Monday, March 17, 2014

A Counterpoint to "The most robust legal market that ever existed in this country"

There is a line in Professor Reich-Graefe's recent essay, Keep Calm and Carry On, 27 Geo. J. Legal Ethics 55 (2014), that is attracting a lot of interest among lawyers, law students, and legal academics: 

[R]ecent law school graduates and current and future law students are standing at the threshold of the most robust legal market that ever existed in this country—a legal market which will grow, exist for, and coincide with, their entire professional career.

This hopeful prediction is based on various trendlines, such as impending lawyer retirements, a massive intergenerational transfer of wealth that will take place over the coming decades, continued population growth, and the growing complexity of law and legal regulation.

Although I am bullish on future growth and dynamism in the legal industry, and I don't dispute the accuracy or relevance of any of the trendlines cited by Reich-Graefe, I think his primary prescriptive advice -- in essence, our problems will be cured with the passage of time -- is naive and potentially dangerous to those who follow it.

The Artisan Lawyer Cannot Keep Up

The primary defect in Reich-Graefe's analysis is that it is a one-sided argument that stacks up all impending positive trendlines without taking into account the substantial evidence that the artisan model of lawyering -- one-to-one consultative legal services that are tailored to the needs of individual clients -- is breaking down as a viable service delivery model.  

Lawyers serve two principal constituencies--individuals and organizations.  This is the Heinz-Laumann "Two-Hemisphere" theory that emerged from the Chicago Lawyers I and II studies.  See Heinz et al, Urban Lawyers (2005). The breakdown in the artisan model can be observed in both hemispheres.

  1. People.  Public defenders are understaffed, legal aid is overwhelmed, and courts are glutted with pro se litigants.  Remarkably, at the same time, record numbers of law school graduates are either unemployed or underemployed.  Why?  Because most poor and middle-class Americans cannot afford to buy several hours of a lawyer's time to solve their legal problems.  
  2. Organizations.  The most affluent organizations, multinational corporations, are also balking at the price of legal services.  As a result, foreign labor, technology, process, or some combination thereof has become a replacement for relatively expensive and unskilled junior lawyers.

The primary driver of this structural shift is the relentless growth in legal complexity.  This increase in complexity arises from many sources, including globalization, technology, digitally stored information, and the sheer size and scope of multinational companies. 

But here is a crucial point:  the complexity itself is not new, only its relative magnitude.  A century ago, as the modern industrial and administrative state was beginning to take shape, lawyers responded by organizing themselves into law firms.  The advent of law firms enabled lawyers to specialize and thus more cost-effectively tackle the more complex legal problems. Further, the diffusion of the partner-associate training model (sometimes referred to as the Cravath system) enabled firms to create more specialized human capital, which put them in an ideal position to benefit from the massive surge in demand for legal services that occurred throughout the 20th century.  See Henderson, Three Generations of Lawyers: Generalists, Specialists, Project Managers, 70 Maryland L Rev 373 (2011). 

The legal industry is at the point where it is no longer cost effective to deal with this growing complexity with ever larger armies of artisan-trained lawyers.  The key phrase here is cost effective.  Law firms are ready and willing to do the work.  But increasingly, clients are looking for credible substitutes on both the cost and quality fronts. Think car versus carriage, furnace versus chimney sweep, municipal water system versus a well.  A similar paradigm shift is now gaining momentum in law.

The New Legal Economy

I have generated the graph below as a way to show the relationship between economic growth, which is the engine of U.S. and world economies, and the legal complexity that accompanies it.

Complexity
This chart can be broken down into three phases.

1. Rise of the law firm. From the early twentieth century to the early 1980s, the increasing complexity of law could be capability handled by additional law firm growth and specialization. Hire more junior lawyers, promote the best ones partner, lease more office space, repeat.  The complexity line has a clear bend it in.  But for most lawyers, the change is/was very gradual and feels/felt like a simple linear progression.  Hence, there was little urgency about the need for new methods of production.

2. Higher law firm profits. Over the last few decades, the complexity of law outpaced overall economic growth.  However, because the change was gradual, law firms, particularly those with brand names, enjoyed enough market power to perennially increase billing rates without significantly improving service offerings.  Corporate clients paid because the economic benefits of the legal work outweighed the higher costs.  Lower and middle class individuals, in contrast, bought fewer legal services because they could not afford them. But as a profession, we barely noticed, primarily because the corporate market was booming. See Henderson, Letting Go of Old Ideas, 114 Mich L Rev 101 (2014).

3. Search for substitutes.  Laws firms are feeling discomfort these days because the old formula -- hire, promote, lease more space, increase rates, repeat -- is no longer working.  This is because clients are increasingly open to alternative methods of solving legal problems, and the higher profits of the last few decades have attracted new entrants.  These alternatives are some combination of better, faster, and cheaper.   But what they all share in common is a greater reliance on technology, process, and data, which are all modes of problemsolving that are not within the training or tradition of lawyers or legal educators.  So the way forward is profoundly interdisciplinary, requiring collaboration with information technologists, systems engineers, project managers, data analysts, and experts in marketing and finance.

Why is this framework potentially difficult for many lawyers, law firms, and legal educators to accept?  Probably because it requires us to cope with uncertainties related to income and status.  This reluctance to accept an unpleasant message creates an appetite for analyses that say "keep calm and carry on."  This is arguably good advice to the British citizenry headed into war (the origin of the saying) but bad advice to members of a legal guild who need to adapt to changing economic conditions.

There is a tremendous silver lining in this analysis.  Law is a profoundly critical component of the globalized, interconnected, and highly regulated world we are entering.  Lawyers, law firms, and legal educators who adapt to these changing conditions are going to be in high demand and will likely prosper economically.  Further, at an institutional level, there is also the potential for new hierarchies to emerge that will rival and eventually supplant the old guard.

Examples

Logo-kcuraOne of the virtues of lawyers is that we demand examples before we believe something to be true.  This skepticism has benefited many a client.  A good example of the emerging legal economy is the Available Positions webpage for kCura, which is a software company that focuses exclusively on the legal industry. 

The current legal job market is terrible, right?  Perhaps for entry-level artisan-trained lawyers.  But at kCura, business is booming. Founded in 2001, the company now employs over 370+ workers and has openings for over 40 full-time professional positions, the majority of which are in Chicago at the company's LaSalle Street headquarters.  Very few of these jobs require a law degree -- yet the output of the company enables lawyers to do their work faster and more accurately.  

What are the jobs?

  • API Technical Writer [API = Application Programming Interface]
  • Big Data Architect - Software Engineering
  • Business Analyst
  • Enterprise Account Manager
  • Group Product Manager
  • Litigation Support Advice Analyst
  • Manager - Software Engineering
  • Marketing Associate
  • Marketing Specialist -- Communications
  • Marketing Specialist -- Corporate Communications and Social Media
  • Product Manager -- Software and Applications Development
  • QA Software Engineer -- Performance [QA = Quality Assurance]
  • Scrum Team Coordinator [Scrum is a team-based software development methodology]
  • Senior SalesForce Administrator 
  • Software Engineer (one in Chicago, another in Portland)
  • Software Engineer (Front-End Developer) [Front-End = what the client sees]
  • Software Engineer in Test [Test = finds and fixes software bugs]
  • Technical Architect
  • Technical Architect - Security
  • VP of Product Development and Engineering

kCura operates exclusively within the legal industry, yet it has all the hallmarks of a great technology company. In the last few years it has racked up numerous awards based on the quality of its products, its stellar growth rate, and the workplace quality of life enjoyed by its employees.

KCuraawards

That is just what is happening at kCura.  There are many other companies positioning themselves to take advantage of the growth opportunities in legal, albeit none of them bear any resemblance to traditional law firms or legal employers.

LexRedux-Eventbrite-headerIn early February, I attended a meeting in New York City of LexRedux, which is comprised of entrepreneurs working in the legal start-up space.  In a 2008 essay entitled "Legal Barriers to Innovation," Professor Gillian Hadfield queried, "Where are the 'garage guys' in law?"  Well, we now know they exist.  At LexRedux, roughly 100 people working in the legal tech start-up space were jammed into a large open room in SoHo as a small group of angel investors and venture capitalists fielded questions on a wide range of topics related to operations, sales, and venture funding.

According to Angel's List, there are as of this writing 434 companies identified as legal start-ups that have received outside capital.  According to LexRedux founder Josh Kubicki, the legal sector took in $458M in start-up funding in 2013, up from essentially zero in 2008.  See Kubicki, 2013 was a Big Year for Legal Startups; 2014 Could Be Bigger, Tech Cocktail, Feb 14, 2014.

The legal tech sector is starting to take shape.  Why?  Because the imperfections and inefficiencies inherent in the artisan model create a tremendous economic opportunity for new entrants.  For a long period of time, many commentators believed that this type of entrepreneurial ferment would be impossible so long as Rule 5.4 was in place.  But in recent years, it has become crystal clear that when it comes to organizational clients where the decisionmaker for the buyer is a licensed lawyer (likely accounting for over half of the U.S. legal economy) everything up until the courthouse door or the client counseling moment can be disaggregated into a legal input or legal product that can be provided by entities owned and controlled by nonlawyers. See Henderson, Is Axiom the Bellwether of Legal Disruption in the Legal Industry? Legal Whiteboard, Nov 13, 2013.

The Legal Ecosystem of the Future

Book-tomorrows-lawyersIn his most recent book, Tomorrow's Lawyers, Richard Susskind describes a dynamic legal economy that bares little resemblance to the legal economy of the past 200 years.  In years past, it was easier to be skeptical of Susskind because his predictions seemed so, well, futuristic and abstract.  But anyone paying close attention can see evidence of a new legal ecosystem beginning to take shape that very much fits the Susskind model.

Susskind's core framework is the movement of legal work along a five-part continuum, from bespoke to standardized to systematized to productized to commoditized.  Lawyers are most confortable in the bespoke realm because it reflects our training and makes us indispensible to a resolution.  Yet, the basic forces of capitalism pull the legal industry toward the commoditized end of the spectrum because the bespoke method of production is incapable of keeping up with the needs of a complex, interconnected, and highly regulated global economy. 

According to Susskind, the sweet spot on the continuum is between systematized and productized, as this enables the legal solution provider to "make money while you sleep."  The cost of remaining in this position (that is, to avoid commoditization) is continuous innovation.  Suffice it to say, lawyers are unlikely to make the cut if they choose to hunker down in the artisan guild and eschew collaboration with other disciplines.

Below is a chart I have generated that attempts to summarize and describe the new legal ecosystem that is now taking shape [click-on to enlarge].  The y-axis is the Heinz-Laumann two-hemisphere framework.  The x-axis is Susskind's five-part change continuum. 

Ecosystem
Those of us who are trained as lawyers and have worked in law firms will have mental frames of reference that are on the left side of the green zone.  We tend to see things from the perspective of the artisan lawyer.  That is our training and socialization, and many of us have prospered as members of the artisan guild.

Conversely, at the commoditized end of the continuum, businesses organized and financed by nonlawyers have entered the legal industry in order to tap into portion of the market that can no longer be cost-effectively serviced by licensed U.S. lawyers.  Yet, like most businesses, they are seeking ways to climb the value chain and grow into higher margin work.  For example, United Lex is one of the leading legal process outsourcers (LPOs).  Although United Lex maintains a substantial workforce in India, they are investing heavily in process, data analytics, and U.S. onshore facilities.  Why?  Because they want to differientiate the company based on quality and overall value-add to clients, thus staving off competition from law firms or other LPOs.

In the green zone are several new clusters of companies:

  • NewLaw.  These are non-law firm legal service organizations that provide high-end services to highly sophisticated corporations.  They also rely heavily on process, technology, and data.  Their offerings are sometimes called "managed services." Novus Law, Axiom, Elevate, and Radiant Law are some of the leading companies in this space. 
  • TechLaw.  These companies would not be confused with law firms. They are primarily tool makers.  Their tools facilitate better, faster, or cheaper legal output.  kCura, mentioned above, works primarily in the e-discovery space.  Lex Machina provides analytic tools that inform the strategy and valuation of IP litigation cases.  KM Standards, Neota Logic, and Exemplify provide tools and platforms that facilitate transactional practice.  In the future, these companies may open the door to the standardization of a wide array of commercial transactions.  And standardization drives down transaction costs and increases legal certainty -- all good from the client's perspective.
  • PeopleLaw.  These companies are using innovative business models to tap into the latent people hemisphere.  Modria is a venture capital-financed online dispute resolution company with DNA that traces back to PayPal and the Harvard Negotiations Workshop.  See Would You Bet on the Future of Online Dispute Resolution (ODR)?  Legal Whiteboard, Oct 20, 2013.  LegalForce is already an online tour de force in trademarks -- a service virtually every small business needs.  The company is attempting to translate its brand loyalty in trademarks into to new consumer-friendly storefront experience.  Its first store is in the heart of University Avenue in Palo Alto.  LegalForce wants to be the virtual and physical portal that start-up entrepreneurs turn to when looking for legal advice.

Conclusion

When I write about the changes occurring in the legal marketplace, I worry whether the substance and methodology of U.S. legal education provides an excellent education for a legal world that is gradually fading away, and very little preparation for the highly interdisciplinary legal world that is coming into being. 

Legal educators are fiduciaries to our students and institutions. It is our job to worry about them and for them and act accordingly.  Surely, the minimum acceptable response to the facts at hand is unease and a willingness to engage in deliberation and planning.  Although I agree we need to stay calm, I disagree that we need to carry on.  The great law schools of the 21st century will be those that adapt and change to keep pace with the legal needs of the citizenry and broader society.  And that task has barely begun.

[PDF version]

March 17, 2014 in Blog posts worth reading, Current events, Data on legal education, Data on the profession, Innovations in law, Innovations in legal education, New and Noteworthy, Scholarship on legal education, Scholarship on the legal profession, Structural change | Permalink | Comments (14)

Saturday, March 1, 2014

Is the Employment Market for Law Graduates Going to be Improving?

Last fall, while making a presentation at the Midwest Association of Pre-Law Advisors Conference in St. Louis, I had the opportunity to respond to the question that is the title of this blog posting. 

Is the employment market for law graduates going to be improving?  My answer was, and is, almost certainly yes, although perhaps not immediately.

I write this to offer my perspective on the employment market for law graduates in the coming years.  A number of people have written on this topic in recent weeks and months.  Bernie Burk has a very thoughtful piece analyzing the changing job market over the last three decades.  In his concluding thoughts he suggests that the decline in the number of law students will mean that the job market will be improving.  Paula Young, Debby Merritt, Matt Leichter, and The National Jurist, also have weighed in on this issue with some disagreement about how to understand the “market” for law graduates in the coming years.  Whether and how to include JD Advantage jobs in the analysis is something that is frequently contested.  Bernie Burk does a thorough job analyzing the challenges of assessing whether JD Advantage jobs should be included within his definition of “law jobs” – “placements for which a law degree is typically a necessary or extremely valuable substantive preparation; or put slightly differently, jobs that a law degree typically makes a truly substantial and significant difference in obtaining or performing.”

To avoid some of these definitional challenges, this post will focus solely on the market for full-time, long-term Bar Passage Required jobs. Initially, it will analyze those jobs in relation to all graduates; then it will look more specifically at the percentage of graduates who are likely to be eligible for Bar Passage Required jobs for whom full-time, long-term Bar Passage Required jobs likely will be available, a point on which few others appear to have focused up until now.

Class of 2013 – Little if Any Good News is Likely

In the short term, for the Class of 2013, for which job results will be reported in the coming weeks, it would not be at all surprising to see little, if any, improvement in the employment results in terms of the percentage of graduates finding jobs classified as full-time, long-term Bar Passage Required jobs.

According to NALP’s data, there were 29,978 full-time, long-term Bar Passage Required jobs for 2007 graduates, a number which fell to 24,902 for 2011 graduates, and then rebounded to 26,876 for 2012 graduates, an increase of 1,974.   According to the ABA’s Employment Outcomes data, between 2011 and 2012, the number of full-time, long-term Bar Passage Required jobs grew from 24,149 to 26,066, an increase of 1,917.  (For this blog posting, I am not going to try to reconcile the slight differences in data between NALP and the ABA’s Employment Outcomes data.)

Unfortunately, however, according to the ABA's Employment Outcomes data, this growth in full-time, long-term Bar Passage Required jobs between 2011 and 2012 corresponded with a growth in the number of law graduates, from 43,979 to 46,364, an increase of 2,385.  Thus, even though the number of full-time, long-term Bar Passage Required jobs grew by 7.9%, the percentage of graduates in full-time, long-term Bar Passage Required jobs grew only slightly, from 54.9% to 56.2%.

Between 2012 and 2013 the number of full-time, long-term Bar Passage Required jobs may increase again, but the number of graduates also will be increasing, likely from 46,364 to roughly 47,250.  (For the last few years, the number of law school graduates has averaged roughly 90% of the number of first-year students who started law school three years previously.  With 52,500 first-year students in Fall 2010, there likely were roughly 47,250 May 2013 graduates on whom employment will be reported in the coming weeks.) 

If the number of full-time, long-term Bar Passage Required jobs for the 2013 graduates reported in the ABA Employment Outcomes data grows by roughly 1,000 to 27,000, an increase of nearly 4%, the percentage of graduates with such jobs would increase only slightly to 57.1%.  If the number of full-time, long-term Bar Passage Required jobs for the 2013 graduates grows only slightly, by roughly 500, to 26,500 (an increase of less than 2%), the percentage of graduates with such jobs will drop slightly, to 56.1%.  If the number of Bar Passage Required jobs is flat, at 26,000, the percentage of graduates with such jobs will drop a little more to 55%.  Between 2011 and 2013, the market might see graduates finding roughly 2,000 to 2,500 new full-time, long-term Bar Passage Required jobs, and yet still see only 55% to 57% of graduates in such jobs because of the growth in the number of graduates between 2011 and 2013.

Classes of 2014, 2015, 2016, 2017 – An Improving Dynamic

What are the employment prospects for those currently in law school or considering starting law school in the fall of 2014?  They almost certainly will be getting better – not necessarily because there will be more jobs, but because there will be fewer graduates.

Indeed, to make this point, let’s assume that there is actually no further growth in full-time, long-term Bar Passage Required jobs between 2012 and 2017.  Assume the number of such jobs plateaus at 26,000 for graduates of the Class of 2013 and then stays at that level each year through 2017.  What percentage of law graduates over the next four years will have such jobs? 

According to the LSAC, "ABA First-Year Enrollment" has declined steadily from 2010 to the present, from 52,500 in 2010, to 48,700 in Fall 2011, to 44,500 in Fall 2012.  The ABA recently released the Fall 2013 enrollment summary noting that it had fallen to 39,675.   The LSAC's most recent Current Volume Summary, from February 21, 2014,  indicates that applicants to law school are down roughly 11% compared to last year.  Thus, it seems reasonable to project that first-year matriculants will decline again in Fall 2014.  If first-year enrollment falls by 5%, that would give us roughly 37,700 first-years.  If it falls by 10% once again, that would give us roughly 35,700 first-years.

With these estimates for the number of first-years, we can estimate the number of graduates (which, as noted above, has averaged roughly 90% of first-years for the last few years).  Even if the number of full-time, long-term Bar Passage Required jobs does not continue to rebound, but plateaus at 26,000, as the number of graduates declines over the next few years, the percentage of law graduates obtaining a full-time, long-term Bar Passage Required job, as shown in Table 1, will grow to between 77% and 84% by 2017 (depending upon first-year enrollment in fall 2014).

TABLE 1

Analysis of the Estimated Number of Full-Time, Long-Term Bar Passage Required Jobs as a Percentage of the Estimated Number of Law Graduates from 2012-2017

   

Grad. Year

2012

2013

2014

2015

2016

2017

2017

 

(5% Dec.)

(10% Dec.)

 

(1st Yrs 3 Yrs Prior)

 

51600

 

52500

 

48700

 

44500

 

39675

 

37700*

 

35700*

 
 

Grads (90% of 1st Yrs.)

 

46364

 

47250*

 

43830*

 

40050*

 

35708*

 

33930*

 

32130*

 
 

FT/LT BPR Jobs

26066

26000*

26000*

26000*

26000*

26000*

26000*

 

% of Grads in FT/LT BPR Jobs

 

56%

 

55%*

 

59%*

 

65%*

 

73%*

 

77%*

 

84%*

 

*Denotes estimated value.

An improvement in the number of law school graduates getting full-time, long-term Bar Passage Required jobs, from roughly 55% to between 77% and 84% is indicative of an improving employment market for law school graduates.  Indeed, according to Bernie Burk’s analysis of the employment market over the last few decades, this rate of employment in full-time, long-term Bar Passage Required jobs would rival or exceed the high water mark for “Law Jobs” of roughly 77% that he identified as having been experienced by the graduates from 2005 to 2007.  (And for his purposes, “Law Jobs” included some JD Advantage jobs.)  Moreover, this assumes no growth in the number of full-time, long-term Bar Passage Required jobs; if there is even modest growth in the number of full-time, long-term Bar Passage Required jobs over the next few years, the percentages of grads in these jobs would be even higher than reflected in this chart.

 Full-Time, Long-Term Bar Passage Required Jobs as a Percentage of Those Eligible for Such Positions by Virtue of Having Passed a Bar Exam

Even so, many may look at this and suggest the market remains less than robust given that perhaps 16%-23% of graduates in this “improved” market in 2017 will not obtain full-time, long-term Bar Passage Required jobs. While some compare the number of full-time, long-term Bar Passage Required jobs to the number of law school graduates to demonstrate why the employment market for law school graduates remains unsatisfactory, this may not be the most accurate way of thinking about the market for full-time, long-term Bar Passage Required jobs as not all graduates are going to be eligible for Bar Passage Required jobs.

Among those graduating from law schools accredited by the Section of Legal Education and Admissions to the Bar and taking a bar exam upon graduation, the National Conference of Bar Examiners indicates that over the last several years, on average, roughly 83% of graduates of ABA-accredited law schools pass the bar exam on their first attempt. 

To calculate the employment market for law graduates in the coming years who are eligible for full-time, long-term Bar Passage Required jobs, let’s assume that all law graduates actually want a full-time, long-term Bar Passage Required job and therefore take a July bar exam, and let’s assume that 83% of them pass the bar exam on their first attempt.  This should give us the maximum number of graduates eligible for full-time, long-term Bar Passage Required jobs 10 months after graduation (which will be the measuring point starting with the Class of 2014). 

Even if we assume no growth in the number of full-time, long-term Bar Passage Required jobs in the coming years and simply hold the number of such jobs at a constant 26,000, the decreasing number of law graduates will mean an even more improved employment market for those seeking full-time, long-term Bar Passage Required jobs who will be eligible for those jobs by virtue of having passed the bar exam on their first attempt, increasing from nearly 70% in 2012 and 2013 to nearly 90% by 2016 and over 90% by 2017.

 TABLE 2

Analysis of the Estimated Number of Full-Time, Long-Term Bar Passage Required Jobs as a Percentage of the Estimated Number of Law Graduates Eligible for Bar Passage Required Jobs from 2012-2017 

Graduating Year

2012

2013

2014

2015

2016

2017

2017

 

First   Year Enrollment

 

51600

 

52500

 

48700

 

44500

 

39675

 

37700*

(5% Dec.)

 

35700*

(10% Dec.)

 
 
 

Graduates   (90% of First Year Enrollment)

 

46364

 

47250*

 

43830*

 

40050*

 

35708*

 

33930*

 

32130*

 

83% of   Graduates (NCBE Avg. for First-Time Takers)

 

38482*

 

39218*

 

36379*

 

33242

 

29638*

 

28162*

 

26668*

 
 

FT/LT Bar   Passage Jobs

 

26066

 

26000*

 

26000*

 

26000*

 

26000*

 

26000*

 

26000*

 

Percentage   of Graduates Who Might Pass the Bar for whom FT/LT Bar Passage Jobs Likely   Would be Available

 

68%*

 

66%*

 

71%*

 

78%*

 

88%*

 

92%*

 

97%*

 

 *Denotes estimated value.

Notably, these estimates probably overstate the number of graduates who will be eligible for Bar Passage Required jobs.  First, not all law school graduates want to take a bar exam as some conclude that they are not interested in practicing law as a licensed attorney.  Second, given the increasing number of law school matriculants with LSATs less than 150, one could anticipate a slightly higher rate of attrition such that fewer than 90% of matriculants graduate after three years.  Third, given the increasing number of law school matriculants with LSATs less than 150, one also could anticipate that the historical average bar passage rate of 83% might be too generous.  All of these points suggest that the number of graduates eligible for full-time, long-term Bar Passage Required jobs may decline between now and 2017 even more than is indicated in Table 2.    

Between 2012 and 2013 to 2016 and 2017, we will have gone from having nearly seven full-time, long-term Bar Passage Required jobs for every ten graduates eligible for such positions by virtue of having passed a bar exam to having nine or more full-time, long-term Bar Passage Required jobs for every ten graduates eligible for such positions by virtue of having passed a bar exam. That strikes me as an improving employment market.

Of course, this may not be good news for those who graduated in the last few years into one of the toughest markets in history.  It is not clear that this improving market will be improving for them.  But it also is not clear that this "excess capacity" will unduly constrain the opportunities available to law school graduates in the coming years.  This excess capacity already has been impacting the market, yet the number of full-time, long-term Bar Passage Required jobs obtained within nine months of graduation grew by nearly 2000 between 2011 and 2012.  That is one reason I think the assumption of no further growth in full-time, long-term Bar Passage Required jobs is probably fairly conservative. 

In addition, this may not be good news for those who fail to pass the bar exam on their first try and may have to look for jobs that do not require bar passage.  While a significant percentage of these graduates will pass the bar exam on their second attempt and may eventually find employment in full-time, long-term Bar Passage Required positions, it may take several months longer than they had desired and may require that they pursue other employment, perhaps JD Advantage employment, during the intervening months.  

Even assuming a flat market for full-time, long-term Bar Passage Required jobs, as a result of significant declines in first-year enrollment that will mean a significant decline in the number of law school graduates in 2016 and 2017, we should be moving from having slightly more than three of ten graduates who were eligible for Bar Passage Required jobs in 2012 who could not find them to having less than one of ten graduates in 2017 who likely will be eligible for Bar Passage Required jobs who cannot find them.  While individual schools and local or regional markets may have more varied results on a "micro level," on a "macro level" this should be good news for current first-year students and students considering starting law school in the fall of 2014.

Whether this improving employment situation will be enough to change the trend in terms of declining number of applicants to law school remains to be seen.  While the future may be brightening, the "news" in the coming weeks will be the report on employment outcomes for 2013 graduates nine months after graduation.  As noted above, that may be somewhat uninspiring because any increase in the number of full-time, long-term Bar Passage Required jobs may be masked by the larger number of graduates in 2013 compared to 2012.  As a result, potential law school applicants may remain reluctant to make the commitment of time and money that law school requires because the "good news" message regarding future employment prospects for law graduates may fail to gain traction if the messages about employment outcomes for recent law school graduates continue to be less than encouraging.

March 1, 2014 in Data on legal education, Data on the profession, Structural change | Permalink | Comments (8)

Sunday, December 8, 2013

Did the Market for Law Firm Associates Peak 25 Years Ago?

Based on the chart below, which reflects 35 years of large law firm data, the answer appears to be yes.  The chart enables us to compare two very simple trendlines: the percentage of lawyers in NLJ 250 law firms who have the title of Associates versus the percentage with the title of Partner. 

Figure1

The chart above was generated by my colleague, Evan Parker-Stephen, who is Director of Analytics at Lawyer Metrics.  I asked Evan to crunch these data after some of research I was working on revealed a 50% decline in Summer Associate hiring between 2002 and 2012 at the ~600 law firms listed in the NALP Directory (11,302 to 5,584). In other words, 2008 is the wrong reference point. See Sea Change, NALP Bulletin (Aug 2013).  Something more substantial was (is) happening.

Indeed, the 35-year graphic above provides a true wide-angle view, which in turn reveals an absolutely remarkable story.  Associates were most integral to the large law firm model over 25 years ago.  Although large law firms went on a hirng spree at various points during the 1990s and 2000s, the firms themselves were simultaneously adding a new layer of human capital that was neither associate or partner/owner.  And in the process, associates were gradually being marginalized. The graph below (also NLJ 250 data) reveals the growing middle section of the so-called Diamond Model:

Figure2_highres

So what does all this mean?  

My best analysis is set forth in a short research monograph I wrote with Evan, entitled "The Diamond Law Firm: A New Model or the Pyramid Unraveling?"  The punchline is that large law firms appear to be chasing short-term profits at the expense of longer-term sustainability.  It would not be the first industry sector to lose its competitive advantage through myopic strategy -- as the saying goes, nothing fails like success.  See Henderson, Three Generations of U.S. Lawyers: Generalist, Specialist, Project Manager.  Large firms are not going extinct.  But as a matter of demographics, they are greying.  If BigLaw were trading on the Nasdaq, the analysts would be very critical of this trend.  

December 8, 2013 in Blog posts worth reading, Data on the profession, Important research, Law Firms, New and Noteworthy, Scholarship on the legal profession, Structural change | Permalink | Comments (9)

Sunday, December 1, 2013

From Big Law to Lean Law

RibsteinIn 2012, Bruce Kobayashi and the George Mason Law & Economics Center organized an ambitious conference series entitled, "Unlocking the Law: Building on the Work of Professor Larry Ribstein."  The collective work product has recently been published in the International Review of Law & Economics.  

My contribution was an essay entitled "From Big Law to Lean Law."  It is a  review of Larry's seminal "The Death of Big Law" article, with the benefit of three years of data and the gradual realization that the entire legal profession is on the brink of a major structural transformation.

The "Death of Big Law"  first appeared on SSRN in the fall of 2009.  The following spring, I attended the annual Georgetown Center on the Legal Profession conference, where Larry's analysis and conclusions were presented to a large audience of Big Law partners, including managing partner commentators.  Suffice to say, the reaction was one of polite bafflement.

"From Big Law to Lean Law" was my best attempt to serve as a translator, albeit with the benefit of three years of market data and hindsight.  Here is the abstract

In a provocative 2009 essay entitled The Death of Big Law, the late Larry Ribstein predicted the shrinkage, devolution, and ultimate demise of the traditional large law firm. At the time virtually no practicing lawyer took Larry seriously. The nation’s large firms were only one year removed from record revenues and profits. Several decades of relentless growth had conditioned all of us to expect the inevitable rebound. Similarly, few law professors (including me) grasped the full reach of Larry’s analysis. His essay was not just another academic analysis. Rather, he was describing a seismic paradigm shift that would profoundly disrupt the economics of legal education and cast into doubt nearly a century of academic conventions. Suffice to say, the events of the last three years have made us humbler and wiser.

This essay revisits Larry’s seminal essay. Its primary goal is to make Larry’s original thesis much more tractable and concrete. It consists of three main pillars: (1) the organizational mindset and incentive structures that blinds large law partners to the gravity of their long-term business problems; (2) a specific rather than abstract description of the technologies and entrepreneurs that are gradually eating away at the work that has traditionally belonged to Big Law; and (3) the economics of the coming “Lean Law” era. With these data in hand, we can begin the difficult process of letting go of old ideas and architecting new institutions that better fit the needs of a 21st century economy.

(SSRN link.)  In the service of explaining these complex market dynamics to lawyers, legal educators, and law students, I am posting the figures used in the paper, which can be downloaded from Slideshare.

December 1, 2013 in Data on the profession, Important research, Law Firms, Scholarship on the legal profession, Structural change | Permalink | Comments (0)

Sunday, November 24, 2013

Understanding Trends in Demographics of Law Students – Part Three

Why the Difference in Response to Market Signals?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Saturday, November 23, 2013

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

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

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

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

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

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

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

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

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

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

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

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

Sunday, November 17, 2013

An Update on Milbank's Big Bet

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

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

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

The video:

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

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

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

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

Sunday, November 10, 2013

Is Axiom the Bellwether for Disruption in the Legal Industry?

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

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

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

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

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

The Inaccurate Axiom Caricature

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

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

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

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

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

The "Managed Services" Business Model

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

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

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

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

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

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

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

Is Axiom a Law Firm?

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

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

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

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

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

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

The Last Days of a Bloodless Revolution

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

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

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

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

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

Back to Houston

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

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

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

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

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

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

Rogerdiffusioninnovationcurve

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

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

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

So, where is Axiom on the Rogers Diffusion Curve? 

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

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

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

Related posts:

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

Sunday, October 27, 2013

Legal departments in India and U.S. appear to be evolving in same direction

There is an interesting article in The Times of India business section that says, essentially, large Indian corporations are realizing that legal strategy and compliance are too important to not elevate these functions to the C-Suite.  As a result, the pay, influence, and prestige of in-house positions in India are now very much on the rise.

This is the same evolution that has occured in the U.S. over the last two to three decades, albeit the evolution appears to be occuring in India at a much faster pace.  So any temporal gap in structure is unlikely to be permanent.

This dynamic reminds me of my visit to India in 2009, when Marc Galanter and I spend time with several law firm leaders.  One of the most striking features we noticed is that all the name partners were alive and very much in their prime.  (In the U.S., the equivalant year would have been roughly 1940.)  These lawyers very much enjoyed being engaged on the future of India.  And unlike the U.S. or U.K., where the market is now defined by league tables, the topic of money never came up -- granted these Indian lawyers were all making plenty of it.  

One of the things most on the minds of the Indian law firm leaders was how they could create a vital, useful organization that would survive them.  So, much to our surprise, the India law firm leaders discussed things like Kaplan Balanced Scorecard for determining partner compensation (based on the work HBS Professor Robert Kaplan).  Another leading law firm, Nishith Desai, constructed its entire firm based on the best practices of professional services firms worldwide. This was the result of a 20-year reflection on this topic by the firm's founder, who is also still in his prime.  See Nishith Desai, Management by Trust in a Democratic Enterprise: A Law Firm Shapes Organizational Behavior to Create Competitive Advantage, Wiley Journal of Global Business and Organizational Excellence, Sept/Oct 2009.

It was almost as if the Indian bar was skipping 100 years of evolution and instead decided to converge immediately on the state of the art.  Well, the same may be happening in India legal departments.

Wondering what a Kaplan Balanced Scorecard looks like?  Here is a good sample.

Balancedscorecard

 

October 27, 2013 in Blog posts worth reading, Current events, Data on the profession, Law Firms, Legal Departments, New and Noteworthy | Permalink | Comments (0)

Sunday, October 20, 2013

Would you bet on the future of Online Dispute Resolution (ODR)?

I would.  The best example of ODR I have come across is Modria, who's tagline is "Any issue, resolved."

Before dismissing Modria as a trivial Internet parlor game, consider this:  The technology and process at work here got its start at Paypal and Ebay.  Why did Paypal and Ebay become so good at dispute resolution?  Because their goal of becoming mega-volume businesses depended on it.  If you have millions of transactions daily, a huge volume of low-stakes complaints is inevitable.  If dissatisfied customers stay dissatisfied, they don't come back.  Worse, they'll talk to their friends.  

Now watch is video. Note that the target audience is businesses who (a) feel disputes are a drain on their time and energy, and (b) want happy, loyal customers who vouch for them to friends and family.  A prompt, fair resolution to a dispute actually deepens the trust relationship.  That's not speculation.  That's science.  And Modria, and it investors, know that.

In this book, Tommorrow's Lawyers, Richard Susskind talks about ODR as a highly disruptive innovation that will fundamentally alter the legal landscape.  It is hard to fully appreciate that claim without seeing concrete example, like the Modria business model, up and running.  Many businesses could be drawn to Modria, but so could/would many smaller governmental units.  Indeed, several (progressive) county governments have become clients (e.g., on property assessment appeals).

Modria is disruptive because so many forums for resolving disputes, such as courts, repeat-player arbitrations, and various government boards, are not perceived as prompt, fair, and/or just, often times because costs of dispute resolution are so high.  So even if the dispute is resolved correctly on the merits--for the subset who can pay the cost--there remains a large residue of dissatisfaction.

This is fundamentally a problem of institutional design. (The ReInvent Law folks understanding this.)   The goal, or ought to be, a speedy, low-cost, resolution that is maximizes on the uumber of user who perceived the outcome as fair.  Does any state or federal court think this way?   In Tomorrow's Lawyers, Susskind asks whether "court is a service or a place" (p. 99).  Alas, this is a staggeringly very large market. 

Check out the management team of Modia.  These folks come primarily from the dispute resolution programs in business and public policy schools.  It is worth noting, however, that Modria's Board and its big-time investors include several lawyers, including Jason Mendelsohn, a former lawyer at Cooley who now works as a venture capitalist.  Jason has invested in other businesses in the emerging legal vendor space.

Times are changing.  And the pace of that change is picking up. 

October 20, 2013 in Cross industry comparisons, Current events, Data on the profession, Important research, Innovations in law, New and Noteworthy, Structural change, Video interviews | Permalink | Comments (4)

Monday, September 16, 2013

The Trend Toward Legal Onshoring -- What It Tells Us about the Future of Law

The trend toward outsourcing of legal work to India may be giving way to "onshoring."  What is the attraction of moving legal jobs back to the US?  The wage gap between India and the US is closing, but more importantly, innovation and continuous improvement are significantly aided by proximity. 

I heard this perspective from a friend of mine who was part of the management team of a successful LPO that was sold (at a substantial profit) to a much larger legal conglomerate.  Indeed, he contemplated getting back into the business, but this time running an onshoring operation. 

BlackHillsIP-logo-RGB-2color-xsThis identical perspective is on display in a recent Minneapolis StarTribune story on Black Hills IP, a 2.0 legal process outsourcer that provides various types of managed services for all things related to intellectual property.   According to its website, Black Hills IP is a "US-based IP paralegal service that is faster, more accurate and more cost-effective than in house departments and off-shore providers."  The company appears to be growing, as it did a PR-blitz to commemorate its 100th client.  The company was originally started in Rapids City, South Dakota but has since expanded to Minneapolis.

Cpa globalWhat make this story especially interesting is that many of the folks who started Black Hills IP were sophisticated Minneapolis corporate lawyers who created a company in the early 2000s called Intellevate, a 1.0 LPO that was sending legal work to India.  In 2006, Intellevate became part of CPA Global, a much larger LPO.  In other words, the folks at Black Hills IP are industry players with much better information than the rest of us who are making bets with their own money. 

Unlike traditional law firms, these types of legal vendors are growing rapidly.  Their secret sauce appears to be combining high-quality processes with capable, motivated paraprofessional talent. 

McCrackinThe challenge for law schools and many practicing lawyers is getting our heads around the fact that, from a pure market perspective, bright legal minds may be less valuable than well-designed and well-executed legal processes and systems.  This state of affairs is just as much an opportunity as it is a threat.

One last interesting note suggesting that companies like Black Hills IP are part of the same ecosystem as traditional law firms and law schools: The CEO of Black Hills IP is Ann McCrackin, a former professor of law at Franklin Pierce (now University of New Hampshire School of Law), where she was director of the Patent Prosecution and Procedure Program.  Prior to that, McCrackin was a shareholder in Schwegman, Lundberg & Woessner, a large patent law firm based in Minneapolis that specializes in high technology.

posted by Bill Henderson

September 16, 2013 in Current events, Data on legal education, Data on the profession, Innovations in law, New and Noteworthy, Structural change | Permalink | Comments (1)

Wednesday, June 5, 2013

Empirical Evidence of Competencies Necessary for Advancement in Law Firms

For those trying to better understand how legal education can better prepare law students for the world that awaits them, I would encourage you to take a look at the draft article my colleague, Neil Hamilton, Director of the Holloran Center for Ethical Leadership in the Professions at the University of St. Thomas School of Law, recently posted on SSRN. The article is entitled Law-Firm Competency Models and Student Professional Success: Building on a Foundation of Professional Formation/Professionalism. Here is some of the description from the abstract:

A law student who understands legal employer competency models can differentiate him or herself from other graduates by using the three years of law school to develop (and to create supporting evidence to demonstrate) specific competencies beyond just knowledge of doctrinal law, legal analysis, and some written and oral communication skills. . . .

In Part I below, this essay analyzes all available empirical research on the values, virtues, capacities and skills in law firm competency models that define the competencies of the most effective and successful lawyers. Part II examines empirical evidence on the competencies that clients evaluate. Part III evaluates the competencies that make the most difference in fast-track associate and partnership promotions. These data and analyses lead to several bold propositions developed in Part IV:

1. Law students and legal educators should identify and understand the values, virtues, capacities and skills (the competencies) of highly effective and successful lawyers in different types of practice (one major example is law firm competency models analyzed below in Part I);

2. Each student should use all three years of experiences both inside and outside of law school (including the required and elective curriculum, extracurricular activities, and paid or pro bono work experiences) to develop and be able to demonstrate evidence of the competencies that legal employers and clients want in the student’s area of employment interest;

3. Law schools should develop a competency-based curriculum that helps each student develop and be able to demonstrate the competencies that legal employers and clients want; and

4. Both law students and law schools should understand that the values, virtues, capacities and skills of professional formation (professionalism) are the foundation for excellence at all of the competencies of an effective and successful lawyer.

The article presents far more useful information than can be summarized here, and different readers may be struck by different things discussed in the article. One of the most significant takeaways for me, however, is the convergence around an array of competencies frequently not taught in law school. The article analyzes competency models used to assess associate development at 14 medium to large law firms in the Twin Cities and compares that with some other literature on competencies clients look for in attorneys. The analysis demonstrates that in addition to traditionally understood technical skills – legal analysis, oral and written communication, and knowledge of the law – there is significant convergence around several competencies frequently not taught in law school – 1) Ability to initiate and maintain strong work and team relationships; 2) Good judgment/common sense/problem-solving; 3) Business development/marketing/client retention; 4) Project management including high quality, efficiency, and timeliness; 5) Dedication to client service/responsive to client; and 6) Initiative/ambition/drive/strong work ethic.

Whether law schools are going to be able to find efficient ways to offer students opportunities to develop these competencies, it is imperative that we make our students aware that they need to be developing these competencies to give themselves the greatest likelihood of professional success.

[posted by Jerry Organ]

June 5, 2013 in Data on legal education, Data on the profession, Important research, Innovations in legal education, Law Firms, Scholarship on legal education, Scholarship on the legal profession | Permalink | Comments (0)

Monday, May 20, 2013

The Calculus of University Presidents

Money-bagsThis week's National Law Journal has a Special Report section on the challenges facing law schools.  Karen Sloan has several stories on how law schools are finding alternative sources of revenues beyond tuition dollars for JD degrees (masters's degrees for nonlawyers, online LLMs, and lawyer executive education).  

I contributed an essay entitled "The Calculus of University Presidents."  Although the essay is posed as the letter I would write to a university president seeking advice on how to handle a significant, unexpected shortfall in law school revenues, the intended audience is lawyers and legal educators seeking to get a handle on the brutal economics that are now threatening the survival of a large swath of law schools.  

From the perspective of many, it would be nice if things would go back to the way they used to be. But that is not going to happen.  Good lawyers understand that we gain no long-term advantage from hiding from these facts. Instead, we need to confront them honestly and proactively.

[posted by Bill Henderson]

May 20, 2013 in Blog posts worth reading, Current events, Data on legal education, Data on the profession, New and Noteworthy, Structural change | Permalink | Comments (2)

Wednesday, March 27, 2013

Losing the Law Business

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

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

by William D. Henderson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, March 13, 2013

ReInvent Law is a Really Big Deal

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

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

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

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

  ReInventLaw

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

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

Here is the Slideshare description:

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

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

[posted by Bill Henderson]

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

Sunday, March 10, 2013

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

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

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

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

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

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

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

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

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

[posted by Jerry Organ]

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

Saturday, February 9, 2013

"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]

February 9, 2013 in Blog posts worth reading, Current events, Data on the profession, Innovations in law, Law Firms, Legal Departments, New and Noteworthy, Structural change, Video interviews | Permalink | Comments (3)

Friday, January 18, 2013

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]

January 18, 2013 in Current events, Data on legal education, Data on the profession, Innovations in legal education, Scholarship on legal education, Scholarship on the legal profession, Structural change | Permalink | Comments (2)

Saturday, December 29, 2012

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

RfennoHere 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:

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]

December 29, 2012 in Current events, Data on the profession, Innovations in law, New and Noteworthy, Structural change | Permalink | Comments (6)

Wednesday, December 5, 2012

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

PredictivecodingdummiesI 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.

KrollontrackThe 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

RecommindRecommind 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-SklarHoward 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]

December 5, 2012 in Blog posts worth reading, Data on the profession, Innovations in law, New and Noteworthy, Structural change | Permalink | Comments (0)