Thursday, April 4, 2013
The revolution is here. It is going to happen. For a detailed analysis of the rise of what I call "Susskind's World" and the new legal entrepenuers, see Part II.C of The Blueprint for Change.
Wednesday, March 27, 2013
The legal industry is changing in ways that very few lawyers understand. I recently tried to explain these changes to a savvy nonlawyer, non-American audience through an essay I published in the Cayman Financial Review, entitled, "Losing the Law Business" (original PDF). I wanted to share this analysis first with an audience that was, frankly, not emotionally or financially wedded to the outcome--hence, they could be objective. Now I want to gauge the U.S. lawyer reaction, so I am republishing the essay here on The Legal Whiteboard.
Losing the Law Business, Cayman Financial Review (Jan. 2013)
by William D. Henderson
If you are not a lawyer, you may find this next sentence very good news. We are entering a period in human history in which we are going to need fewer lawyers, at least the traditionally trained variety. The world is becoming more interconnected, regulated and complex. Although regulation and complexity have historically been very good for the lawyer business, something very fundamental is changing. Clients are increasingly struggling to pay the bills of artisan lawyers who prefer to craft individual, customized solutions for each transaction and each dispute.
In essence, law is facing a productivity imperative. To cope with globalization, the world needs better, faster, and cheaper legal output. The artisan trained lawyer just can’t keep up. To address the productivity imperative – or, more accurately, to turn a profit from this business opportunity—a new generation of legal entrepreneurs has emerged.
Lawyers continue to have a lock on advocacy work and client counseling on legal matters. But an enormous amount of work that leads up to the courthouse door, or the client counseling moment, is increasingly being “disaggregated” into a series of tasks that does not need to be performed by lawyers. Indeed, it may be best performed by computer algorithms. Further, the entire process is amenable to continuous improvement, driving up quality and driving down costs. This is a job that is likely more suitable for a systems engineer, albeit one with legal expertise, than a traditionally trained lawyer.
Although this change may sound radical, it is actually the logical next step in an evolutionary progression that began in the early 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.
Wednesday, March 13, 2013
I was at the ReInvent Law Silicon Valley event last week. Following up on Jerry's thorough remarks, I can honestly say it was unlike any legal education and lawyer conference I have ever attended (the only thing close is Law Without Walls). There is a new guard in the legal academy taking shape, and it is led -- truly led -- by Dan Katz and Renee Knake at Michigan State.
Admittedly, Dan and Renee lean heavily toward my bias. Most of us law professors talk. Dan and Renee, in contrast, are doers. Shortly after becoming assistant professors, they each moved quickly from ideas to action to actually having the audacity to attempt to build new and relevant institutions. Moreover, they both did it untenured--Dan is only in his second year of teaching and Renee just cleared the tenure hurdle earlier this year. They did all of this without a net. To my mind, they are winning the "Game of Life." If other junior faculty follow their example, the legal academy is going to truly change. And right now, that is what we need.
One of my favorite Paul Lippe quotes is this, "In hindsight, the new solutions are all going to look obvious." ReInvent Law was 40 speakers tied together by a common interest in experimentation. Were all the ideas good? If history is any guide, and the criteria is moving from concept to implementation to financial and institutional sustainability, the answer is surely no. But it was invigorating to be in a room of doers who are all willing to risk failure. That is the courage and leadership we need right now. To me, it looked obvious that we need a place like ReInvent Law where insurgent ideas can be expressed with enthusiasm, even if only a handful or fewer will transform the legal landscape.
I was fortunate to be one of the presenters. Dan Katz was kind enough to take my picture when I gave my Ted-style talk (all the talks were Ted-style or "Ignite"). If you zoom-in on me, I look ridiculous. I am no showman. But you have to admit that the lighting is pretty spectacular. The green screen, by the way, is the running twitter feed, an idea that I can assure you was not stolen from the ABA or the AALS.
Amidst all these "revolutionary" ideas, I think my presentation was probably the most conservative. My central claim is that 100 years ago, as the nation struggled to find enough specialized lawyers to deal with the rise of the industrial and administrative state, some brilliant lawyers in cities throughout the U.S. created a "clockworks" approach to lawyer development. These clockworks filled the enormous skills and knowledge gap. Firms like Cravath, Swaine & Moore, through their "Cravath System," finished what legal educators started. (I use the Cravath System as my exemplar because its elegant business logic was written out so meticulously in the firm's 3-volume history.)
The whole purpose of the clockworks was to create a "better lawyer faster." This is a quote from volume II. The company I co-founded, Lawyer Metrics, incorporated it into our trademark -- the value promise is that compelling. See the slides below.
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
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]
Sunday, February 17, 2013
On March 8, 2013 - The ReInventLaw Laboratory - Founded by Daniel Katz and Renee Knake from Michigan State will host ReInventLaw Silicon Valley 2013 @ The Computer History Museum in Mountain View, CA.
Topics to be covered include:
LegalTechStartUp, Lawyer Regulation, Quantitative Legal Prediction, Legal Supply Chain, Project Management, Technology Aided Access to Justice, Design, 3D-Printing, Driverless Cars, Business of Law, Legal Education, Legal Information Engineering, New Business Models for Law, Lean Lawyering, Augmented Reality, Legal Process Outsourcing, Big Data, New Markets for Law, Virtual Law Practice, E-Discovery, Information Visualization, E-Discovery, Legal Entrepreneurship, Legal Automation … and much more.
What do I need to know?
- At all price points, the legal services market is rapidly changing and this disruption represents peril & possibility. This meeting is about the possibility ... about some of the game changers who are already building the future of this industry.
- This is a 1 day event featuring 40 speakers in a high energy format with specific emphasis on technology, innovation and entrepreneurship.
- It will highlight the new and growing portion of the legal services industry. It will not be boring.
- For more on our lab and related events please see: http://reinventlaw.com/
How Much Does it Cost?
This event is generously sponsored in part by the Ewing M. Kauffman Foundation, Michigan State University College of Law and the ReInvent Law Laboratory.
Thus, tickets are FREE but limited.
There will only be 400 tickets for this free event. Many of them are already taken and when they are gone, they are gone. Thus, if you or your friends/colleagues/students would be interested in attending -please sign up today.
Final Thoughts …
As I mentioned to Bill Henderson the other day … the old internet adage applies with equal vigor in the legal services industry "the future is here … it is just not evenly distributed."
Come join the future already in progress at #ReInventLaw Silicon Valley March 8th, 2013 (and at our other free public events in London and New York later in 2013).
February 17, 2013 in Current events, Fun and Learning in the classroom, Important research, Innovations in law, Innovations in legal education, New and Noteworthy, Structural change | Permalink | Comments (0)
Wednesday, February 13, 2013
My previous post on Washington & Lee's 3L Program stirred a lot of interest and commentary, including some disbeleiving critics. Fortunately, Professor Jim Moliterno agreed to write a reply essay, below, that completes the cycle. [Bill Henderson]
Jim Moliterno Replies [This is a long reply, so a PDF version online here]
A number of comments to Bill’s January 28 post and posts regarding it on other blogs cause me to enter this conversation.
Are students really coming to W&L because of the new curriculum? Yes, to a significant extent. How do we know? Because the entering students say so. As do many law schools, we administer a questionnaire to our enrolling students. Among the questions asked is the obvious one: why are you here?
In the most recent such survey the students were asked to rank the strengths of the law school. Here are the top ten, in order, according to the entering students:
- Third Year Curriculum
- Ranking / Prestige
- Quality of Life
- National Reputation
- Job Placement
- General Cirriculum
- Clinical Program
- Financial Aid Award
- Size of Lexington
The curriculum reform was first. Financial aid awards were 9th, just ahead of the “size of Lexington.” The data does not support the unsubstantiated claims of some bloggers that students are choosing W&L because of the generosity of financial aid awards.
The curriculum reform has steadily moved higher on the “strength” rankings given by enrolled students since 2009. The 2011 and 2012 surveys are nearly identical, and the written comments of students about their reasons for coming to W&L (none reprinted here), are more striking than the numbers themselves.
I don’t know of any better data on this proposition but the statements of those whose reasons are under study. If that data is unsatisfying to some, then they will continue to be unsatisfied.
Are there other reasons students come to W&L? Of course. W&L has a highly productive, highly visible faculty engaged in scholarship and projects at the highest levels. Some students undoubtedly value W&L’s faculty prowess. W&L is highly ranked. Some students undoubtedly are affected by a top 25 ranking. It has an excellent reputation as a small, closely-knit academic community. Some students select for the sense of community and size. No reason will ever be the only reason for prospective students to choose a law school. Changes made by law schools will affect student choices for or against a particular law school. The W&L curriculum reform is positively affecting a significant number of students’ calculus about choosing W&L.
And some do come because of the financial aid package they were offered. But the financial aid reason is unlikely to explain the increase in applications since 2008. Some students, the recipients of aid, undoubtedly come in part because of the aid. That is no different than the students who choose [insert name of any school] because of the financial aid they were awarded. In 2012, about the same number of offers of admission were made as in previous years, but instead of the usual 130 or 135 admittees choosing to attend, more than 260 made deposits. Some were asked to defer their attendance until 2013 and once the dust settled we had a class of 187 instead of the usual 130 to 135. This same class entering in 2012 listed the curriculum reform first and financial aid ninth as strengths of the law school.
What else was happening in 2008 and 09 when the applications increased by nearly 33% per year?
In 2009 and 10, while W&L applications were on the rise, the US News ranking fell from 25-34 (while its reputation rank among academics stayed steady). It has now recovered to 24. If anything, that should have led to a drop in applications during 2008-2011 rather than the sharp increases that actually occurred.
Can we exclude all other possible explanations than those previously mentioned? Of course not. It could be that being in a small, beautiful mountain town is all the rage among young adults and 33% more students want that now than wanted it in 2007. I know of no data to prove or disprove that proposition, so it remains one that could be true. The reality is that the students who have come in recent years rate the curriculum reform among the top reasons (often the most important reason) for their attendance at W&L. That matters.
There is empirical evidence that the W&L curriculum reform is engaging students more than in the traditional “no plan” third year curriculum. Is it perfect evidence? Of course not. Is it definitive evidence that has no flaw? Of course not. Is anything ever supported by perfect, definite evidence that has no flaw? Not to my knowledge. We make all of our most important decisions in life based on the best available evidence. As long as the evidence is empirically sound and statistically significant, it is worthy of respect. The evidence of W&L 3L engagement increases is sound and statistically significant and marks a path toward further research and verification.
One commenter suggested that the data is suspect because the peer schools have not been identified. Their data belongs to them, not W&L. LSSSE does not make specific school data available to other schools. So W&L has only a composite score for those peer schools. And it would be unseemly for W&L to reveal the specific schools. I will not do so here. But to be sure, W&L asked LSSSE to calculate the data from a list of schools because they are the schools with whom W&L competes for students and competes in the rankings. It would not have served W&L’s research interests to learn how it compares with a list of schools that it does not compete with in the marketplace. No one at W&L has the data for any specific school.
Nonetheless, do not be mistaken, the schools with whom W&L is compared in LSSSE data are the schools anyone would expect them to be: schools that by their geography, rank and quality compete with W&L in the relevant markets for students and placement.
One observation: in the legal profession and legal education in particular, the status quo never seems to need empirical justification. Only change is suspect and wrong until proven definitively to be otherwise. Is there any empirical evidence that the status quo third year is the best possible third year except that it has been done that way for a long time? None that I know of. The old adage, “if it ain’t broke don’t fix it” does not apply here. The third year of legal education is “broke”.
Amid calls for its abandonment by some, dating back at least to the early 1970s report by Paul Carrington, the third year is widely acknowledged to be of the least value among the three years. (See below on W&L’s largely unchanged approach to years 1 and 2.) The Roman Legions (and more than a few other military powers) have found out that the mere fact that something has been successfully done before is not sufficient evidence that it will prevail in the present or future. Arguing in favor of the status quo based on no empirical evidence, . . . based only on instinct and the argument that it is the way things are currently done, is an approach doomed to failure. Just ask Kodak. (And see my forthcoming book: “The American Legal Profession In Crisis,” Oxford, March 2013.)
How about the claim that “[W&L’s LSAT has] gone down every year since [the new curriculum was announced], while its GPA rank has, after a plunge, more or less returned to where it was.” The blogger made that claim, once again without any data, let alone empirically credible data. Actually the W&L median LSAT was steady at 166 from 2005-2010, dropped 2 points to 164 in 2011 and stayed at 164 for 2012. It has not “gone down every year since [the new curriculum was announced in 2008].” Meanwhile, the GPA of entering classes, which was in the 3.5 and 3.4 range in 2008-2010, has gone up to the 3.6 range (3.65 and 3.62) in 2011 and 2012. The two modest changes in LSAT and GPA have essentially off-set one another in US News points. Hardly the reason for pause suggested by the blogger.
It seems that as long as someone is arguing against change, no rules apply to the arguments’ underpinnings.
Here is what the empirical evidence from the LSSSE surveys shows and what it does not show: students are more engaged in their work and their work includes more writing, more collaboration and more problem solving. Here are a few charts even more striking than those Bill used in his post. Together they say that significantly more than their peers or their predecessors at W&L, current third year students are working more, writing more, collaborating more, applying law to real world problems more, and preparing for class more often. Overall, they describe a harder-working, more engaged student body. And they are working harder at acquire the skills that matter to success as a lawyer.
February 13, 2013 in Blog posts worth reading, Current events, Data on legal education, Innovations in law, Innovations in legal education, New and Noteworthy, Scholarship on legal education, Structural change | Permalink | Comments (6)
Saturday, February 9, 2013
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)
Saturday, February 2, 2013
Below is a photo of the exhibitor list at the LegalTech New York trade show. [Click on to enlarge]
There was a lot of money sloshing around this trade show. What do these companies sell? How do they make money? Who are their clients? Who founded these companies and who financed their growth? Are lawyer-employees a key part of their business models? These are the questions I am asking.
[Posted by Bill Henderson]
Saturday, December 29, 2012
Here is my best guess: We show up at the intersection and we listen to lawyers, judges, regulators and vendors talk about the issues of the day. Alas, this is not original to me. It is the "soak and poke" research method pioneered by the renowned political scientist, Richard Fenno (photo to right). See Fenno, U.S. House Members in Their Constituencies: An Exploration, 71 Am. Polit. Sci. Rev. 883, 884 (1977) (seminal article that describes the "soaking and poking" methodology as one that "befits the earliest stages of exploration and mapping") (HT to my PhD colleague Jay Krishnan, who explained this all to me).
Earlier this month, there was a major conference in Washington, DC on developments in the world of electronic discovery -- the very thing that has added enormous cost and complexity to civil litigation in this country, impacting access to justice, and producing a restructuring of how corporations buy and manage a significant portion of their legal services. If there is a burgeoning legal technology revolution, the frontline is the world of e-discovery. Lawyers and clients can no longer cope with the rapidly growing volume of electronically stored information (ESI). Going forward, technology and nonlegal expertise are a permanent part of the legal industry.
This major conference was organized by the Advanced eDiscovery Institute, which is part of Georgetown Law's CLE operations. According to its website, the conference (now it its ninth year) has "gained a reputation among judges, practitioners, and vendors as the leading eDiscovery conference of its kind in the United States." Notice that "law professors" and "legal educators" are entirely absence from this description.
If you leaf through the lengthy roster of speakers and organizers, you'll see:
- A dozen federal judges, including the busiest and most influential district courts (SDNY, ND Illinois, SD Texas, District of Columbia)
- Lawyers from the FTC, DOJ, SEC, and US Commodity Futures Trading Commission
- Several state courts and state agencies
- Partners from a huge swath of the corporate bar
- In-house lawyers from Google, Raytheon, Pfizer, Tyco, Motorola, Genentech, Apple, Deloitte Financial Advisory Services, Honda, UBS Financial, United Technologies, and many other Fortune 500 companies
- The National Institute of Standards and Technology
- The Sedona Conference
- Several leading eDiscovery vendors
This is a very serious crowd. Yet, I located only one full-time law professor in the mix: John Carroll, who is Dean of the Cumberland School of Law at Samford University. Yet, even Dean Carroll is not your typical legal academic. He is a Vietnam veteran, a 1974 graduate of Cumberland Law, a former federal magistrate judge, and a current member of the Sedona Conference. Kudos to Dean Carroll, whom I suspect knows quite a bit about cutting edge issues in eDiscovery. But where is the next generation of legal academics soaking up all this valuable institutional knowledge?
Nearly 10 years ago I showed up at the Indiana Solo & Small Firm Conference. I was there to gain some basic insight for a course I was putting together called "The Law Firm as a Business Organization." As the organizers will tell you, a law professor had never before ventured into their conference. What was their reaction? A very kind, "It's about time!" I was immediately drafted onto the organizing committee and in subsequent years conducted two major surveys for the ISBA Solo & Small Firm Section. To this day, the lawyers I met at that first Solo & Small Firm Conference remain an important part of my professional network. Ironically, several years ago the small firm crowd was issuing a clarion call on the importance of law and technology -- for them, it was all about survival.
Now law and technology is on nearly everyone's radar. New tools and work processes are opening the door to better, faster, and cheaper legal solutions -- solutions that bear little resemblance to the artisan method of lawyering taught in US law schools. Unfortunately, there are no classes to turn any of us into experts--the practicing bar itself is struggling to comprehend the implications of the new world we are entering. During a paradigm shift, the job of academics is going to messy and chaotic. At this juncture, we have to educate ourselves by showing up, talking to people, and observing. Cf. Susan Helper, Economists and Field Research: "You Can Learn A Lot Just by Watching", 90 Am. Econ. Rev. 228 (2000). It is time to get to work.
Interested in a primer on law and technology? Consider the NYC LegalTech, which runs from Jan 29-31. Early bird registration ends Dec 31, 2012. I will definitely be at ReInvent Law Silicon Valley 2013, which is March 8 at the Computer History Museum. Other high quality options -- I am told by people more knowledgable than me-- are the ABA Techshow, which runs from April 4-6 in Chicago this year, and the International Legal Technology Association annual conference, which runs August 18-22 in Las Vegas this year. I would love to get together with other law professors who will be attending these important industry meetings.
- How Law & Society Research is Part of the Solution to Structural Change, Apr 11, 2012.
- Why Are We Afraid of the Future of Law?, Sept 6, 2012.
- 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]
Wednesday, December 5, 2012
I have been reading about predictive coding for a few months now, and that is my conclusion. Predictive coding is the use of computer algorithms and machine learning to conduct the review of electronically stored information (ESI). For a useful primer, see Frederick Kopec, Predictive Coding in eDiscovery or Predictive Coding for Dummies (remarkably, there are two editions, one by Symantec and the other by Recommind, see Legal Tech Insider, A Tale of Two Predictive Coding Books).
From the client perspective, predictive coding is at least as good as first-level human review (typically junior attorneys screening for relevance and privilege) but dramatically less expensive. And note, whatever efficiency and accuracy benefits predictive coding has today, it will only improve in the months and years to come. It contrast, our processing capacity as humans is, well, static.
The big players in the space are Kroll Ontrack and Recommind. These are not insignificant companies. Kroll Ontrack started as a hard disk recovery service and evolved into the e-discovery and information management services. It now employs 1,500 workers in eleven U.S. and nineteen foreign locations around the world. In 2010, Kroll Ontrack had revenues of $250 million. A few layers up, it is owned by the Private Equity giant Providence Equity Partners.
Recommind has approximately $15 million in annual revenues and approximately 100 employees spread over facilities in Massachusetts, California, London, Germany, and Australia. According to this June 2012 story at the CIO Agenda at Computer Business Review, Recommind is gearing up to go public.
Howard Sklar, Senior Corporate Counsel for Recommind, just posted an essay entitled, Legal Acceptance of Predictive Coding: A Journey in Three Parts. The parts are: (1) acceptance that predictive coding reasonable, (2) arguments that it is better and thus must be used in this case, (3) sua sponte judicial order that it be used. The fourth part, still to come argues Sklar, is a state bar ethics watchdog issuing a ruling that failure to use predictive coding is unethical.
Here is an excerpt from Sklar's post:
There’s a certain trajectory for technology adoption. Early adopters, mainstream acceptance, laggards. But, slow or fast, adoption occurs. The law is the same way, in its own fashion. But the legal acceptance of predictive coding has had a path that’s unorthodox. From the legal perspective, predictive coding has gone through three cycles, not entirely as expected.
In cycle one, companies began using predictive coding. The efficiencies are compelling. Better end results in less time at a cost savings. An ability to better find and understand the facts embedded—sometimes hidden—in your documents. These things are crucial in today’s corporate world. Law firms were slower, but generally followed their clients into predictive coding, and soon saw the benefits first hand.
Other vendors—usually the first to adopt new technology—were laggards. They fought the adoption of predictive coding as long as they could, mainly because they didn’t have the capability to do it themselves. Eighteen months ago, the most frequent question I would get at conferences was “has there been a court case approving the use of predictive coding?” In the “ridicule it and it will go away” marketing approach, they were hoping to scare corporations and law firms away from the benefits corporations could achieve.
Then came Da Silva Moore and Global Aerospace [which, against the objections of one of the litigants, ruled that predictive coding was a judicially reasonable method of conducting discovery.] ...
During this period, other vendors stopped criticizing predictive coding and started marketing it—sometimes with the capability, sometimes without. ...
After waiting for the first decision approving the use of predictive coding, we went to stage two faster than anyone had thought possible: not whether you can use predictive coding, but whether you must use it. This was the argument in the Kleen Products case. The defendants had completed their review, and the plaintiffs’ argued that the review was defective because predictive coding wasn’t used. Eventually, the parties cooperated to end that dispute, but the argument had been made. ...
We’re now in stage three: a court has sua sponte ordered the use predictive coding. And not just any court, the Delaware Chancellery Court, one of the most important corporate courts in the nation.
In the future, we’ll enter stage four: the decision by a state bar’s ethics watchdog that failure to use predictive coding is ethically questionable, if not unethical. After all, purposefully using a less-efficient, less accurate, more expensive option is problematic. I think that’s probably 18 months away. But given how fast we’ve gone through the first three states, stage four may come next week.
[posted by Bill Henderson]
Thursday, November 1, 2012
As U.S. lawyers successfully derail the most modest changes to the Rule 5.4 prohibition on nonlawyer investment in law firms, see e.g., this Wisconsin Bar commentary, the Brits are going in an entirely different direction. The Legal Services Act of 2007 lifted the fee-splitting prohibition in the U.K., but it has taken five years to set up the necessary regulatory infrastructure to facilitate the opening of the legal market to nonlawyer investors.
The UK experience is bound to have a big influence on the U.S. debate because so much of the rhetoric on both sides is based on the alleged impact of the nonlawyers. Proponents argue that it will drive down costs, accelerate innovation, and improve access to justice. The critics, who so far have the upper hand, assert that investor profit motives will compromise lawyer independence, leading to the ruination of the profession.
Thanks to developments in the UK, we are moving from abstract arguments to concrete experience. Coverage in the British legal press suggests that a new legal order is indeed beginning to take shape.
One novel development, reported by the Law Society Gazette, is an equity stake in the Knights Solicitors law firm by Hamilton Bradshaw, a British private equity fund run by entrepreneur and investor James Caan. Knights is a 23-solicitor Midlands regional firm founded in 1759 (yes, 1759) whose business profile at the time Caan invested was being a competent, responsive law firm at a price point considerably below the London-based firms. See, e.g, this Legalweek article describing Knights' collaborations with US/UK powerhouse Hogans Lovells.
The plot here is pretty thick. In both the UK and Austrailia, which also liberalized its legal market a few years ago, the early investors have been on the personal injury side. In contrast, Knights is full-service commercial law firm. With the aid of outside capital, the firm's ambition is to catapult itself into the top 100 UK law firm within three to five years. Further, Caan is not just any investor. He is famous in England because he served as as judge on the popular Dragon's Den television program. The show's concept is simple: entrepenuers pitch their ideas to some colorful, high roller celebrity investors. Contestants potentially get funding plus a priceless primetime branding opportunity. Dragon's Den was the basis for ABC's Shark Tank, where serial entreprenuer and Dallas Mavericks owner Mark Cuban serves as a judge.
Well, Caan got the regulatory okay a few months ago and is settling in with his new investment. His early rhetoric suggests that he has little interest in fitting into the dominant culture of the British legal profession. According to a story titled "Profit a 'Dirty Word' in Law," Caan regaled the NetLaw Strategic Leadership Forum in London with his experience of interviewing 20 firms in his bid to enter the legal market. What he observed was "a profession dogged by the partner structure, failing to build a lasting relationship with clients and with too little focus on making money."
Although he and others would be keen on investing in more law firms, the culture within firms, including excessive deliberations in making basic management decisions, is a major hinderance. Caan remarked:
A lot of people said this is not how this industry works: we’re about service, and profitability was a dirty word. ... The minute a business forgets the reality of why it is there it will never grow. Every day you walk into the office you’re looking to make a profit. Being ashamed or embarrassed is not how you grow – every business I invest in, I’m not ashamed that is the strategy.
For a U.S. audience, this quote is likely to stoke the fire of both critics and proponents of fee-splitting. On the one hand, here is a nonlawyer wanting to clean house in pursue of profits -- that seems to go the heart of lawyer independence. On the other hand, wringing out more profit could well be possible if lawyers had a laser-like focus on the needs of their clients. Caan only makes money if the clients (including sophisticated commercial clients) are drawn to his model, essentially rejecting the bundle of services offered by traditional law firms.
The late Larry Ribstein was a sincere believer in the latter view. According to Larry, the pervasiveness of lateral movement -- which, under state legal ethics rules, cannot be curtailed by noncompete agreements -- had caused law firms to become hopelessly focused on the short-term. This includes the most prestigious firms, which were (and, in my estimation, are) burning down decades of accumulated reputational capital.
Yet, the short-termism of coporate law firms is curable with money plus a coherent business strategy. With an injection of patient capital, some extremely talented lawyers could be persuaded to stick around and focus on innovative legal products and services. The idea is that patient capital could guarantee a partner's income for a period of years (essentially a partner's opportunity cost on the lateral market) in exchange for splitting the upside on innovations with the nonlawyer capitalists.
In a few years, Larry's ideas will be fully roadtested in the U.K. If he was a right (and I think he was), this could eventually become a consumer rights issue that captures the attention of state legislatures. And who will be advocating for those consumers? Lawyers who want to take outside investments so they can replicate the financial success enjoyed by their UK counterparts. Time will tell.
[posted by Bill Henderson]
Tuesday, October 23, 2012
Have your heard of "Big Data"? Basically, it is the mining of large existing datasets to make better business decisions. There is a lot of discussion on this topic in the business world. See, e.g., Big Data: The Management Revolution, Harvard Business Review (Oct 2012); The Age of Big Data, New York Times (Feb 11, 2012).
The first signs of Big Data in the law firm world are the companies that provide electronic billing platforms for large corporations. These companies have all the data needed to discern the relative efficiency of various service providers -- name of firm, title of lawyer, practice area, billing rate, office, and a large portofolio of matters uniformly coded by subject matter and discrete technical tasks. Clients, of course, know the outcomes of matters, which provides the last piece of missing information to not only calcuate cost and efficiency, but also value delivered to the client.
What I love about this video is that the reporters are outsiders to the law world. They note that the "transparency" and "information" these companies provide are wonderful developments for clients -- and, of course, they are 100% right. Nobody wants to overpay, so tools to eliminate this problem are going to be widely embraced.
The obviousness of this point is why the legal services industry is at the beginning, rather than the middle or end, of a massive structural shift that will be wonderful for legal consumers but profoundly disruptive to law firms and law schools. In the years to come, we will have fewer lawyers and generally flat or declining incomes within the profession.
The real money will be made at the intersection of law and technology, which has the potential to scale legal work so it can be better, cheaper and faster. This is the road to commodification of law. It is good for society, but bad for those of us wedded to a traditional model where lawyers enjoyed more market power. Those days are fading into the horizon.
[posted by Bill Henderson]
Saturday, September 22, 2012
From our UK colleagues, specifically the lawyers at Riverview Law, which is a new-breed British law firm that does things exclusively on the flat fee model. Check it out:
Riverview's advantage may be more than its ability to produce funny videos that ricochet into the inboxes of inhouse lawyers. (I was alerted to this video via Twitter from Patrick Lamb, one of the ABA New Normal guys and a principal at Valorem Law, a Chicago-based flat-fee shop. Pat recieved his link from a client.)
Lawyers from Riverview Law were at the Legal Tech Camp that I have discussed in prior posts (here and here). To my mind, Riverview's greatest advantage is focus -- they want to do the same work as other corporate law firms at the same quality level or higher, but also at a signficantly lower, fixed fee price. The firm appears to work backwards from the price to make process-design and sourcing decisions. The result, plain and simple, is innovation. Long term, that is the only way they can make money.
Here is how they explain just one of their services, called Legal Advisory Outsourcing -- again, in a well produced video.
If you think Riverview Law is no big deal, this may get your attention. The flat-fee shop is partially owned by the mega law firm DLA Piper. Earlier this year, they opend an office in New York City.
[posted by Bill Henderson]
Friday, August 3, 2012
Over a 3 Geeks, Toby Brown asks, "Is the legal market flat?" Toby's analysis is especially interesting because of his day job -- he is a strategy professional at an AmLaw 50 firm who focuses on pricing and market analytics. In that capacity, he has access to the various proprietary databases that track legal spending. Toby writes, "Although there have been minor ups and downs on this stat (most recently a slight up-tick), the overall demand has been and continues to be predicted as … flat."
But then Toby wonders if the stats are potentially misleading because the databases define the market as BigLaw. If work is leaking out of this market and going to new entrants, flat revenues may mask a reconfiguration of the legal marketplace--one where BigLaw is less dominant.
As evidence for this possible trend, Toby links to an article on Pangea3, which is a legal process outsourcing (LPO) owned by Thomson-Reuters (a publicly traded company). Since its inception in 2003, Pangea3 has grown at "40% to 60%" per year and is "growing even faster" in 2012. Pangea3 now employs 850 lawyers, mostly in India.
Now think about that: 850 lawyers growing at 50% per year for five years is 6,455 lawyers--by 2017. And that is just one LPO.
Huron Consulting Group (NASDAQ: HURN) recently issued a press release announcing a new document review and data operations facility in Gurgeon, India (functionally a booming suburb of India--I've been there). The press release reads, "The Company offers around-the-clock global discovery support with 1,500 seats at nine locations across the U.S., U.K., and India to address clients’ complex business needs." As I noted in an earlier post, Mindcrest, with HQ offices in Chicago but facilities in India, is also growing at a breakneck pace.
Toby draws a conclusion: "The simple math of 50% market growth suggests LPOs are taking market share from firms."
In my estimation, very few lawyers or law professors grasp what is taking place here. We look at flat revenues in BigLaw and draw the inference that we are in a prolonged recession. Meanwhile, the legal business is absolutely booming in India, thanks in substantial measure to its integration into the U.S. and U.K. legal supply chain. Play these trends forward for five more years, and the prolonged recession storyline will no longer be credible.
And remarkably, the drivers of this change are publicly traded companies or companies funded by venture capital and private equity.
Beyond Toby's observations, I would add the following to the big picture. The ABA Commission on Ethics 20/20 was recently pressured to drop its recommendation for even a very most modest change to the Rule 5.4 prohibition on fee splitting with nonlawyers. (see here.) This effort was lead by the Illinois State Bar Association, which wanted to shut down debate on this topic during the August ABA Annual Meeting in Chicago.
I fear that the U.S. legal profession is looking through the wrong end of the telescope. In a practical sense, fee spliting only applies to counseling and advocacy. But the full legal supply chain includes a host of legal products and inputs that Wall Street and Sand Hill Road capitalists are anxious to supply. This supply chain analysis is especially true when the client is a Fortune 500 corporation. The policy that drives fee-splitting is consumer protection and a belief that the nonlawyer profit motive will compromise lawyer independence and injure the client. Yet, organizational clients want innovation and more for less. And they are finding non-law firm vendors who are filling that need. The organized bar is powerless to stop these changes.
[posted by Bill Henderson]
Friday, July 27, 2012
Here is some welcomed good news for the legal industry--we now have data showing diverse lawyers, within certain large and important legal markets, ascending to law firm partnership in significant numbers. Let me be clear. I am reporting progress here, not perfection. But the progress provides key insights on how to further reduce the partnership diversity gap.
The research, which I just published in the NALP Bulletin (see "Diversity by the Numbers," July 2012), is based on the 2005-06 edition of the NALP Directory of Legal Employers. The NALP Directory is a city-by-city guide for several hundred law firms that participate in the on-campus interview (OCI) process. This information includes a breakdown of lawyers by firm, branch office, title, and race/gender/GLBT status. (See full article for overview data.)
The aggregate-level statistics are not every encouraging--less than 5% of partners at these corporate firms are minority. These are the type of bleak statistics that frame the diversity discussion. Yet, when the data are disaggregated, we see racial subgroup making substantial partnership inroads in specific geographic markets. For African-Americans, it is Atlanta and Washington, DC; for Asians, it is L.A., San Francisco, and Pacific Northwest/Rocky Mountain region; for Hispanics, it is Houston, Dallas, Miami and L.A. Further, these partnerships disproportionately in AmLaw 200 firms.
The map and table below expresses these geographic variations using a location quotient methodology.
(Note: CSA means "Consolidated Statistical Area", a geographic area defined by the U.S. Census Bureau. Among other things, CSAs are very large metropolitan area labor markets.)
In the map above, the emphasis on large metropolitan areas is deliberate. Among the 600+ law firm in the 2005-06 Directory, 64.2% of their attorneys worked in the top 10 metropolitan markets; these same markets also accounted for 74.8% of hiring at the NALP firms.
A Location Quotient (LQ) is a tool for identifying relative surpluses or shortages of an economic activity within specific locations. If, for example, the percentage of female partners in New York City is the same as the entire US market, the location quotient for female partners would be 1.00. In fact, the LQ for female partners in New York City is .87. This means that are 13% fewer female parters in New York City relative to the total base of New York City partners. Likewise, the LQ for African American partners in Atlanta is 2.67. This means that there are 167% more African American partners in Atlanta relative to the total Atlanta partnership base. Cells in Yellow are underrepresented by more than 10%; cells in blue are overrepresented by more than 10%.
The implication of this analysis is that significant diversity tends to exist in pockets that follow distinctive demographic patterns. These significant pockets rebut the pessimistic view, held by some, that minority partners lack the skills and ability to be successful in large corporate law firms. Quite the opposite is true -- minority lawyers' willingness to enter a market and persist at a firm is likely influenced by number of people from the same minority group who have ascended to the partner level. If you are a African American lawyer, the wind is at your back in DC or Altanta, but in many branch offices in Dallas, Phoenix or Boston you will be breaking barriers.
This brings up the issue of pipeline, which is a precursor to any hoped for progress on partner diversity.
To look at pipeline-to-partner issues, I created separate regression models to predict the % minority associates within a law office (not the firm as whole). I ran the model separate for African American, Asians, Hispanics, GLBT and females. Each factor below makes an independent contribution to a larger pipeline of diverse associates.
- Geography matters. Diverse associates are disproportionally going to the same market where their same subgroup has been successful becoming partner. African Americans to Atlanta and DC; Asians to the west coast; Hispanics to the major markets in the Southeast and Southwest.
- Large Firms. Large firms are more successful recruiting diverse associates. This could be salary, prestige, recruitng resources.
- Large Offices. Bigger branch offices are more successful. This could be recruiting resources or a more appealing variety of practice areas.
- % of Diverse Partners. This is the critical factor -- for every category, % of partners is associates with higher % of associates. This is independent of size and geography! Further, there is zero crossover effect.
Quoting from the full article, "The takeaway from the above analysis is both simple and frustrating. We would have more African American (or Hispanic or Asian or Female or GLBT) associates if only we had more African-American (or Hispanic or Asian or Female or GLBT) partners. But getting more diverse partners will be slow going until we become better at retaining, rather than just recruiting, diverse associates. The first generation of diverse lawyers will, by definition, not have the benefit of diverse mentors. And in many firms, or at least branch offices, the first generation has not yet arrived."
I am really grateful to NALP for giving me access to this unique dataset. It caused me to think much more deeply on how lawyer development can be used to create greater diversity in the huge number of branch offices where there is no critical mass of diverse partners. It short, it is all about creating a competency model and evaluation system--i.e., a roadmap--that makes the path to partnership more explicit. Why am I bullish on our ability to make progress on partnership diversity? Because these systems simultaneously advance profitability and diversity. The article recounts one such example.
[posted by Bill Henderson]
Tuesday, July 17, 2012
With the passage of the Legal Services Act 2007, the UK began the process of liberalizing its market for legal services. The UK legal market and all of legal education is now regulated by the Legal Services Board, which is presided over by a nonlawyer civil servant named Chris Kenney.
The LSB's regulatory objectives are set out in Section 1 of the Act. They include: "(a) protecting and promoting the public interest"; "(c) improving access to justice"; "(d) protecting and promoting the interests of consumers"; "(e) promoting competition in the provision of services within subsection (2)"; and "(g) increasing public understanding of the citizen's legal rights and duties[.]"
One of the fruits of the new LSB regime is this just released empirical study on how British citizens evaluate and make decisions about their own legal needs. In a nutshell, they often go in alone without the benefit of a lawyer. Further, only about 20% of this unmet legal need fall in the domain of "reserved legal activities," which require a licensed legal professional.
Although the report does not come out and says this, the implication of the myriad statistics is that the British consumer market is ripe for commodification through technology and mass distribution channels. When confronted with a legal need, face-to-face counseling with a skilled professional may be the ideal, but that is far from the reality for most British citizens.
[posted by Bill Henderson]
Sunday, July 15, 2012
I created the graphic below to depict the shrinking right mode of the bi-modal distribution since its 2007 high water mark (measured in February 2008).
[Note: The difference between the mean and adjusted mean in the 2011 distribution is due to the fact that law grads who fail to report their salaries tend to have have less lucrative employment; so NALP makes a prudent statistical correction --basically a weighted average based on practice settings.]
From a labor market perspective, the class of 2007 entry level salary distribution was extraordinary and anomalous. Why? Because we can safely assume that legal ability, however it might be defined, is normally distributed, not bi-modal. So when such a distribution appears in a real labor market, something is significantly out of kilter.
Why did the entry level market become bi-modal? As the legal economy boomed from the mid-90s through the mid-00s, many large law firms (NLJ 250, AmLaw 200) were trying to make the jump from regional dominant brands to national law firms. For decades, going back to the early to mid-20th century, these firms followed a simple formula: hire the best and brightest from the nation's elite law schools. As they continued to enjoy growth, they reflexively followed that same formula. Yet, by 2000s, the demand for elite law graduates finally outstripped supply.
This micro-level logic ("let's not tinker with our business model") produced a macro-level bidding war. This is how the right mode came to be. Yet, because it was a macro-level phenomenon, clients, led by industry groups such as the Association of Corporate Counsel (ACC), reacted by saying, "Don't put any junior level lawyers on my matters --they are overpriced." Outsourcing and e-discovery vendors have also eaten into the work that used to go to entry level lawyers. So the volume of BigLaw hiring has collapsed, hence the melting of the right mode. For a more detailed overview, see NALP, Salary Distribution Curve.
Long Term Structural Change in Big Law
That said, it is not just the entry level market that is under stress -- the fundamental economics of Big Law are also changing. Consider the chart below (from Henderson, Rise and Fall, Am Law June 2012), which shows that revenues per lawyer at AmLaw 100 firms has gone flat and moved sideways since 2007, breaking a pattern of steady growth that dates back to the pre-Am Law 100 days.
Stagnant revenue is a source of enormous worry for law firm managers. Without higher profits to distribute--and growing the top line is the usual profitability fomula--their biggest producers might leave, causing a run on the bank ala Dewey, Howrey, Wolf Block, etc. So the dominant strategy now has nothing to do with entry level hiring. Rather, the goal is to keep and acquire lateral partners with portable books of business. After all, clients aren't protesting the value of most senior level lawyers. And seniors lawyers are plentiful, thanks to the excellent health of baby boom lawyers and the poor health of their retirement accounts.
This strategy may work fine for this fiscal year, but over the middle to long term, BigLaw is going to get older and dumber. Further, this dynamic produces substantial ripple effects on legal education -- albeit ripple effects that feel like tremors.
The long term solution -- for both law firms and law schools -- is for the price of entry level talent to come down to the point where young lawyers are more cost-effective to train. And that price point is not $160,000. This inflated pay scale (which has supported ever higher tuitions at law schools) only persists because large firms are deathly afraid of adjusting their salary scales and being labeled second rate. So the solution is keep the entry pay high but hire very few law school graduates. This is not a farsighted or innovative business strategy.
It's been 100 years since law firms engaged in sophisticated business thinking. And that last great idea was the Cravath System, which was method of workplace organization that performed expert client work while simultaneously developing more and better human capital. See Henderson, Three Generations of Lawyers: Generalista, Specialists, Project Managers. According to the Cravath Swaine & Moore firm history, published in 1948, the whole point of the Cravath System was to make "a better lawyer faster."
I think the next great model for a legal service organization (law firm may not be the right term) likewise will be based on the idea that there is a large return to be had by investing in young lawyers. As my friend Paul Lippe likes to say, "When it appears, it will look obvious."
[posted by Bill Henderson]
Friday, June 29, 2012
Ignite rules are simple: a talk with 20 PowerPoints that advance automatically every 20 seconds. Six minutes to make your point. It you don't know your material, it's a disaster. If you are prepared and you understand how to connect with your audience, you educate and inspire -- in a word, you ignite the audience.
Below is an example of Ignite done very well, by Michael Bossone (Miami Law, co-founder of Law Without Wall). This presentation just got a rousing ovation at the Law Tech Boot Camp in London. I saw it happen live. It was awesome.
[posted by Bill Henderson]
Saturday, May 12, 2012
LegalZoom plans to go public. According to the company's Form S-1 registration statement, which was just filed with the SEC, the company had $156M in revenues in 2011, with profits of $12 million. Here is the first line of the prospectus:
We believe that everyone deserves access to quality legal services so they can benefit from the full protection of the law. Our mission is to be the trusted destination where small businesses and consumers address their important legal needs and to be our customers' legal partner for life.
Well, LegalZoom seems to be making progress.
We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of our surveyed customers said they would recommend LegalZoom to their friends and family, our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formed using our online legal platform. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depth of the services we provide to our customers.
I recently rented a car on a business trip. The radio was tuned to the Jim Rome Show, a national sports radio talk show that is carried by more then 200 stations nationwide. During my two hour drive, I heard at least four LegalZoom radio commercials.
What is LegalZoom's long term play? Based on the S-1, it is to use its trusted brand to build a network of "legal subscribers" who obtain legal advice from licensed attorneys. As LegalZoom says,
We are not a law firm, and we do not provide legal advice. We provide self-help legal documents at our customers' specific direction and teneral information on legal issues generally encountered. Independent, licensed attorneys participate in our attorney network to provide services to our customers through our legal plans.
LegalZoom is seeking $120M for general corporate purposes. Sheppard Mullin and Latham & Watkins are listed on the S-1 registration statement. Think LegalZoom is no big deal? If so, I would encourage you to read my previous post.
[posted by Bill Henderson]
This story is fresh off the newswire: "Law firms are no more the preferred destination for fresh law graduates looking for jobs. With outsourcing catching up even in this industry, legal process outsourcing (LPO) companies are now bagging a large number of graduates." A law professor opines, “There is a rising trend of students opting for LPOs. The nature of work is changing and these places offer good packages and work culture. ... [P]romotions also come faster in LPOs.”
Wonderful news. But the story was written for the Hindu Business Line. The law graduates went to school in India. Why are the LPOs become more attractive jobs for Indian law grads? Probably because (a) LPOs are increasingly focusing on process and technology, engineering out the drudgery work, and (b) process and technology are creating a sustainable competitive advantage within a global industry -- and that can support higher salaries.
Dalal explains his hiring philosophy: "There are very few lawyers available in India who are experts in the laws of the US or the UK, which constitute a bulk of our clients. In general, therefore, we prefer to hire younger legal talent, whether fresh or a few years out of Indian law schools." (Historical note: Paul Cravath explicitly focused on new law school graduates in building his firm. Why? He did not want to undo the bad habits and fixed ideas of other (inferior) employers -- he too had a process.)
The president of Mindcrest is a former partner at McGuireWoods, an AmLaw 200 law firm. According to its website, Mindcrest now has 600 employees. How many are in the U.S.? We have no idea -- but we can triangulate data from other sources in order grasp the magnitude of changes occurring as a result of companies like Mindcrest..
So consider the following, which I believe signals a true structural shift.
Chart 1 below is generated from County Business Patterns data. It summarizes U.S. Law Firm employment according to the North America Industry Classification System (NAICS), which is how the U.S. Census Bureau groups and categorizes economic activity. The NAICS went into effect in 1998, replacing the Standard Industrial Classification (SIC) system, which reflected an industrial economy rather than one driven by information and services. The advantage of County Business Patterns (CBP) is that it is not a sample -- it is "universe" data. CBP covers everyone working in the U.S. who received a W-2. Law firms, as shown below, comprise a 1.1 million employee sector. [click on to enlarge]
The key takeway? Law office jobs peaked in 2004 -- four years before the collapse of Lehman Brothers. Total employment in law offices (NAICS 54111) totaled 1,123,000 jobs, which was 92.2% of the larger legal services sector (NAICS 5411). Since the high water mark in 2004, the sector shrank by 26,100 jobs (at least through 2009).
County Business Patterns, however, has another catch-all category called "all other legal services" (NAICS 541199). Mindcrest's employment (just the domestic) is almost certainly included in this catch-all. Chart 2 below compares change in total employment from base year 1998 for "Law offices" and "All other legal services." [click on to enlarge]
The takeaway from Chart 2 is that "All other legal services" is growing very quickly, albeit from a much smaller base. When Law offices were shedding 26,100 jobs after the 2004 high water mark, the "All other legal services" category added 5,800 new employees. It is worth noting that the average 2009 salary in All other legal services are 40% lower than in law firms ($46,800 versus $78,500). [more after fold]