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, 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]
Tuesday, January 29, 2013
Here it is in a nutshell. There is empirical evidence that Washington & Lee’s experiential 3L curriculum is delivering a significantly better education to 3L students—significantly better than prior graduating classes at W&L, and significantly better than W&L’s primary competitors. Moreover, at a time when total law school applicants are on the decline, W&L’s getting more than its historical share of applicants and getting a much higher yield. When many schools are worried about revenues to survive next year and the year after, W&L is worried about creating the bandwidth needed to educate the surplus of students who enrolled in the fall of 2012, and the backlog of applicants that the school deferred to the fall of 2013.
[This is a long essay. If you want it in PDF format, click here.]
Alas, now we know: There is a market for high quality legal education. It consists of college graduates who don’t want to cast their lot with law schools who cannot guarantee students entree to meaningful practical training. Some might argue that W&L is not objectively better-- that the 3L curriculum is a marketing ploy where the reality falls well short of promotional materials and that, regardless, prospective students can't judge quality.
Well, in fact there is substantial evidence that the W&L 3L program delivers comparative value. The evidence is based on several years' worth of data from the Law School Survey of Student Engagement (LSSSE). I received permission from Professor James Moliterno, someone who took a leadership role in building W&L’s third year program, to share some of the key results (each school controls access to its LSSSE data.) They are below.
But before getting into empirical evidence, I want to put squarely on the table the most sobering finding that likely applies to virtually all of legal education. It is this: On several key LSSSE metrics, W&L has made impressive gains vis-à-vis its own historical benchmarks and its primary rival schools. But even for this leader, there remains enormous room for improvement. More on that below.
Here is the bottom line: Traditional legal education, when it is measured, does not fare very well. Yet, as W&L shows, substantial improvement is clearly possible. We law professors can respond to this information in one of two ways:
- Don’t measure, as it may disconfirm our belief that we are delivering a great education.
- Measure—even when it hurts—and improve.
I am in the second camp. Indeed, I don’t know if improvement is possible without measurement. Are we judging art work or the acquisition of key professional skills needed for the benefit of clients and the advancement of the public good?
Moving the Market
I doubt I will ever forget Jim Moliterno’s September 2012 presentation at the Educating Tomorrow’s Lawyers (ETL) conference at the University of Denver. He presented a single graph (chart below) showing W&L actual applicant volumes since 2008 versus what would have happened at W&L if its applicant volume had followed national trends.
While law school applicants crested a few years ago, W&L enjoyed a large run-up in volume of applicants, presumably due to the launching of their new 3L program. This larger applicant pool effectively served as a buffer when applicant declines began in 2011 and 2012. Since 2008, overall law school applicants are down -19%, yet W&L is up overall +33%.
But much more significantly, after their experiential 3L year was up and running and the overall legal job market continued to stagnate, W&L yields spiked. Ordinarily they would enroll 135 students. But for the fall of 2012, they received enrollment commitments from well over 260 students. Indeed, at the ETL conference Jim Moliterno said the school had to offer financially attractive deferments to get the class to approximately 185 incoming students -- a 50 student bulge.
When Jim Moliterno showed the above graph and explained the corresponding changes in yield, my good friend Gillian Hadfield, a skeptical, toughminded, evidence-demanding economist who teaches at USC Law, leaned over and said to me, “that is the single most important takeaway from this entire conference.” I agreed. The market for a legal education with practical training is, apparently, much more inelastic than the market for traditional JD programs.
Yet, what is perhaps most remarkable is that a large proportion of incoming students at W&L were enrolling based on little more than faith. Nobody knew for sure if W&L had the ability to pull off their ambitious 3L curriculum. The program relies on a large cadre of adjunct professors, after all, and W&L is located in remote Lexington, Virginia. Many law faculty outside of W&L, and perhaps some inside, thought (or perhaps think) that the program could not live up to the hype. Well, as shown below, the program appears to have produced meaningful gains.
The only data-driven critique anyone can muster is that the gains remain significantly short of perfection. But that critique bites harder on the rest of us. To use a simple metaphor, W&L is tooling around in a Model-T while the rest of us rely on horse and buggy. What ought to be plain to all of us, however, is that, just like automobile industry circa 1910, we are entering a period of staggering transformation that will last decades. And transformation will be roughly equal parts creation and destruction. See Schumpeter.
W&L Data, Internal Historical Benchmark
LSSSE is a phenomenally rich dataset – nearly 100 questions per year on a wide variety of topics related to student classroom experience, faculty interaction, type and quantity of assessments, time allocation, and perceived gains on a variety of dimensions related to personal and professional development. The survey instrument is online here.
Aside from a host of questions related to demographics, career goals, and debt, major sections in the LSSSE include:
- Section 1, Intellectual Experience (20 questions)
- Section 2, Examinations (1 question)
- Section 3, Mental Activities (5 questions)
- Section 4, Writing (3 questions)
- Section 5, Enriching Educational Experiences (9 questions)
- Section 6, Student Satisfaction (7 questions)
- Section 7, Time Usage (11 questions)
- Section 8, Law School Environment (10 questions)
- Section 9, Quality of Relationships (3 questions)
- Section 10, Educational and Personal Growth (16 questions)
W&L deserves to be a detailed case study. But frankly, legal education can’t wait. So I will do the best I can to cover the landscape in a blog post. I hope every law faculty member who reads this post makes a strong plea to their dean to enroll in LSSSE. Why? So your school can benchmark itself against the detailed LSSSE case studies that are bound to flow out of W&L and other innovative law schools. Though they don’t get much press, there are, in fact, other innovative law schools.
Friday, January 18, 2013
Brian discusses the bleak employment prospects of law schools, but (through no fault of his own) understates the nature of the structural change that is occurring in the U.S. and global market for legal services. In Part II, I will write about some logical next steps for law schools looking to get ahead of the coming tsunami.
I tried to write Part II, but a blog post just was not up to the task. Further, I sensed that my colleagues were in no mood for half-baked solutions. There has been enormous criticism of legal education on the blogs and in the media, but very little in the way of detailed prescriptions to improve the situation. I felt an obligation to back off on the criticism and focus on solutions. So, in essence, Part II of my Tamanaha review became an article.
I just posted to SSRN an article entitled "A Blueprint for Change" forthcoming in the Pepperdine Law Review. It is both a diagnosis and a proposed solution -- a solution I am actively pursuing. Here is the abstract:
This Article discusses the financial viability of law schools in the face of massive structural changes now occurring within the legal industry. It then offers a blueprint for change – a realistic way for law schools to retool themselves in an attempt to provide our students with high quality professional employment in a rapidly changing world. Because no institution can instantaneously reinvent itself, a key element of my proposal is the “12% solution.” Approximately 12% of faculty members take the lead on building a competency-based curriculum that is designed to accelerate the development of valuable skills and behaviors prized by both legal and nonlegal employers. For a variety of practical reasons, successful implementation of the blueprint requires law schools to band together in consortia. The goal of these initiatives needs to be the creation and implementation of a world-class professional education in which our graduates consistently and measurably outperform graduates from traditional J.D. programs.
I have a large backlog of shorter articles and analyses that I have not posted because I wanted my own detailed solution in the public domain. I hope to tie all of these ideas together over the coming weeks.
Thank you, Brian Tamanaha, for writing an book that required me to think in terms of solutions.
[posted by Bill Henderson]
January 18, 2013 in Current events, Data on legal education, Data on the profession, Innovations in legal education, Scholarship on legal education, Scholarship on the legal profession, Structural change | Permalink | Comments (2)
Saturday, December 29, 2012
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]
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]