Monday, September 5, 2016
For the last couple of years, Dan Katz has been telling me and anyone else who would listen that law will eventually be a subfield of finance. Following Dan's reasoning, this will occur because legal risk can be modeled and quantified like financial risk, thus enabling parties to allocate time, money, expertise based on probabilities. If the modeling is accurate within a fairly predictable range, it facilitates an investment strategy where the business side of legal risk is equally predictable. Add leverage and/or other people's money, and basically you have a hedge fund with legal claims as its primary asset class.
Based on a story in Sunday's Boston Globe, Katz may be on to something. The story reports the launching of Legalist, which funds lawsuits based on the size and probability of recovery. This concept is not new, as companies like Burford Capital have moved into this market and are growing rapidly.
Legalist is potentially different, however, because it pools together smaller and medium-sized legal claims that are likely to paid out. Case evaluations are made using data algorithms that draw upon "a database of 15 million court cases from all over the United States." So, in theory, the company can generate a strong return by building a diversified portfolio of claims that are likely too small for the high-end litigation financiers like Burford.
One of the co-founder of Legalist is Eva Shang (photo right), who is pursuing the idea thanks to a $100,000 grant from the Thiel Foundation. This is the Peter Thiel organization that encourages undergraduates to drop out of college in favor of pursuing a promising start-up idea. After forgoing her senior year at Harvard, Shang also earned a spot in Y Combinator, the famed Silicon Valley accelerator that has a strong record of picking and nurturing successful start-ups. The other co-founder is Christian Haigh, who is a master's degree student in computer science at Harvard.
The core idea here is that with the right quantity and quality of data, computers can be extremely useful in valuing legal claims on several dimensions: size of payout, likelihood of payout, total time to reach a resolution, etc. Lawyers provide the same service, but with a sample size limited to their own experience.
The most intriguing part of the Boston Globe story is that Shang and Haigh originally thought that law firms would pay for their service in order to improve their own case assessments. But "about a month in, we realized that attorneys weren't all that interested in legal analytics." The dialogue with lawyers, however, enabled them to learn about the field of litigation finance.
Based on these insights, the Legalist decided to pivot. In the June 2016 press release from the Thiel Foundation, the company was described as "a legal analytics and alert platform that helps lawyers keep track of new developments in case law so that they can represent their clients more effectively." Today, Shang's LinkedIn page describes Legalist as an "Algorithmic litigation financing for small businesses with meritorious lawsuits" -- a description with a Y Combinator polish.
I have no idea whether Shang or Legalist will be successful. However, the story provides another striking example of the reluctance or inability of lawyers--I don't know which--to consider data as a tool to better serve their clients and, perhaps as a result, to earn a higher income. Conversations with lawyers on this topic often stall on what the data cannot effectively model and thus the mistakes that might result. The mindset seems to be, "find an example where it may not work and kill the concept." I really do believe that there are a handful of behavioral economics biases that apply with special vengeance to lawyers.
Katz is likely right to think of law as a powerful use case for finance. The goal is not about getting something right this time, but instead getting it right more often than not with a high degree of certainty. In short, it's probability with reliable estimates of risk. And for clients, that is valuable.
If we pull on this string long enough, eventually it will be possible to quantify how, all else equal, particular law firms and lawyers affect the odds of winning a case. When that happens, there will be strong incentives to deconstruct the skill sets and backgrounds of the most bankable lawyers. Law will become less a credence good and accordingly the utility of longstanding signals of quality that law schools and law firms are built around will get tested by data and repriced.
I have no idea if this future will actual emerge. Certainly a case could be made that were are better ways to resolve disputes than protracted litigation where armies of lawyers are hired to advance only one side of an argument. Regardless, I am confident that the practice of law is definitely going to change.
Thursday, July 14, 2016
The 2nd Annual International Legal Hackers Summit takes place this weekend in Brooklyn, New York. The event includes an impressive array of keynotes, panels, workshops, demos, and cultural activities from leaders of the legal hacking, legal technology and civic innovation communities. U.S. legal education has a surprisingly strong showing. Full details here.
One of the organizers, Dan Lear (@rightbrainlaw), Director of Industry Relations at Avvo, is offering weekend passes for a small number of law students interested in attending. If you drop my name, Dan will feed you and help you network, starting with the Welcome Party tomorrow night at 61 Local Cafe & Public House. If you are a law student in NYC this weekend and want to attend, please send me an email (email@example.com) and I will connect you with Dan.
I guarantee a learning experience that will be inspiring and fun.
Sunday, March 13, 2016
Below is an excerpt from an article I just published in the PD Quarterly. The topic is diversity, one of the hardest and most intractable problems affecting the legal profession. What makes this article different is that it is draws heavily upon my applied research with law firms.
In the coming months, I will be writing more about applied research within the legal field -- in particular, the challenges of this work and why, notwithstanding the challenges, applied research is destined to grow in importance and influence.
Here is a familiar fact pattern in large U.S. law firms.
Time 1. Partners come together and agree that diversity is part of their firm’s core values; they review the firm’s bleak statistics, particularly at the partnership level, and agree they can and will do better.
Time 2. Through significant time and expense, they successfully recruit a diverse class of incoming associates.
Time 3. A disproportionately large number of female and diverse associates leave the firm.
Time 4. The remaining associates eligible for partner are primarily white men.
Time 5. Partners come together and agree that diversity is part of their firm’s core values; they review the firm’s bleak statistics, particularly at the partnership level, and agree they can and will do better.
Why does this cycle repeat itself? As a long-time law firm researcher who has seen this cycle play out over several iterations, I can tell you that it is easy for a group of lawyers, especially those new to leadership, to convince themselves that they can solve the profession’s diversity problem through greater moral resolve. Yet, if the root causes are not moral in nature, we won’t make much progress.
In this article, I ask readers to consider the possibility that the profession’s lack of progress on diversity is a systems problem rather than a failure of moral resolve.
What does it mean to have a systems problem? Every firm has a system of recruitment, selection, development, feedback, evaluation, and promotion that enables law graduates to enter as legal novices and, through years of effort, acquire the skills, knowledge, and experience necessary to become partners. At most law firms, however, this system is driven more by tradition and past practice than science. Further, the system seldom places explicit or rigid demands on partner-owners because partner-owners prize their autonomy and are given the greatest rewards for bringing in business. To the extent the system relies on measurement, the quality of the data is uneven and under-analyzed. Stated another way, the “system” for creating successful lawyers and partners is not much of a system at all. And in this ignorance lies the cause of our diversity problem.
For the last several years, I have shifted my focus from academic to applied research. Although academic ideas can be elegant, compelling, and important, their major limitation is that we don’t really know if they will work in actual practice. Applied research attempts to sort this out, usually through social scientists hired by organizations that are hungry for a competitive advantage. The goal of applied research is to find solutions to important problems and then make them cheap and simple to implement. Law has a shortage of applied researchers, partially because the profession has been so prosperous for so long (what’s there to fix?) and partially because lawyers tend to be uncomfortable with data and statistics. Yet, these background factors are starting to change.
In this article, I am going to share what I have learned through my applied research as it bears on the problem of law firm diversity. The bottom line is that the problem is fixable. If we design and implement a better system, out the other side will flow successful diverse attorneys in roughly the same proportion as the number we managed to hire several years earlier. Further, the stakes are hardly academic. Organizations with a reliable system for creating diverse lawyers will have a competitive advantage for attracting clients and the best entry-level talent. Likewise, esteem and accolades await the leaders who finally make a breakthrough on law firm diversity.
You Have to Start with a Theory
An intelligent system is invariably built upon a theory drawn from multiple sources. One high quality source is published empirical research. A second is one’s own professional work experience: “When I have tried X, Y usually happens” — so we rely on X. Finally, a subset of our theories will be based on pure reason: “Based on our collective knowledge and experience, this is the best approach for this problem.” Figure 1 is a summary of my own theory for creating high performing partners.
Figure 1. Elements Need to Create a High Performing Partner
In narrative form, I am saying that the creation of high-performing partners is influenced by five factors: (1) aptitude, also known as cognitive ability; (2) motivation, which is primarily a function of values alignment between the lawyer and the substance of his or her work; (3) the type and quality of work experience that a lawyer receives during his or her early career; (4) the quality, quantity, and timeliness of training and feedback; and (5) the presence and quality of a mentoring or coaching relationship.
The model can also be broken down into selection and development components. A law firm optimizes elements (1) and (2) through a process of accurate selection at the point of hiring. The less accurate the selection, the higher the lawyer attrition due to poor fit for aptitude and motivation. A firm can optimize (3), (4), and (5) by designing and implementing systems for professional development. The better the design and execution of the interconnected systems, the faster and higher the lawyer’s growth trajectory.
What is the relative importance of these factors? This is a good question that no one can answer with any degree of precision, primarily because we are in the early days of applied research within the legal profession and the required data has not yet been collected and analyzed. The best we can do is to start with a theory that is consistent with the data we do have and continuously improve our knowledge through measurement.
It has been my experience, however, that lawyers often have strong opinions on what does and doesn’t matter. These views on lawyer selection and development essentially create a series of default settings based on conventional wisdom and past practice. I have enough knowledge of the social science literature and enough experience doing sophisticated applied research in law firms to conclude that many of these default settings are wrong.
Below is a summary of what I know about each of the five components in my five-factor model. One by one, and cumulatively, these model components provide me with optimism that law firm diversity can be dramatically improved, particularly at the partnership level.
Interested readers can download the full article from SSRN.
Sunday, February 21, 2016
This Tuesday at 11 am PT /2 pm ET, Clio, a leading cloud-based practice management company, will be offering a provocative webinar on Legal Artificial Intelligence. The legal media has hyped this issue with the help of some lawyers with little firsthand knowledge of the topic. This program, however, has true experts, including ROSS Intelligence co-founders Andrew Arruda and Jimoh Ovbiagele along with Clio's Lawyer in Residence, Joshua Lenon. The program is also CLE-eligible in at least some jurisdictions.
The following questions will be covered:
- What is classified as artificial intelligence (AI)?
- How legal professionals can use AI?
- What legal AI tools are in development?
- How lawyers can get started with AI?
You can register online at: https://landing.goclio.com/legal-artificial-intelligence.html
Monday, January 11, 2016
If I were in northern California tomorrow evening, I would be headed to Stanford Law to attend this interesting program:
January 12 @ 5:00 pm - 8:00 pm
5:00 – 9:00pm
Room 290, Stanford Law School
The event is sponsored by CodeX – The Stanford Center for Legal Informatics and Evolve Law. Some very accomplished start-up folks are participating, including Eddie Hartman (LegalZoom), Josh King (Avvo), Steven Silberbach (Clio), and Jeroen Plink (advisor to Kira Systems who also built Practical Law Company's US operations before the sale to Thomson Reuters).
The program is free and open to the public. For those lucky enough to be near by, you can register here. Remarkably, it is also broadcast live over the web!
There is no question that northern California has become the hotbed location for legal start-ups. Stanford Law is ideally situated to both study and facilitate this evolution.
Sunday, November 29, 2015
The Law Society Gazette reports a new apprenticeship levy that will be imposed in 2017 on UK employers with more than £3 million in payroll. The Gazette notes that the levy, which totals .5% of payroll, will sweep in nearly 200 legal employers.
The program has a potentially clever twist that could prove to be an effective economic stimulus for the UK economy. Employers get a credit for the cost of their current apprenticeship programs. For the UK legal industry, this means that the bigger firms will be fully paid up just by running their current training contract programs. Yet, the article also notes that "the levy may force a number of firms to develop apprenticeship programmes so that they get their money back."
This is an idea that draws on both liberal and conservative principles. It's liberal because it mandates, through a tax, a strong national policy that favors human capital creation. Yet, it's also conservative because it lets employers opt out of the tax by running their own apprenticeship programs. The result is an increase in paid entry-level training for young people and, invariably, some infrastructure being developed around ongoing apprenticeship programs, likely from nonprofits and trade associations who serve or orbit around specific industries.
In the United States, there are roughly 3,000 law firm employers with a payroll of $5 million or more. They account for roughly half of the $91 billion annual payroll of all US law firms (NAICS 541110 Offices of Lawyers). Many law firms are not hiring because client demand is sluggish and it's perceived as more cost effective to use senior personnel who are already trained. As a result, the US legal profession is graying significantly. See Is the Legal Profession Showing Its Age, LWB, Oct 12, 2014; What is Driving the Demographic Gap between BigLaw Leaders and their CEO/GC Clients?, LWB, Sept 1. 2015.
Consider the benefits of a program like this operating in the US. A .5% apprenticeship levy on $45 billion would mean that no less than $225 million per year would be invested in entry-level training contracts in the legal field, with a significant number of legal employers getting off the sidelines to create their own programs. Astute bar associations would likely step in to provide logistical and administrative support. Further, the US Department of Labor already has a detailed legal framework around apprenticeships.
With this kind of financial and administrative support, it is plausible to imagine the US legal profession moving to a true apprenticeship model where training contracts replace the 3L year of law school. I acknowledge this all sounds very fanciful, but a relatively modest employer apprenticeship tax may be better national policy that asking young people to take on more education-related debt.
Saturday, August 1, 2015
Lex Machina and Ravel Law are two start-ups in the legal analytics space (I call companies like this "toolmakers"). Per an invite that arrived in my email yesterday, these Lex Machina and Ravel are collaborating on an upcoming webinar that shows lawyers how to use legal analytics to build a substantive legal strategy. And not just any strategy, but one more likely to win.
Is this smoke and mirrors or the real deal? That remains an open empirical question. But it's worth noting the venture capitalists who backed these companies are betting on the proposition that humans + machines > humans or machine. (This is Dan Katz's formulation.) For lawyers interested in staying current on the legal market (most of us, right?), it's likely worth attending. Sure, Lex Machina and Ravel will be hawking their own products, but hey, educating your prospective clients is how one builds a market for complex technical products. This skill will eventually be taught in law schools -- at least the good ones. It is worth noting that both Lex Machina and Ravel trace their origins back to Stanford Law.
Here is the essential information on the webinar.
How can you employ Legal Analytics in your practice to get clients and win cases?
New legal technologies are transforming the practice of law by enabling lawyers to uncover trends in the behavior of judges, parties, law firms and attorneys.
Ravel Law's case law analytics and Lex Machina's IP docket analytics enable lawyers to make data-driven decisions about case strategy and tactics.
Click here to register for a live 45-minute webinar on Thursday, August 6th at 11:00 am PT.
Host: Ralph Baxter, Advisor, Writer, and Speaker, Former Chair, Orrick
Speakers: Owen Byrd, Chief Evangelist & General Counsel, Lex Machina & Daniel Lewis, CEO & Co-Founder, Ravel Law
- Another Example of Using Big Data to Improve Odds of Winning in Court, LWB, Apr 12, 2015.
- The Early Days of Legal Analytics, LWB, Feb 7, 2015.
Wednesday, July 29, 2015
That's the headline from today's Law Society Gazette, the publication of record for solicitors in England and Wales. The UK is fairly far along in liberalization of its legal markets, progressing from the Clementi Report in 2004 to the Legal Services Act 2007 to the licensing of Alternative Business Structures in 2012. Now several hundred entities have obtained ABS status.
The Gazette article reports that accountants are poised to be large players in the ABA space:
Accountants will soon be competing directly with solicitor firms ‘on every high street in the country’, according to a leading financial advisor to the legal sector.
Ian Muirhead, chairman of Solicitors Independent Financial Advice, said he expects 750 accountancy firms – three times more than first envisaged – to move into probate work after securing an alternative business structure licence.
The Institute of Chartered Accountants in England & Wales has accredited 113 entities as an ABS since last October, having been accepted as an approved regulator almost a year ago. A further 34 applications are being processed.
Speaking at a Westminster Legal Policy, Muirhead said too many solicitor firms are ‘in denial’ about the threat from the accountancy profession.
‘Success will go to those who can manage businesses and I query whether that’s going to be the solicitors or whether solicitors are going to be the back room boys,’ he said.
Muirhead argued that law firms’ response so far has been focused on consolidation, mergers and acquisitions – but this risks playing into rivals’ hands.
‘[The response is] safety in numbers, more of the same, not thinking outside the legal silo, and therefore missing the opportunity of which many new ABSs are availing themselves, of providing a more diversified and holistic client service,’ he added. ...
Some U.S. lawyers believe that liberalization won't come to the U.S. because the legal industry is too balkanized by state bar authorities.
I think this view, however, is likely naive. The market can change because regulators change the rules (the UK). Alternatively, the market can change because clients change their buying habits in favor of nontraditional legal service providers that are financed by sophisticated nonlawyer investors (the US). See, e.g., Is Axiom the Bellwether for Disruption in the Legal Industry, LWB, Nov. 10, 2013.
In the US, it is probably true that regulators lack the stomach to initiate a regulatory action where the client ostensibly being protected is a Fortune 500 corporation. If the action ends up in federal court, the bar officials risk looking like protectors of the guild and have a decent chance of losing. The prohibition against nonlawyer investment (MR 5.4) is based on the assumption that the nonlawyer profit motive will compromise lawyer independence, thus harming the unwitting and unsophisticated legal consumer. But that does not describe IBM's or JP Morgan's relationships with sophisticated LPO or analytics shop (or any general counsel charged with stretching his or her legal dollar). As a result, the venture capital money flows in.
When liberalization is viewed in this light, there are probably more similarities between the US and UK than we might want to acknowledge.
Sunday, April 12, 2015
Back in February, I wrote a post on The The Early Days of Legal Analytics. It discussed some of the innovations at Lex Machina, a legal start-up that uses Big Data to value contested patents and develop a litigation strategy designed to maximize value / minimize risk. I recently came across another company, Premonition, that claims to use artificial intelligence to select lawyers with the best odds of achieving a favorable result. See Premonition Infographic at bottom of this post.
I spend a lot of time on the road talking to law firm lawyers and legal innovators, including legal start-ups. Many large firm lawyers tend to dismiss new innovations without stopping to listen to, much less gather, relevant facts. Likewise, there is a lot of puffery among legal start-ups as they try to land their first few customers. Thus, I tend to apply a windage factor to accurately interpret what I am being told.
The image below contains Premonition's simple, one-sentence pitch. I don't know about the product, but the concept is pretty clear.
The core benefit Premonition appears to offer is a list of lawyers with winning track records in front of specific judges. We don't need artificial intelligence (AI) to make that calculation. A win-rate is a simple descriptive statistic, even if it has been filtered for a variety of matching criteria.
That said, AI could come in handy in building the requisite data sets. As explained on Premonition's website, courts don't construct their case management systems so they can be vacuumed out by data mining companies. Indeed, local court officials would likely to be hostile to such requests because any resulting statistical model is unlikely to make them look good. Indeed, the purpose of the model is, at least in part, to identify and exploit imperfections in the judicial process.
Because the courts have no incentive to make life easy for Big Data vendors, Premonition's Chief Innovation Officer, Toby Unwin, claims to have tackled the data assembly problem by building a technology that scrapes and buckets the necessary data from the jumbled chaos of web portals for state and local courts. Such a task, in theory, can be performed by fairly standard machine learning, which qualifies as AI, at least in some circles.
Assuming Premonition has built a machine that can calculate win-rate of lawyers, is that information valuable to clients trying to maximize the likelihood of a favorable result? I don't know, but its plausible enough to test with data.
Some data skeptics will argue that win-rates, whether high or low, are just artifacts of any normally distributed outcome. The reasoning runs, "Two, three, and four sigma events occur in the ordinary course of life, but regression to the mean is pulling them back to the center. Thus, they are poor predictors of the future." This reasoning is why many people buy indexed funds rather than shares in actively managed mutual funds. Cutting the other way, the hedge fund industry is premised on the belief that some money managers are a lot better than others. Five-year return rates are aggregated and published in the industry trade press. Some of the returns may be due to random luck, but some could be attributed to superior skill. It is absurdly unlikely, for example, that Warren Buffet's success in buying and selling stocks is just a 60-year lucky streak.
In the case of win-rates in court, I can think of at least two plausible non-random factors that could affect outcomes:
- Judicial bias or favoritism. Judges, either consciously or unconsciously, may react differently to the case depending upon the advocate. One does not have to wade too far into the political science literature to find peer-reviewed empirical studies that reveal that judges are influenced by more than just facts and law.
- The gap between credentials and bona fide skill. Law has historically been a credence good. This means the market relies on elite credentials and firm reputation as a proxy for skill. Yet, it is plausible that some lawyers may lack the pedigree to get hired by large, elite law firms, yet they go on to develop outstanding legal skills, perhaps because of superior drive, intellectual curiosity, or "early at-bats" as a prosecutor or public defender. If these folks exist, Big Data can likely find them.
I can't vouch for Premontion's technology beyond two statements: (1) it sounds plausible, and (2) it is a waste of time to debate its usefulness because it's an empirical question that the market will answer in the relatively near term.
Below is one of Premonition's infographics.
Saturday, February 7, 2015
There is an interesting story in Forbes on Lex Machina, a legal start-up that provides analytics for use in patent litigation. See Dan Fisher, Stanford-Bred Startup Uses Moneyball Stats to Handicap Judges, Forbes, Feb. 2, 2015. The company was created by faculty at Stanford Computer Science and Stanford Law. As the company emerged from the University, the reigns were handed to Josh Becker, a Stanford JD-MBA. To date, the company has raised $8 million in start-up funding. According to the Forbes article, the company's clients include some of the nation's large technology companies plus one-third of the AmLaw 100.
What makes Lex Machina so interesting is that the company is not a NewLaw service provider that trying to take marketshare. Instead, Lex Machina is a toolmaker. It is a true Big Data company that provides analytics to (a) value contested patents and (b) protect/maximize that value through a litigation strategy that is informed by data.
The impact of Lex Machina is hard to decipher, primarily because if it does provide an edge, the customers are unlikely to be too vocal. Just like a hedge fund with an effective trading strategy, why advertise the ingredients of your secret sauce? Indeed, compared to other toolmakers (e.g., predictive coding, expert systems) Lex Machina's benefits are less about efficiency and more about affecting the outcomes of cases -- who wins and by how much. If Lex Machina is truly delivering, it will eventually touch-off a Big Data legal analytics arms race akin to the quant revolution on Wall Street. Dan Katz frequently makes this point, and I think he is right. The Forbes article makes the point that Lex Machina is already moving into adjacent areas of IP law and general commercial litigation.
The broader legal industry is unlikely to notice Lex Machina until it has a substantial liquidity event -- i.e., it's acquired or goes public, making if founders far richer than the BigLaw partners and in-house lawyers they currently serve.
If we are looking for early signs of a tipping point for legal analytics, one marker may be the number of Stanford Law grads who are turning down entry-level opportunities in BigLaw to pursue legal start-ups. In recent years, Stanford Law grads fresh out of law school have gone on to found other venture-backed legal start-ups like Ravel Law, Judicata, and Law Gives. Back in 2013, The Stanford Lawyer (SLS alumni magazine) had an extensive write-up with several examples. See Sharon, Driscoll, A Positive Disruption, June 4, 2013. In 2014, Stanford's CSO offered a program titled, An Alternative to BigLaw -- Startups.
The legal world isn't going away; it's just changing.
Thursday, September 4, 2014
Plexus, a NewLaw law firm based in Australia, has just released a new legal product that purports to apply artificial intelligence to a relatively common, discrete legal issue -- detemining whether a proposed trade promotion (advertisement in US parlance) is in compliance with applicable law.
In the video below, Plexus Managing Partner Andrew Mellett (who is a MBA, not a lawyer), observes that this type of legal work would ordinarily take four to six weeks to complete and cost several thousand dollars. Mellett claims that the Plexus product can provide "a legal solution in 10 minutes" at 20% to 30% of the cost of the traditional consultative method -- no lawyer required, albeit Plexus lawyers were the indispensible architects for the underlying code.
From the video, it is unclear whether the innovation is an expert system -- akin to what Neota Logic or KM Standards are creating -- or artificial intelligence (AI) in the spirit of machine learning used in some of the best predictive coding algorithms or IBM's Watson applied to legal problems. Back when Richard Susskind published his PhD dissertation in 1987, Expert Systems In Law, an expert system was viewed as artificial intelligence--there was no terminology to speak of because the application of technology to law was embryonic. Now we are well past birth, as dozen of companies in the legal industry are in the toolmaking business, some living on venture or angel funding and others turning a handsome profit.
My best guess is that Plexus's new innovation is an expert system. But frankly, the distinction does not matter very much because both expert systems and AI as applied to law are entering early toddler stage. Of course, that suggests that those of us now working in the legal field will soon be grappling with the growth spurt of legal tech adolescence. For law and technology, it's Detroit circa 1905.
Sunday, August 24, 2014
Nashville, TN. It is time to put down the broad brush used to paint BigLaw as inefficient and out of touch. At least for me, that is the big takeaway from the 2014 International Legal Technology Association (ILTA) conference, which took place this past week at the Gaylord Opryland Hotel in Nashville and included nearly 2,000 lawyers, administrators, staff, and vendors from around the world.
My takeaway is based on what I saw during the presentation session for the ILTA Most Innovative Law Firm Award. The three finalists all qualify as big: Bryan Cave (985 lawyers), Seyfarth Shaw (779 lawyers), and Littler Mendelson (1002 lawyers). Presenters from each firm had 15 minutes to share their innovations followed by 5 minutes of Q&A. Afterwards, ILTA members in attendance casted ballots for first, second, and third place.
Kudos to Bryan Cave, Seyfarth Shaw, and Littler Mendelson for publicly sharing their innovations, as it demonstrates a commitment to the broader legal profession.
In this post, I will describe the salient points of each innovation. I will err on the side of detail because, when it comes to innovation in the legal space, there is a short supply of “guts of the operations” commentary. I will then offer some macro-level observations. As it turns out, BigLaw has on balance a surprisingly good hand to play. Many will thrive, but at the expense of taking market share from the rest.
Presenter: John Alber, Strategic Technology Partner
Bryan Cave has developed an ingenious and highly efficient way to educate its lawyers on the economics of its business. Prior to the presentation, I was familiar with the firm’s investment in a rigorous cost accounting system to guide the firm’s strategy and operations.
Yet, to get the full benefit out of such a system, the understanding needs to filter down to the individual lawyer-timekeeper level so that each lawyer-timekeeper can use the superior data to allocate time and effort in ways that strengthen the enterprise. Even in the year 2014, many successful and skilled BigLaw lawyers confuse revenues with profit. And the confusion is understandable because portable books of business, which tend to be measured in terms of revenue, drive the valuation of lateral partners. See Henderson & Zorn, Of Partners and Peacocks, Am. Law., February 2014.
The core Bryan Cave innovation is a simple dashboard that tracks a variety of statistics at the lawyer, practice group, and firm level. What is most striking about the Bryan Cave initiative is the sensitivity shown to the large percentage of lawyers who are not comfortable processing numbers (“arithmophobia” was the term used in the presentation). The Bryan Cave innovation team dealt with this constraint in two ways.
1. The Octagon. The Octagon is a data visualization technique that communicates eight key metrics in an octagon-shaped graphic. Wondering what the term "data visualization" means? It's finding graphical ways to communicate complex multivariable data in a format that requires the end user, such as a lawyer, to have very little technical training. The Octagon is a textbook example. It uses colors and distance from the center of the graphic to convey essential information related to origination, client relationships, matter management, days to bill, days to collect, hours billed, leverage, and profit margins. (There may be other octagons containing other metrics--the one we were shown appeared to be geared toward partners.)
Each lawyer each month gets a new updated Octagon; and that graphic communicates, through its shape, the lawyer’s relative contributions to the firm. Specifically, there are distinctive patterns well known within the firm that tend to signal rainmaker, service partner, project manager, technical specialist, or some blend thereof. The features of the Octagon also communicate how well a lawyer is performing in his or her various roles relative to his or her peers. So, on a monthly basis, self-image confronts hard numbers.
This type of transparency is bound to have a profound effect on behavior. (During another ILTA session I heard, from another Bryan Cave presenter, that since the introduction of the Octagon a couple of years ago, the average days to collect has fallen from 60 to 44.)
2. The Rosetta. Some lawyers are bound to prefer a story rather than a picture. For these lawyers, the firm has created a narrative, referred to as the Rosetta, that translates the numbers into a diagnostic story of strengths, weaknesses, and, most importantly, specific prescriptive advice on how to improve.
But there is an interesting catch—the stories are all written with a computer algorithm. How is this possible? It’s a technology pioneered by a company called Narrative Science. Note that computers that are fed nothing but a traditional baseball scoring sheet now routinely write sports stories that summarize the game for the local sports page. This narrative summary accompanying the Octagon removes any lingering ambiguity regarding what the diagram means. Further, all report generation, including practice-group level Octagon and Rosetta reports, has been entirely automated.
I am told that the Octagon and Rosetta programs can handle, and properly incentivize, work that is done on either a billable or alternative fee arrangement basis. If this is true, Bryan Cave has an innovation designed for the legal market of the future.
Some readers may be turned off that the Bryan Cave innovation may seem, on the surface anyway, entirely focused on law firm financial performance. I am not. To my mind, this type of technology is valuable for communicating the fundamentals of the business. This reduces the myths and false narratives that routinely take hold in data-poor environments. This innovation is also timely because it is getting harder to give clients superior value while also delivering a strong return to the firm's owners -- the best of whom could lateral to another firm tomorrow.
The challenge of every BigLaw firm is getting all of the firm's stakeholders to row in the same direction. The combination of the Dashboard, Octagon, and Rosetta is a breakthrough in lawyer communication and, by extension, change management. Bryan Cave attorneys have the information they need to both build their practices while also advancing the broader goals of the enterprise.
Seyfarth Shaw’s innovation is the creation of a true Research & Development Department staffed by lawyers, project managers, technologists, and software developers. The charge of Seyfarth’s R&D Department is to build solutions in advance of perceived client needs. As the presenters mentioned, “we are not doing this because our clients are asking for these solutions; we are doing this because our clients will ask.”
Sunday, June 1, 2014
Jordan Furlong is one of the first-rate commentators on the legal industry. He is an excellent observer, a deep thinker, and skilled and stylish communicator.
Over at Law 21, Jordan has written a set of companion essays that explain the ferment that is now taking hold in the legal industry. Check them out if you need or want the seemingly complex made simple.
The first essay is a highly useful reference guide to NewLaw (#NewLaw), a category coined by the Australian consultant George Beaton. Jordan modestly titled the essay "An Incomplete Inventory of NewLaw," but its alleged incompleteness does not distract from its usefulness. Complicated things like new business models need to be organized and simplified before we can get our heads around them. Here, Jordan creates a elegant typology and fills it out with example after example. Before Jordan's essay, few of us could be sure we were discussing the same ideas or concepts.
One of Jordan's most noteworthy observation is that the talent side of NewLaw is appears to be growing faster in the UK (new models of organizing and delivering legal services and content) while the US seems to be getting the most traction in legal tech. The former is likely due to liberalization of regulations that flow from the UK's Legal Services Act of 2007 and the latter from the proximity to venture funding. To have similar legal ecosystems developing in different ways is bound to trigger consequences and interactions that we cannot fully anticipate.
Jordan's second post is on the failure of legal innovation, which he points out is nothing more than the precursor long-term success. See "The Failure of Legal Innovation," Law 21, May 29, 2014. I definitely agree. When I look at the legal innovation space in 2014 -- and my frame for reference is LegalTech, LexRedux, ReInvent Law, some of the ABA Legal Rebels, and a lot of shoe-leather research on my part -- I think of Detroit in 1905. There were roughly 125 car manufacturers and hundreds more in other parts of the country, as Detroit was not yet car capital of the world. All of those business owners were right about one thing: The car is the future. But they wistful optimists about something else -- their car company is the future.
A start-up is like a sapling in the woods -- the odds are against it ever growing to the treeline. Fortunately, in the start-up ecosystem good ideas and talented entrepreneurs never really lose. Instead, they are rolled up into competitors to form the types of companies that can truly shape an entire new industry. Along these lines, if I were working in investment banking these days, I would be trying to specialize in the legal sector, as the roll-ups in this space are going to be fast and furious in the years to come.
Let's fasten our seatbelts. The next several years are going to be time of great tranformation.
Thursday, May 1, 2014
Five years ago this April, I helped organize a novel experiment on how to reengineer the modern law firm. The occasion was FutureFirm 1.0, a collaborative competition in which teams of law firm partners, associates, and in-house lawyers to create a strategic plan for the fictional firm of Marbury & Madison (M&M). The goal was a new business model that would enable the firm "to survive and thrive over the next 20 years." See M&M Fact Pattern.
We planned FutureFirm 1.0 in the fall of 2008, but by April 2009, things looked pretty unstable. Deal flow had ground to a halt, and corporations were reluctant to fund noncrucial litigation. Law firms in turn were rescinding offers to thousands of law students. Further, the specter of law firm failure hung in the air. Suffice it to say, the timing was not right for sharing the results of FutureFirm. As a result, my analysis of the event, "What Ails the Large Law Firm? Will the Real FutureFirm Please Stand Up," was never published or circulated.
Having not read this essay for five years, I am surprised at how well the FutureFirm analysis holds up. Yet, the biggest takeaway from my FutureFirm experience is not the specifics of the analysis, but acclimating myself to the permanence of new change dynamic, much of which I can see through the participants of FurtureFirm 1.0.
- Two law firm partners subsequently left to start their own boutiques, one of which is aggressively moving into managed services in South Africa.
- Another law firm partner became a judge in King County, Washington (Seattle).
- Several summer associates joined BigLaw only to leave within three or four years to become sophisticated in-house lawyers who are themselves driving change.
- Several people in all roles have switched over to the business side. Indeed, new legal businesses are actively being planned.
In the spring of 2014, the new normal is here to stay, and it has no froth. FutureFirm was probably a fringe activity back in 2009. Now, an event like FutureFirm would be one of the key places to go for answers. Indeed, I have very serious senior in-house lawyers at Fortune 100 companies who want to run this type of colloborative competition to help better design tomorrow's legal departments. So stay tuned for that.
I hope you are sufficiently curious to do a bit of time travel and give "What Ails the Large Law Firm?" a read. I would welcome your thoughts and feedback.
Monday, March 17, 2014
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.
- 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.
- 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.
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.
One 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.
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.
In 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
In 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.
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:
- LeanLaw. This sector is comprised of BigLaw that is transforming itself through reliance on process and technology. Seyfarth Shaw has become the standard-bearer in this market niche, see What does a JD-Advantaged Job Look Like? A Job Posting for a "Legal Solutions Architect", Legal Whiteboard, Oct 15, 2013, though several other law firms have been moving under the radar to build similar capabilities.
- 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.
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.
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 (16)
Wednesday, November 27, 2013
If you have the courage and curiosity to understand the breadth and depth of the changes taking shape in the legal market, then I would encourage you to use some of your Thanksgiving break to read "Recalculate the Future of Law," which is Insight Lab's interview with MSU Law Professor Dan Katz.
It is all-too-easy to believe that innovation occurs in the wake of a great idea, but that is not quite right. Innovation is also about timing and understanding how human institutions are held together and change and evolve. If the innovator has the benefit of timing and understands how human institutions actually work, an effective adoption strategy is possible.
Fortunately, for Dan Katz, all of these factors appear to be in alignment. Katz is acutely aware of his timing and the myriad of factors that enable innovation to take hold. He is also young (35 years old) and has the courage to place very large bets -- the largest bet being that he is not waiting to get tenure before starting his life's work. He is doing it now in his third year of teaching.
But to mind, there is some additional secret sauce. What makes Katz so disruptive is his 100% personal commitment to the growth and potential of his students. He is awaking the sleeping giant -- hope and a sense of purpose for young people. Specificially law students. If you are in his ReInvent Law Labratory, you see a different legal landscape with a whole lot more options. But to tap into that hope, Dan makes you do the work. You have to challenge yourself. And you have to shed the bullshit phobia over basic math. He is building a community of interest that has the potential to morph into a movement driven by young lawyers and law graduates. For more on Katz's unusual bio, see "This is just an education design problem," LWB, Sept 23, 2013.
The interviewer over at Insight Labs got pretty close to the full, uneditted Dan. If you want to learn about the underinvestment problem that is undermining BigLaw, the crucial role of start-ups in the emerging field of legal R&D, how the next generation of law students can do well and do good, or the real hazards of the $1 Million JD debate, give it a full read.
November 27, 2013 in Blog posts worth reading, Current events, Fun and Learning in the classroom, Innovations in law, Innovations in legal education, New and Noteworthy, Structural change | Permalink | Comments (2)
Sunday, November 17, 2013
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.
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.
Sunday, November 10, 2013
I 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 Smith, Dentons, Katten 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.
Much 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.
There 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.
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.
- "LPOs Stealing Deal Work from Law Firms", Feb 6, 2013.
- Mark Harris of Axiom Answers Hard Questions, Sept 25, 2013.
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 20, 2013
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)
Thursday, October 17, 2013
That is the message of Larry Richards, a JD-PhD consultant who runs a company called Lawyer Brain. At the 18th Annual Law Firm Leaders Group Conference here in NYC, Larry made this point with the video below. Very effective.
Five years ago, Larry told me to read Daniel Pink's book, A Whole New Mind. (Daniel Pink, by the way, is a lawyer by training.) The message of that book is developing the right side of brain (emotive, aesthetic, storytelling) with our left side (analytical, quantitative). That was very good advice. Thanks, Larry!