required me to think in terms of solutions.

[posted by Bill Henderson]

How Do Law Professors Learn About the Intersection of Law and Technology?

Here is my best guess:  We show up at the intersection and we listen to lawyers, judges, regulators and vendors talk about the issues of the day.  Alas, this is not original to me.  It is the "soak and poke" research method pioneered by the renowned political scientist, Richard Fenno (photo to right).  See Fenno, U.S. House Members in Their Constituencies: An Exploration, 71 Am. Polit. Sci. Rev. 883, 884 (1977) (seminal article that describes the "soaking and poking" methodology as one that "befits the earliest stages of exploration and mapping") (HT to my PhD colleague Jay Krishnan, who explained this all to me).

Earlier this month, there was a major conference in Washington, DC on developments in the world of electronic discovery -- the very thing that has added enormous cost and complexity to civil litigation in this country, impacting access to justice, and producing a restructuring of how corporations buy and manage a significant portion of their legal services. If there is a burgeoning legal technology revolution, the frontline is the world of e-discovery.  Lawyers and clients can no longer cope with the rapidly growing volume of electronically stored information (ESI).  Going forward, technology and nonlegal expertise are a permanent part of the legal industry.

This major conference was organized by the Advanced eDiscovery Institute, which is part of Georgetown Law's CLE operations.  According to its website, the conference (now it its ninth year) has "gained a reputation among judges, practitioners, and vendors as the leading eDiscovery conference of its kind in the United States."  Notice that "law professors" and "legal educators" are entirely absence from this description. 

If you leaf through the lengthy roster of speakers and organizers, you'll see:

• A dozen federal judges, including the busiest and most influential district courts (SDNY, ND Illinois, SD Texas, District of Columbia)
• Lawyers from the FTC, DOJ, SEC, and US Commodity Futures Trading Commission
• Several state courts and state agencies
• Partners from a huge swath of the corporate bar
• In-house lawyers from Google, Raytheon, Pfizer, Tyco, Motorola, Genentech, Apple, Deloitte Financial Advisory Services, Honda, UBS Financial, United Technologies, and many other Fortune 500 companies
• The National Institute of Standards and Technology
• The Sedona Conference
• Several leading eDiscovery vendors

This is a very serious crowd.  Yet, I located only one full-time law professor in the mix:  John Carroll, who is Dean of the Cumberland School of Law at Samford University.  Yet, even Dean Carroll is not your typical legal academic.  He is a Vietnam veteran, a 1974 graduate of Cumberland Law, a former federal magistrate judge, and a current member of the Sedona Conference. Kudos to Dean Carroll, whom I suspect knows quite a bit about cutting edge issues in eDiscovery. But where is the next generation of legal academics soaking up all this valuable institutional knowledge?

Nearly 10 years ago I showed up at the Indiana Solo & Small Firm Conference.  I was there to gain some basic insight for a course I was putting together called "The Law Firm as a Business Organization."  As the organizers will tell you, a law professor had never before ventured into their conference. What was their reaction?  A very kind, "It's about time!"  I was immediately drafted onto the organizing committee and in subsequent years conducted two major surveys for the ISBA Solo & Small Firm Section.  To this day, the lawyers I met at that first Solo & Small Firm Conference remain an important part of my professional network.  Ironically, several years ago the small firm crowd was issuing a clarion call on the importance of law and technology -- for them, it was all about survival.

Now law and technology is on nearly everyone's radar.   New tools and work processes are opening the door to better, faster, and cheaper legal solutions -- solutions that bear little resemblance to the artisan method of lawyering taught in US law schools.  Unfortunately, there are no classes to turn any of us into experts--the practicing bar itself is struggling to comprehend the implications of the new world we are entering. During a paradigm shift, the job of academics is going to messy and chaotic.  At this juncture, we have to educate ourselves by showing up, talking to people, and observing. Cf. Susan Helper, Economists and Field Research: "You Can Learn A Lot Just by Watching", 90 Am. Econ. Rev. 228 (2000).  It is time to get to work.

Interested in a primer on law and technology?  Consider the NYC LegalTech, which runs from Jan 29-31.  Early bird registration ends Dec 31, 2012.  I will definitely be at ReInvent Law Silicon Valley 2013, which is March 8 at the Computer History Museum.  Other high quality options -- I am told by people more knowledgable than me-- are the ABA Techshow, which runs from April 4-6 in Chicago this year, and the International Legal Technology Association annual conference, which runs August 18-22 in Las Vegas this year.  I would love to get together with other law professors who will be attending these important industry meetings.

Related posts:

• How Law & Society Research is Part of the Solution to Structural Change, Apr 11, 2012.
• Why Are We Afraid of the Future of Law?, Sept 6, 2012.

Useful resources:

• DennisKennedy.com, a blog writen by Dennis Kennedy, a lawyer and legal technology expert. Dennis has a strong following among individual lawyers to want to leverage technology to improve their practice.
• Strategic Legal Technology, a blog written by consultant Ron Friedmann, a brilliant and generous person with 30 years of experience and perspective.  Ron was there at the genesis of law and technology.  At some point, I hope his career is written up.  Ron is a guru on knowledge management and enterprise-level technology.
• Law Technology News, a great electronic resource edited by Monica Bay.  LTN is part of American Lawyer Media.  I predict that LTN is going to go mainstream rather than niche in the very near future.
• Computational Legal Studies, which is a blog founded by Professor Dan Katz at Michigan State.  Dan is preparing for a whole new way of conceptualizing legal problems and legal practice.
• Law21, a blog written by lawyer, journalist, and consultant Jordan Furlong.  Tech is a common theme for Jordan.  He is a great translator who puts things into a broader perspective.

[posted by Bill Henderson]

Predictive Coding is a Disruptive Innovation that will Change How Law is Practiced

I have been reading about predictive coding for a few months now, and that is my conclusion.  Predictive coding is the use of computer algorithms and machine learning to conduct the review of electronically stored information (ESI).  For a useful primer, see Frederick Kopec, Predictive Coding in eDiscovery or Predictive Coding for Dummies (remarkably, there are two editions, one by Symantec and the other by Recommind, see Legal Tech Insider, A Tale of Two Predictive Coding Books).

From the client perspective, predictive coding is at least as good as first-level human review (typically junior attorneys screening for relevance and privilege) but dramatically less expensive.  And note, whatever efficiency and accuracy benefits predictive coding has today, it will only improve in the months and years  to come.  It contrast, our processing capacity as humans is, well, static.

The big players in the space are Kroll Ontrack and Recommind. These are not insignificant companies.  Kroll Ontrack started as a hard disk recovery service and evolved into the e-discovery and information management services. It now employs 1,500 workers in eleven U.S. and nineteen foreign locations around the world.  In 2010, Kroll Ontrack had revenues of $250 million. A few layers up, it is owned by the Private Equity giant Providence Equity Partners. 

Recommind has approximately $15 million in annual revenues and approximately 100 employees spread over facilities in Massachusetts, California, London, Germany, and Australia.  According to this June 2012 story at the CIO Agenda at Computer Business Review, Recommind is gearing up to go public.

Howard Sklar, Senior Corporate Counsel for Recommind, just posted an essay entitled, Legal Acceptance of Predictive Coding: A Journey in Three Parts.  The parts are: (1) acceptance that predictive coding reasonable, (2) arguments that it is better and thus must be used in this case, (3) sua sponte judicial order that it be used. The fourth part, still to come argues Sklar, is a state bar ethics watchdog issuing a ruling that failure to use predictive coding is unethical. 

Here is an excerpt from Sklar's post:

There’s a certain trajectory for technology adoption.  Early adopters, mainstream acceptance, laggards.  But, slow or fast, adoption occurs.  The law is the same way, in its own fashion.  But the legal acceptance of predictive coding has had a path that’s unorthodox.  From the legal perspective, predictive coding has gone through three cycles, not entirely as expected.

In cycle one, companies began using predictive coding.  The efficiencies are compelling.  Better end results in less time at a cost savings.  An ability to better find and understand the facts embedded—sometimes hidden—in your documents.  These things are crucial in today’s corporate world.  Law firms were slower, but generally followed their clients into predictive coding, and soon saw the benefits first hand.

Other vendors—usually the first to adopt new technology—were laggards.  They fought the adoption of predictive coding as long as they could, mainly because they didn’t have the capability to do it themselves.  Eighteen months ago, the most frequent question I would get at conferences was “has there been a court case approving the use of predictive coding?”  In the “ridicule it and it will go away” marketing approach, they were hoping to scare corporations and law firms away from the benefits corporations could achieve.

Then came Da Silva Moore and Global Aerospace [which, against the objections of one of the litigants, ruled that predictive coding was a judicially reasonable method of conducting discovery.]  ...

During this period, other vendors stopped criticizing predictive coding and started marketing it—sometimes with the capability, sometimes without.  ...

After waiting for the first decision approving the use of predictive coding, we went to stage two faster than anyone had thought possible: not whether you can use predictive coding, but whether you must use it.  This was the argument in the Kleen Products case.  The defendants had completed their review, and the plaintiffs’ argued that the review was defective because predictive coding wasn’t used.  Eventually, the parties cooperated to end that dispute, but the argument had been made. ...

We’re now in stage three: a court has sua sponte ordered the use predictive coding.  And not just any court, the Delaware Chancellery Court, one of the most important corporate courts in the nation.

In the future, we’ll enter stage four: the decision by a state bar’s ethics watchdog that failure to use predictive coding is ethically questionable, if not unethical.   After all, purposefully using a less-efficient, less accurate, more expensive option is problematic.  I think that’s probably 18 months away.  But given how fast we’ve gone through the first three states, stage four may come next week.

[posted by Bill Henderson]

What is the Significance of Major Combinations between Canadian and U.S. Law Firms?

Law firm consolidations are in the air.  Over the last couple of weeks, two major Canadian law firms have entered into combination agreements with U.S./UK counterparts. 

1. Norton Rose (a British firm with a major Canadian presence) is merging with Fulbright & Jaworski, creating a firm with 55 offices and 3,800 lawyers.  Details here.
2. Fraser Milner Casgrain is combining with SNR Denton (US-UK firm that swallowed up the legacy Sonnenschein law firm in 2010) and Salans, which is a European law firm original formed in France. The resulting firm will have 2500 lawyers in 79 offices and 52 countries worldwide.   Details here. 

In the video interview below, Jordan Furlong, a Canadian lawyer, journalist and consultant (Law21), views these developments as the beginning of a major sea change.

To my mind, the consolidations we are witnessing have a lot to do with flat worldwide revenues. Law firms become uncomfortable places when they are not growing. Yet, really big law firms seldom fail because failure requires that a large number of partners vote their feet. A 30-partner defection can be a lethal blow to a 500-lawyer firm, but not so much for a 2,500-lawyer firm. The larger number of lawyers provides managers with more time and latitude to figure out a longer term strategy. Big feels safer.  Further, once the consolidation is complete, the firm managers can thin the ranks of weaker partners, producing a stronger overall firm.  (That is the theory, anyway.)

[Posted by Bill Henderson]

What Would Happen If Nonlawyers Invested in Law Firms? Soon We Will Have Data

As U.S. lawyers successfully derail the most modest changes to the Rule 5.4 prohibition on nonlawyer investment in law firms, see e.g., this Wisconsin Bar commentary, the Brits are going in an entirely different direction.  The Legal Services Act of 2007 lifted the fee-splitting prohibition in the U.K., but it has taken five years to set up the necessary regulatory infrastructure to facilitate the opening of the legal market to nonlawyer investors. 

The UK experience is bound to have a big influence on the U.S. debate because so much of the rhetoric on both sides is based on the alleged impact of the nonlawyers.  Proponents argue that it will drive down costs, accelerate innovation, and improve access to justice.  The critics, who so far have the upper hand, assert that investor profit motives will compromise lawyer independence, leading to the ruination of the profession. 

Thanks to developments in the UK, we are moving from abstract arguments to concrete experience.  Coverage in the British legal press suggests that a new legal order is indeed beginning to take shape.

One novel development, reported by the Law Society Gazette, is an equity stake in the Knights Solicitors law firm by Hamilton Bradshaw, a British private equity fund run by entrepreneur and investor James Caan.  Knights is a 23-solicitor Midlands regional firm founded in 1759 (yes, 1759) whose business profile at the time Caan invested was being a competent, responsive law firm at a price point considerably below the London-based firms.  See, e.g, this Legalweek article describing Knights' collaborations with US/UK powerhouse Hogans Lovells.  

The plot here is pretty thick.  In both the UK and Austrailia, which also liberalized its legal market a few years ago, the early investors have been on the personal injury side.  In contrast, Knights is full-service commercial law firm.  With the aid of outside capital, the firm's ambition is to catapult itself into the top 100 UK law firm within three to five years. Further, Caan is not just any investor.  He is famous in England because he served as as judge on the popular Dragon's Den television program.  The show's concept is simple:  entrepenuers pitch their ideas to some colorful, high roller celebrity investors.  Contestants potentially get funding plus a priceless primetime branding opportunity.  Dragon's Den was the basis for ABC's Shark Tank, where serial entreprenuer and Dallas Mavericks owner Mark Cuban serves as a judge.

Well, Caan got the regulatory okay a few months ago and is settling in with his new investment.  His early rhetoric suggests that he has little interest in fitting into the dominant culture of the British legal profession.  According to a story titled "Profit a 'Dirty Word' in Law," Caan regaled the NetLaw Strategic Leadership Forum in London with his experience of interviewing 20 firms in his bid to enter the legal market.  What he observed was "a profession dogged by the partner structure, failing to build a lasting relationship with clients and with too little focus on making money." 

Although he and others would be keen on investing in more law firms, the culture within firms, including excessive deliberations in making basic management decisions, is a major hinderance.  Caan remarked:

A lot of people said this is not how this industry works: we’re about service, and profitability was a dirty word.  ... The minute a business forgets the reality of why it is there it will never grow. Every day you walk into the office you’re looking to make a profit. Being ashamed or embarrassed is not how you grow – every business I invest in, I’m not ashamed that is the strategy.

For a U.S. audience, this quote is likely to stoke the fire of both critics and proponents of fee-splitting.  On the one hand, here is a nonlawyer wanting to clean house in pursue of profits -- that seems to go the heart of lawyer independence.  On the other hand, wringing out more profit could well be possible if lawyers had a laser-like focus on the needs of their clients.  Caan only makes money if the clients (including sophisticated commercial clients) are drawn to his model, essentially rejecting the bundle of services offered by traditional law firms.

The late Larry Ribstein was a sincere believer in the latter view.  According to Larry, the pervasiveness of lateral movement -- which, under state legal ethics rules, cannot be curtailed by noncompete agreements -- had caused law firms to become hopelessly focused on the short-term.  This includes the most prestigious firms, which were (and, in my estimation, are) burning down decades of accumulated reputational capital.

Yet, the short-termism of coporate law firms is curable with money plus a coherent business strategy.  With an injection of patient capital, some extremely talented lawyers could be persuaded to stick around and focus on innovative legal products and services.  The idea is that patient capital could guarantee a partner's income for a period of years (essentially a partner's opportunity cost on the lateral market) in exchange for splitting the upside on innovations with the nonlawyer capitalists. 

In a few years, Larry's ideas will be fully roadtested in the U.K.  If he was a right (and I think he was), this could eventually become a consumer rights issue that captures the attention of state legislatures. And who will be advocating for those consumers?  Lawyers who want to take outside investments so they can replicate the financial success enjoyed by their UK counterparts.  Time will tell.

[posted by Bill Henderson]

The Rise of Legal Analytics, or the First Signs of Big Data in Big Law

Have your heard of "Big Data"?  Basically, it is the mining of large existing datasets to make better business decisions.  There is a lot of discussion on this topic in the business world.  See, e.g., Big Data: The Management Revolution, Harvard Business Review (Oct 2012); The Age of Big Data, New York Times (Feb 11, 2012).  

The first signs of Big Data in the law firm world are the companies that provide electronic billing platforms for large corporations.  These companies have all the data needed to discern the relative efficiency of various service  providers -- name of firm, title of lawyer, practice area, billing rate, office, and a large portofolio of matters uniformly coded by subject matter and discrete technical tasks.  Clients, of course, know the outcomes of matters, which provides the last piece of missing information to not only calcuate cost and efficiency, but also value delivered to the client.

In the video below, reporters from the Boston Business Journal explain the services provided by these new data analytic companies (TyMetrix and Sky Analytics are briefly featured). 

What I love about this video is that the reporters are outsiders to the law world.  They note that the "transparency" and "information" these companies provide  are wonderful developments for clients -- and, of course, they are 100% right.  Nobody wants to overpay, so tools to eliminate this problem are going to be widely embraced.

The obviousness of this point is why the legal services industry is at the beginning, rather than the middle or end, of a massive structural shift that will be wonderful for legal consumers but profoundly disruptive to law firms and law schools.  In the years to come, we will have fewer lawyers and generally flat or declining incomes within the profession. 

The real money will be made at the intersection of law and technology, which has the potential to scale legal work so it can be better, cheaper and faster.  This is the road to commodification of law.  It is good for society, but bad for those of us wedded to a traditional model where lawyers enjoyed more market power.  Those days are fading into the horizon.

[posted by Bill Henderson]

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]

Location, Location, Location – Geography Matters in Law School Employment 2010-2011

NALP notes that for the Class of 2010 -- and the Class of 2011 -- two-thirds of all employed graduates were employed in the state in which their law school was located. This suggests location matters.

Is location important to employment results at a large number of schools? Are some law schools more national than others? Are some states more “local” in hiring than other states? The answers are yes and yes and yes.

ANALYZING SCHOOL SPECIFIC DATA -- This analysis is based on the Class of 2010 and Class of 2011 employment outcome data reported on the ABA Section of Legal Education website, excluding the law schools in Puerto Rico. This means there are 195 law schools in this analysis (if the two Widener campuses are combined).

The law schools were asked to report the three states with the most employed graduates and the number of employed graduates in each of those three states. Taking those totals as a percentage of employed graduates, and paying attention to the states identified, one can get some idea of which schools are “regional” and which schools might actually have a more “national” footprint. The simple result of the analysis is that the vast majority of schools are “regional” rather than “national.”

1. For both the Download Class of 2010 and the Download Class of 2011, there were 117 law schools for which more than 67 percent of their employed graduates are employed in the state in which the law school is located.
2. For the Classes of 2010 and 2011, there were 144 and 145 law schools, respectively, for which more than 67 percent of their employed graduates are located in the state in which the law school is located or an adjacent state, and 104 law schools for which more than 80 percent of their employed graduates are located in the state in which the law school is located or an adjacent state.
3. There were only 46 law schools for which less than 67 percent of their employed graduates were employed in the state in which the law school is located or an adjacent state for both the Classes of 2010 and 2011.

Notably, 28 of these 46 law schools are in the USNews top-50, for which it is easily imaginable that the employment geography is much more national than regional. For many of these 46 law schools, two of the three states with the most employed graduates generally are not adjacent to the state in which the law school is located, suggesting some national reach. The three non-adjacent jurisdictions reflected most frequently should not be surprising – California, the District of Columbia and New York. Of the 18 other law schools, nine law schools are ranked in the alphabetical list of schools -- schools one generally would consider regional – while nine are ranked between 51 and 145 in USNews.

Perhaps most significantly, due to the incomplete nature of some of the data sets, this summary probably understates the number of law schools for which the employment outcome data suggests the law school is more regional than national. Several of these 46 law schools come in with 60% or more of their employed graduates employed in the state of the law school or an adjacent state for both years -- Boston College, Minnesota, NYU, Ohio State and Penn State – and if the data were to include graduates employed in all adjacent states, the total for these schools well might exceed 67 percent.

In sum, then, more than 76% of all law schools and more than 87% of law schools outside the USNews top-50 had more than 67% of their employed graduates in the state in which the law school is located or an adjacent state for either the Class of 2010 or the Class of 2011.

LOOKING AT STATE SPECIFIC DATA -- NALP also notes that for the Class of 2010, there are 30 states in which two-thirds or more of the jobs were taken by graduates from law schools in those states. (Jobs & JDs, Class of 2010, p. 69)  Taking NALP’s state-specific data for the Class of 2010 in conjunction with the ABA’s data for the Class of 2010, there actually are 35 states in which two thirds or more of the jobs were taken by graduates of law schools in those states or an adjacent state and 30 states in which three-quarters or more of the jobs within the state were taken by graduates of the law schools in the state or in an adjacent state.

Again, this data likely understates the results. For example, in Arizona, Colorado, Connecticut, Maryland, Tennessee, and Virginia, roughly 65-75 percent of jobs within the state were taken by graduates from law schools within the state or an adjacent state. But with several schools in adjacent states not counted in the tallies because these states were not one of the top three states for employed graduates from those schools, one could infer that were graduates from all schools from adjacent states included the percentage might exceed 75 percent. (Notably, 13 of the 15 states with less than 67 percent of jobs taken by graduates of the law school in the state or law schools in adjacent states are states with modest populations and only one law school (or no law school) – Alaska, Delaware, Hawai’i, Idaho, Maine, Montana, Nevada, New Hampshire, New Mexico, Rhode Island, South Dakota, Vermont, and West Virginia.  The other two states are Utah and Virginia. The District of Columbia also falls into this category.)

LOCATION MATTERS -- In sum then, location matters. For the vast majority of law students at the vast majority of law schools, the vast majority of reasonable employment prospects associated with going to a given law school are going to be in the state in which the law school is located or an adjacent state. In the absence of a unique or specific aspect of a law school's program that might make a particular law school very appealing, this suggests that location should matter when considering a law school, perhaps more than ranking.

For example, if a prospective student has a choice between going to a higher ranked regional law school in a state in which the student does not anticipate practicing or living (and perhaps paying more in tuition), or a lower ranked regional law school in the location in which he or she hopes to live and work professionally (and perhaps paying less in tuition), the prospective law student should give serious consideration to attending the lower-ranked regional law school in the location in which he or she hopes to live and work professionally. This will make it easier to begin networking while in law school and to facilitate employment opportunities in the region in which the student is interested in practicing law and living. (And it may help the prospective student save money if the lower-ranked regional school happens to cost less (if it is a public school, for example), or if the prospective student has a more competitive LSAT/GPA profile at the lower-ranked regional school such that the student may be eligible for a scholarship.) 

[Posted by Jerry Organ]

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]

Cool Infographic on the Legal Services Industry

A really compelling way to convey a lot of important information.  I continue to be blown away by the volume of innovation I am seeing, mostly around interconnectivity.  (H/T: Greg Voakes at Business Insider)

[posted by Bill Henderson]

Encouraging Data on Law Firm Diversity

Here is some welcomed good news for the legal industry--we now have data showing diverse lawyers, within certain large and important legal markets, ascending to law firm partnership in significant numbers.  Let me be clear.  I am reporting progress here, not perfection.  But the progress provides key insights on how to further reduce the partnership diversity gap.

The research, which I just published in the NALP Bulletin (see "Diversity by the Numbers," July 2012), is based on the 2005-06 edition of the NALP Directory of Legal Employers. The NALP Directory is a city-by-city guide for several hundred law firms that  participate in the on-campus interview (OCI) process.  This information includes a breakdown of lawyers by firm, branch office, title, and race/gender/GLBT status.  (See full article for overview data.)

The aggregate-level statistics are not every encouraging--less than 5% of partners at these corporate firms are minority.  These are the type of bleak statistics that frame the diversity discussion.  Yet, when the data are disaggregated, we see racial subgroup making substantial partnership inroads in specific geographic markets.  For African-Americans, it is Atlanta and Washington, DC; for Asians, it is L.A., San Francisco, and Pacific Northwest/Rocky Mountain region; for Hispanics, it is Houston, Dallas, Miami and L.A.  Further, these partnerships disproportionately in AmLaw 200 firms.

The map and table below expresses these geographic variations using a location quotient methodology.

(Note: CSA means "Consolidated Statistical Area", a geographic area defined by the U.S. Census Bureau.  Among other things, CSAs are very large metropolitan area labor markets.)

In the map above, the emphasis on large metropolitan areas is deliberate.  Among the 600+ law firm in the 2005-06 Directory, 64.2% of their attorneys worked in the top 10 metropolitan markets; these same markets also accounted for 74.8% of hiring at the NALP firms.

A Location Quotient (LQ) is a tool for identifying relative surpluses or shortages of an economic activity within specific locations.  If, for example, the percentage of female partners in New York City is the same as the entire US market, the location quotient for female partners would be 1.00.  In fact, the LQ for female partners in New York City is .87.  This means that are 13% fewer female parters in New York City relative to the total base of New York City partners.  Likewise, the LQ for African American partners in Atlanta is 2.67.  This means that there are 167% more African American partners in Atlanta relative to the total Atlanta partnership base. Cells in Yellow are underrepresented by more than 10%; cells in blue are overrepresented by more than 10%.

The implication of this analysis is that significant diversity tends to exist in pockets that follow distinctive demographic patterns.  These significant pockets rebut the pessimistic view, held by some, that minority partners lack the skills and ability to be successful in large corporate law firms.  Quite the opposite is true -- minority lawyers' willingness to enter a market and persist at a firm is likely influenced by number of people from the same minority group who have ascended to the partner level.  If you are a African American lawyer, the wind is at your back in DC or Altanta, but in many branch offices in Dallas, Phoenix or Boston you will be breaking barriers.

This brings up the issue of pipeline, which is a precursor to any hoped for progress on partner diversity. 

To look at pipeline-to-partner issues, I created separate regression models to predict the % minority associates within a law office (not the firm as whole).  I ran the model separate for African American, Asians, Hispanics, GLBT and females. Each factor below makes an independent contribution to a larger pipeline of diverse associates.

• Geography matters.  Diverse associates are disproportionally going to the same market where their same subgroup has been successful becoming partner.  African Americans to Atlanta and DC; Asians to the west coast; Hispanics to the major markets in the Southeast and Southwest.
• Large Firms.  Large firms are more successful recruiting diverse associates. This could be salary, prestige, recruitng resources.
• Large Offices.  Bigger branch offices are more successful.  This could be recruiting resources or a more appealing variety of practice areas.
• % of Diverse Partners.  This is the critical factor -- for every category, % of partners is associates with higher % of associates.  This is independent of size and geography!  Further, there is zero crossover effect. 

Quoting from the full article, "The takeaway from the above analysis is both simple and frustrating.  We would have more African American (or Hispanic or Asian or Female or GLBT) associates if only we had more African-American (or Hispanic or Asian or Female or GLBT) partners.  But getting more diverse partners will be slow going until we become better at retaining, rather than just recruiting, diverse associates.  The first generation of diverse lawyers will, by definition, not have the benefit of diverse mentors.  And in many firms, or at least branch offices, the first generation has not yet arrived."

I am really grateful to NALP for giving me access to this unique dataset.  It caused me to think much more deeply on how lawyer development can be used to create greater diversity in the huge number of branch offices where there is no critical mass of diverse partners.  It short, it is all about creating a competency model and evaluation system--i.e., a roadmap--that makes the path to partnership more explicit.  Why am I bullish on our ability to make progress on partnership diversity?  Because these systems simultaneously advance profitability and diversity.  The article recounts one such example.

[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]