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]
Monday, November 19, 2012
Law schools care deeply about their academic reputation. If this were not true, my Indiana Law mailbox would not be stuffed full with glossy brochures sharing the news of faculty publications, impressive new hires, areas of concentration, and sundry distinguished speaker series, etc.
Because of the timing of these mailings – I got nearly 100 in Sept and October—I am guessing that the senders hoped to influence the annual U.S. News & World Report Academic Reputation survey. Cf. Michael Sauder & Wendy Espeland, Fear of Falling: The Effects of U.S. News & World Report Rankings on U.S. Law Schools 1 (Oct 2007) (reporting "increases in marketing expenditures aimed toward raising reputation scores in the USN survey"). But does it work? A recent study by Larry Cunningham (St. Johns Law) suggests that the effect is, at best, decimal dust.
Glossy brochures may not reliably affect Academic Reputation, but I have uncovered four factors that are associated with statistically significant increases and decreases of USN Academic Reputation. To illustrate, consider the scatterplot below, which plots the 1993 ordinal rank of USN Academic Reputation against the 2012 ordinal rank [click on to enlarge].
Four sets of dot (Red, Blue, Orange, and Green), each representing distinctive shared features of law schools, tend to be above or below the regression line. These patterns suggest that changes in USN Academic Reputation over time are probably not the result of random chance. But we will get to the significance of the Red, Blue, Orange, and Green dots soon enough.
The primary takeaway from the above scatterplot is that 2012 USN Academic Reputation is overwhelmingly a function of 1993 USN Academic Reputation. Over 88% of the variation is explained by a school's starting point 20 years earlier. Part of this lock-in effect may be lateral mobility. That is, there are perks at higher ranked schools: they tend to pay more; the teaching loads are lighter; and the prestige is greater, etc. So school-level reputations rarely change, just the work addresses of the most productive scholars. This is, perhaps, the most charitable way to explain the enormous stickiness of USN Academic Reputation.
That said, the scatterplot does not show a perfect correlation; slightly less than 12% of the variation is still in play to be explained by influences other than starting position. A small handful of schools have made progress over these 20 years (these are the schools above the regression line), and a handful have fallen backwards (those below the line).
The Red circles, Blue rectangles, Orange diamonds, and Green circles represent four law school-level attributes. The Reds have been big gainers in reputation, and so have the Blues. In contrast, the Oranges have all experienced big declines; and as as a group, so have the Greens. When the attributes of the Red, Blue, Orange, and Green Schools are factored into the regression, all four are statistically signficant (Red, p =.000; Blue, p = .001; Orange, p = .012; Green, p = .000) and the explained variation increases 4% to 92.3%. As far as linear models goes, this is quite an impressive result.
Before you look below the fold for answers, any guesses on what is driving the Red and Blue successes and Orange and Green setbacks?
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]
Sunday, October 14, 2012
By Bruce MacEwen, of Adam Smith, Esq., a well known blog on law firm economics. What Bruce is talking about is going to have major fallout for legal education.
[posted by Bill Henderson]
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]
Thursday, September 20, 2012
NALP just announced that the median salary for first year associates in Big Law has dropped from $160K to $145K. I think that is very significant. We are now back to to the entry level price point of 2007.
But to my mind, there is much bigger story here. In 2011, firms of 500+ attorneys hired 2,856 entry level lawyers. In 2007, that figure was 4,745. So, after five years, Big Law is paying the same wage but hiring 40% fewer lawyers. Compare 2007 NALP Nat'l Summary with 2011 NALP Nat'l Summary.
Here is another important piece of NALP data, generated from the print versions of the July 2012 NALP Bulletin. It shows the percentage of entry level law jobs that are private practice.
Two takeaways here: (1) there is a longterm trendline showing a declining number of private practice jobs--and that is the economic engine that enables law schools to exist at current tuition levels, and (2) the cliff-like dropoff in 2010 and 2011 is likely Big Law, and that hurts.
[posted by Bill Henderson]
Newgeography focuses on trends in urban affairs and economic geography. Eds and Meds are of interest to this group because these two sectors have been such a critical part of maintaining or restoring many regions' economic vitality. Why? Universities and hospitals generally pay high wages, don't lay people off, and are perceived as long term drivers of growth because more degrees and longer life spans are two trends that will probably continue.
But the author, Aaron Renn, presents compelling trend data suggesting that America can no longer to afford extra large helpings of Eds and Meds. As shown in the chart below, these sectors have been growing faster than virtually all other sectors for a long, long time.
Renn points out the healthcare is on its way to consuming 20% of our GDP by the year 2021. And the growth in the higher education sector has been substantially fueled by student loans. Unfortunately, even college grads are subject to the pressures of outsourcing and competition with very able professionals from around the globe. So the ability to repay all that debt can't be taken for granted. What can't go on forever, won't.
Here is another chart presented by Renn, this one presenting the rates of inflation occuring in Eds and Meds sectors as compared to the overall CPI:
There is an opportunity here. I would be extremely bullish on innovations that produce productivity gains in the Eds and Meds sectors. I recently listened to this HBR Ideocast discussion with Robert Kaplan, the Harvard Business School professor best know for developing the Balanced Scorecard. Kaplan is now turning his considerable intellect toward the problem of cost-containment in healthcare.
What the key insight? Measuring how much patient treatment actually costs--to date, there has been almost no sophisticated cost accounting in healthcare. Most of the brainpower has gone to dealing with (and maximizing) third party reimbursements. Under Kaplan's system, fortunately, we can actually identify the points in the system that cost way too much and thus begin the reengineering process.
The same thing may soon be happening in higher ed. Another Harvard Business School professor, Clayton Christiansen, who authored the renowed business book, The Innovator's Dilemma, recently co-authored a letter that called for colleges and universities to quit chasing prestige and start focusing on innovations that improve educational quality without increasing price. Remarkably, the letter was included in a mass mailing by the American Council of Trustees and Alumni -- going to 13,000 trustees! See Inside Higher Ed, Distruption's Strange Bedfellow, July 12, 2102. Another Insider Higher Ed story suggests that this may be the true faultline driving the University of Virginia controversy. See Disruptive Innovation: Rhetoric or Reality?, June 26, 2012.
The world appears to be changing, even in Eds and Meds sector.
[posted by Bill Henderson]
Thursday, September 6, 2012
Below is my most recent column in the National Jurist [PDF version]. Although 100% targeted at law students, I think lawyers and law professors might find this topic interesting. [Bill Henderson]
Richard Susskind is a famous British lawyer and technology consultant who travels the world giving speeches on how the legal industry is on the brink of a fundamental transformation. Because his topic is change, Susskind’s ideas are quite controversial among lawyers. But as a futurist, he has a pretty good track record.
Back in 1996, in his book The Future of Law, Susskind predicted that e-mail would someday become the dominant method for lawyers and clients communicate with each other. Because the Web was still a novelty limited to universities and computer aficionados, Susskind’s comments were viewed as reckless and unprofessional—lawyers would never rely on such an insecure method to communicate with clients. Yet, 16 years later, lawyers are daily lives are comprised of an endless stream of emails coming over their desktops, laptops and smart phones.
Friday, August 10, 2012
NPR's Planet Money has a story on interplay between higher college and university tuition and changes in financial aid. As shown in the graphic below (from the College Board), the federal government is assuming a larger role in finaning higher education. Every other source of funding is shrinking its a proportionate contribution to financial aid. Despite favorable bankruptcy laws enacted in 2005, the federal takeover of higher ed financing has almost completely muscled out the private lenders.
"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained" - March 28, 2007.
Two days ago, Bernanke said:
"I don’t think student loans are a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government" - August 7, 2012
Now take a look at the federal government's holding of consumer debt (overwhelmingly student debt that has piled up since the 2010 legislation). See Henderson & Zahorsky, The Law School Bubble, ABA Journal (Jan. 2012).
Student loans are viewed as "assets" by the federal government ... until they become uncollectable, in which case the value of the assets eventually has to be adjusted through write-downs, just like mortgages in the mortgage crisis. Extensive use of Income-Based Repayment makes it possible for a student loan to be simultaneously uncollectable but not in default.
Folks, I am an unapologetic New Deal Democrat. But the current "system" of federal higher education financing is near perfect insanity. We set tuition and, no questions asked, the federal government writes us checks in exact proportion to students' willingness to sign loan papers. For young people who have never worked, it is all like Monopoly money.
The only way the math works is if the real earnings go up en masse for virtually all college and professional school graduates. In a rapidly globalizing world in which our students are competing against Chinese and Indian professionals, the assumption of mass rising real incomes is implausible. See, e.g., views of economist Alan Blinder in this NPR article.
Right now we--higher ed and the nation as a whole--are maintaining the illusion of prosperity through debt financing heaped on naive young people. This is immoral in the extreme. Moreover, in the long run, it is economic and political ruination.
The only long term solution is cost containment imposed on higher ed by reforming the terms of federal financing. The financing has to incentivize educational productivity -- i.e., fewer tuition dollars expended to obtain better skills and learning as measured by marketplace earnings and innovation. No more $100,000 checks from the federal government for sorting students by standardized test scores. Our graduates will actually have to think, collaborate, communicate and problem-solve at a very high level. How many of my fellow law professors grasp the depth of our problems? Not enough.
[Posted by Bill Henderson]
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]
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]
Sunday, July 8, 2012
The Big Think just posted a wonderful video of Slovenian philosopher Slavoj Zizek, who describes himself as a "complicated Marxist" because he holds in his mind simultaneously the virtues of individual capitalists with the problems of domination and inequality that are endemic to the capitalist system.
I am posting the Zizek interview here because many of the problems currently afflicting legal education and the legal industry that I write about here are, more formidably, mere symptoms of broader problems that flow from a rapidly globalizing world economy--a topic so complex that we seldom acknowledge it. That said, Frank Pasquale, in a post called "Jobless Futures," does an admirable job of cataloging our collective confusion.
Zizek suggests that the solution to engage in serious thinking rather than misguided, ill-conceived activism. Ah, now this should be the competitive advantage of a university-based graduate-level law degree--in addition to practical lawyering skills, we should be practicing with our students the science and art of critical thinking. The best lawyers sidestep ideology and can think through issues on par with Zizek, whom we don't have to wholly agree with to admire.
[posted by Bill Henderson]
Thursday, July 5, 2012
This is a simple question of great practical importance to many law schools, yet very few law school administrators understand how to answer it. Who would have thought that clarity would be supplied free-of-charge by an underemployed recent law school graduate?
But that is what is happening now, in "Tough Choices Ahead for Some High-Ranked Law Schools," an Am Law Daily essay written by Matt Leichter, one of the silver linings of the declining legal job market -- and there aren't too many. Matt is a J.D.-M.A. in law and international affairs from Marquette University who passed the New York bar in 2008, finished his masters work in 2009, and then moved to the Big Apple as the bottom was falling out of the entry level market. Unable to find conventional legal employment, Matt started doing freelance writing on law-related topics.
With plenty of time on his hands, Matt turned his graduate-level quantitative skills to the task of analyzing a law school education market that seemed unsustainable. Matt first put his analyses on display at the Law School Tuition Bubble. His writings eventually attracted the attention of The American Lawyer, which has now published several of his data-driven essays.
Here is what sets Matt apart.
- He digs very deep for facts and, in turn, uses one of his biggest asset --time -- to build datasets that answer important and relevant questions
- He is non-ideological. Just facts and factual analysis.
- He writes about complex technical stuff in an accessible, credible way
Matt has all the core skills of a truly great lawyer. Finding no takers, the entire legal education establishment benefits by Matt channeling his time, energy, and considerable intellect into relevant topics crying out for dispassionate analysis.
His "Tough Choices" essay is a real gem. Here is the bottomline: This year's applicant cycle likely will deliver its greatest blow to US News Tier 1 schools who generally admit students who were angling to get into even higher ranked schools. This inference can be teased out of the ratio of applicants to offers (selectivity), and offers to matriculants (yield).
To conduct this analysis, Matt had to cull data, school-by-school, from several years of the ABA-LSAC Official Guide to Law Schools (aka "the Phonebook"). But it enables him to produce the chart below:
What this chart says is that admissions officers have to read more applications and make more offers to fill their entering classes. Based on the data in Matt's chart, in 2004, for all ABA-accredited law schools, there was a 24% acceptance rate, and a 31% yield from those offers. In 2010, the acceptance rate went up to 31% (schools were being less selective) and the yield went down to 25% (fewer showed up to enroll).
Applicant volume may be declining, but the trends above suggest that there is a lot more "competitive shopping" going on. Why? Because information costs are going down and prospective students are adapting. And this year is bound to be the most aggressive year ever. According to this NLJ story, It's a Buyers' Market for Law School, virtually every student is now negotiating for scholarship money.
Declining applicant volume, shifting yields, and highly informed consumers make it very difficult for law school administrators to lock in their LSAT and UGPA numbers, which schools generally fixate on because of U.S. News ranking. This produces pain in one of three ways:
- The school shrinks the entering class (announced by at least 10 schools), which severely tightens the budget
- The school buys its class through financial aid, which blows a hole in the budget (happening here)
- The school significantly relaxes the LSAT and UGPA and braces for a drop in the rankings because its peers are pursuing strategies #1 or #2.
#1 and #2 may seem like the prudent course, but a central university won't (more likely can't) provide a financial backstop for more than a year or two, if that. If the admissions environment does not change dramatically, which seems unlikely, some combination of layoffs, rankings drop, or closures will have to be put on the table.
Matt's ingenuity is on full display when he demonstrates, with data, the profile of the most vulnerable schools -- and its a far cry from the bottom portion of the U.S. News rankings.
- Low accept/high yield (think Yale and Stanford) are safe.
- High accept/high yield are also fine. They are nonprestigious but have strong regional niches or missions. Tier 3 or 4 designation means nothing.
- Low accept/low yield crowd -- a bunch of Tier 1 schools -- are vulnerable to significant rankings volatility. If they drop, next year's applicant volume will be affected, making it very difficult to rebound.
- High accept/low yield are the most likely to close.
Until August and September, when the wait lists finally clear, nobody really know the depth of market shift. Only then can the budget holes be finalized. Deans will then have candid conversations with their central administrations to answer the question, "Is this downward trend permanent?"
[posted by Bill Henderson]
Wednesday, June 27, 2012
The U.S. Census Bureau just released its 2010 data for the County Business Patterns (CBP) dataset. CBP compiles payroll and employee headcount data by sector for all employers operating within the U.S. CBP is what is know as universe data. It is not a sample; it's a census.
The news for the legal sector is not good. Law Offices (NAICS 54111), which comprise 93.1% of the U.S. legal services industry, shrank by 21,600 jobs between 2009 and 2010. Total payroll also sank by $113 million. As shown on the chart below, the high water mark for U.S. law office employment was in 2004 (1,122,723 jobs). That was eight years ago, four+ years before the recession hit.
There is another sector, called "All Other Legal Services," that is relatively small yet worth paying attention to because it continues to grow. Using 1998 as a base (the first year of the NAICS coding system) the chart below compares Law Offices to All Other Legal Services (NAICS 541199):
"All Other Legal Services" seems to be doing pretty well, adding jobs while the number law office jobs declines. What is in "All Other Legal Services"? Almost certainly registry services for contract lawyers (doing e-discovery on a temp basis) and the domestic operations of legal process outsourcers. See here. The average job in this sector pays less than $46,000 per year compared to $79,900 in the law office sector.
What does all this mean? For law firms, it means a brutal competition over marketshare. Survival will require innovation. Yet, many lawyers are in denial. For law schools, it means the same thing -- there are too many law graduates chasing after a shrinking number of opportunities.
We legal educators have a really hard time getting our head around this changing market -- naively, we think the solution is a grand idea that will surface during an academic conference. That's not going to happen. Instead, to survive, each law school is going to have to get more than its proportionate share of high quality jobs for its graduates -- you don't have to outrun the bear, just the other law schools.
The key drivers here are: (a) what we teach, (b) how we teach it, (c) relationships with employers, and (d) relationships with alumni -- our best, friendliest windows on the real world. To turn this corner, a school needs great leadership that can move recalitrant faculty toward a difficult and complex new reality. Good luck! Time to get back to the work of Indiana Law. For additional analysis, see The Hard Business Problems Facing U.S. Law Faculty.
[posted by Bill Henderson]
Tuesday, June 26, 2012
Just a few days ago, the ABA Section on Legal Education and Admission to the Bar posted on its website, in downloadable spreadsheet format, the employment outcomes for the Class of 2011 (here). In a few short years, these data are going to fundamental reshape our industry. The changes will make the industry better and stronger, but the journey to this better place is going to painful and disorienting for all law schools—that’s right, even the elite national law schools will be affected.
This is worth explaining in very simple and concrete terms. The Class of 2011 employment data consists of 134 variables on 200 ABA-accredited law schools-- 26,800 discrete data points, which is enough fill a phonebook. For a long time, the policy of the ABA was to do just that – publish a phonebook of data in the form of the ABA-LSAC Official Guide to Law Schools. Well, decisions on where to attend law school are not free. They require time and effort. When a prospective student has to wade through a phonebook to assemble relevant data to make important decisions, many (most) will forgo the exercise altogether.
This has two very important effects:
- The quality of enrollment decisions goes down because, from the student perspective, the costs are too high. That’s error #1. But it is forgivable—decisionmaking is a skill taught in a top-notch legal program, not a prerequisite for applying.
- To simplify their decisions, students gravitate to U.S. News ranking, which is a compact 4-page table that contains easy-to-understand comparative data.
Yes, the U.S. News has serious flaws; and every year, overreliance on them produces tragic consequences in the form of excessive student debt. Now, with the ABA employment "phonebook" in spreadsheet format, those a with modicum statistical skills and an internet connection can analyze, simplify and publish relevant statistics that will better inform the decision to attend law school.
Consider the chart below:
When I created this simple pie chart, I started with a simple premise: If I am applying to law school, my minimum hope is that nine months after graduation I will be able to obtain a full-time, permanent professional job. The phonebook has three columns of data that speak to this hope:
- Bar Passaged Required Jobs, FTLT (i.e., Full-time, Long-Term)
- JD-Advantage Jobs, FTLT
- Professional Jobs, FTLT.
All the other myriad data columns, parsing things by part-time, short-term, non-professional, unemployed, unknown, etc., do not meet the minimum hope. So they are lumped together as “Other Outcomes.” Clearly, for 1/3 of the Class of 2001, their full-time, permanent professional ambitions have not yet materialized.
A reasonable next question is how these figures vary by U.S. News rank. The answer is reflected in the chart below.
- Least surprising. The outcomes are better at “national law school”--almost 90% are FTLT professional jobs. I used the T14 cutoff because the composition of this group has not changed in two decades of U.S. News rankings. Few people would disagree that these schools have strong pull among legal employers.
- Most surprising. There is a whole lot of Purple--i.e., “Other Outcomes”--throughout Tiers 1, 2, 3, and 4. For over 90% of law schools, this is a very challenging legal market.
- Biggest reality check. The JD-Advantaged and Professional jobs appear to be, on balance, less desirable than those requiring bar passage. They increase nearly three times in relative proportion as we move from T14 to Tier 1 to Tier 2. Many are likely compromise jobs—not as good as practicing law, but better than non-professional alternatives.
With these relative benchmarks in place, a prospective law student can look for law schools that are outperforming their U.S. News rankings. And there are quite few.
For example, in Tier 4, St. Mary’s (Texas) has 78.3% Bar Passage Required placement; Mississippi College’s figure is 75.3%; and Campbell (NC) is 71.4%. These schools aren’t feeding BigLaw, but their graduates appear to be full-time practicing lawyer nine months after graduation. What accounts for their success? Most of their graduates are probably in cities and towns far away from corporate practice. Nonetheless, these schools have a clear niche they are filling.
In contrast, there are 20 schools in Tiers 1 and 2 that have less than 50% Bar Passage Required jobs. What do they have in common? Many are in big cities in the Northeast and Mid-Atlantic or California--large urban markets that are attractive for young professionals. It is likely that too many young lawyers are chasing after a finite set of legal jobs. It is worth noting, however, that these same schools also have rates of placements in JD Advantage and Professional jobs that are higher than other law schools at statistically significant levels.
So many young law graduates are voting with their feet. Better to stay in the city as a non-lawyer professional than to move to the South to be country lawyer doing small firm practice. Although I suspect a large proportion of these grads will fare quite well, it is important to keep in mind that JD-Advantaged and Professional jobs are not a panacea—they are also in short-supply. At most schools in Tiers 1, 2, 3, and 4, between 30% and 42% of graduates are either unemployed and underemployed in jobs that are either nonprofessional, part-time, or short-term. Indeed, 4.3% (1,874) of all jobs for the Class of 2011 were funded by the law schools themselves!
So what is going to happen? Notwithstanding the heady optimism of the “Kaplan kids”, the ABA employment data, thanks to the blogosphere, is going to reduce information costs, making it easier for prospective law students to determine whether law school is a good investment. The needle is going to move, just not as fast as a Chicago School economist might predict.
Further, expect students to aggressively negotiate for scholarship money. Whether schools become more generous in merit aid, admit fewer students, or both, all signs point to shrinking budgets for law schools.
The utter transparency of a changing and stagnant legal market has potentially more dire consequences for law schools. The lifeblood of the entire legal education establishment, including elite law schools, is federal student loans. Our students get the same generous terms as graduates of medical and dental schools, who are not struggling to make six figure incomes. The graphs above suggest that a large proportion of our students will be on Income-Based Repayment (IBR), which is – functionally – insurance in the event a high income fails to materialize in the years following graduation. The downside risk of that insurance – lack of repayment of expected principal and interest—is borne by U.S. taxpayers.
Right now, it is possible to estimate the size and probability of this downside risk. All the Federal Government has to do is add-up the shortfall between the repayment of principal and interest in normal repayment versus the monies actually being collected. What percentage of graduates are on IBR? What portion of their current principal and interest are they able to pay? These are simple numbers that some enterprising journalist will eventually request. Further, they are legitmate public policy questions that we, the legal academy, should face long before the journalists get there.
Lawyers and law schools are not a favored interest group on Capitol Hill. We need to plan for the extremely high probability that the financing of law schools will be dramatically altered in the years to come. The longer we wait, the more painful and disastrous the transition. Every law school will need a damn good story to justify continued federal loans. And right now, many of us lack that story – being in Tier 1 or T14 (where debt loads tend to be the highest) won't mean anything if the math falls short.
In summary, our ivory tower is crumbling. With the ABA putting the employment data in downloadable format on its website, law schools will have to do something completely new and scary to us—we are going to have to compete to keep our jobs and stay in business. The litmus test is going to be the ability of our graduates to obtain remunerative professional work in a highly competitive global economy. This is very serious work.
[Posted by Bill Henderson]
Tuesday, May 29, 2012
That is the title of an essay I just published at The Am Law Daily. It is on the demise of Dewey & LeBoeuf, which officially filed for bankruptcy yesterday. I wrote the essay because I think the lessons drawn from the Dewey collapse are all-too-likely to follow the "lawyers are greedy" storyline. This problem is bigger than our collective flaws as lawyers and as people. Below are the first two graphs:
Dewey & LeBoeuf, an amalgam of two storied New York City law firms that merged in 2007, has died. Understandably, this has prompted a lot of soul-searching among lawyers. One storyline that will attract many followers is that large law firm lawyers, long viewed as the profession's elite class, have lost their way, betraying their professional ideals in the pursuit of money and glory. This narrative reinforces that lawyer-joke mentality that lawyers just need to be become better people.
And that narrative is wrong. Yes, we all need to become better people, but that still won't begin to cure the larger structural problem affecting large U.S. law firms. At its core, Dewey's collapse has less to do with individual moral failings than with aging organizational structures that worked remarkably well for over a century yet, but for a variety of reasons, now inhibit law firms' ability to adapt to a changing legal marketplace.
[Posted by Bill Henderson]
Sunday, May 20, 2012
Entrepreneur Peter Thiel (Stanford Law '92) is financing twenty $100,000 scholarships for young people who agree to "stop" their formal education for two years to pursue or join a real world project broadly related to some aspect of business, innovation or technology. See Thiel Foundation's "The 20 Under 20 Fellowships."
Thiel is a former federal judicial clerk turned securities trader turned entrepreneur (founded PayPal) turned hedge fund manager/venture capitalist (he bet big on Facebook and won). Thiel believes that the key skills for innovation are not taught very well in universities. Further, because Thiel believes we are in the midst of a serious higher education bubble, he argues that the debt incurred by students only hobbles their ability to pursue activities that would redound to the benefit of the U.S. economy. Thus, as a nation, we are stuck in a very unhealthy spot.
Saturday, May 19, 2012
That's the headline of a story in the Sunday edition of The Age, one of Australia's leading daily newspapers. Here is the nut:
ALMOST two-thirds of Australia's law graduates are not working as lawyers four months after they have completed their degrees, according to a study.
The Graduate Careers Australia survey of 1313 recent graduates from all over the country found that 64 per cent were not practising law between 2010 and 2011.
There was ''no way'' law firms could accommodate all the graduates from Australia's 31 law schools, La Trobe University's director of undergraduate studies, Heather King, said. ''It's a well-acknowledged fact that 40-50 per cent will not end up in a traditional law practice.''
These statistics may seem even bleaker than those that describe the U.S. legal market. Yet, for two key reasons, these Australian students are far better off. First, the Australias follow the LLB model, which has some substantial advantages. According to my Australian colleagues, a law undergraduate degree is often combined with a major in another field or discipline, such as business, accounting, sociology, or literature. So a student's commitment to law as career is often tentative and, in many cases, hedged by another career interest. Second, higher education in Australia enjoys a large national subsidy. So law graduates typically graduate with little or no debt.
Ironically, as the story reports, some Australian universities are moving toward the J.D. model, essentially concluding the law is best taught to more mature students as a graduate discipline.
I agree that students ought to have a cost-effective way to opt out of law. I also agree that law is best taught as a graduate discipline to students with some substantial life experience. I don't, however, see an easy way to cost-effectively achieve both. The fact that the solution is not easy will, conversely, make the solution quite valuable.
[posted by Bill Henderson]