Friday, August 3, 2012

Connecting the Dots on the Structural Shift in the Legal Market

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.

Pangea3As 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.  

HuronHuron 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."  MindcrestAs 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]

August 3, 2012 in Blog posts worth reading, Current events, Data on the profession, Innovations in law, Law Firms, Legal Departments, New and Noteworthy, Structural change | Permalink | Comments (4)

Friday, July 27, 2012

Encouraging Data on Law Firm Diversity

Here is some welcomed good news for the legal industry--we now have data showing diverse lawyers, within certain large and important legal markets, ascending to law firm partnership in significant numbers.  Let me be clear.  I am reporting progress here, not perfection.  But the progress provides key insights on how to further reduce the partnership diversity gap.Nalplogo

The research, which I just published in the NALP Bulletin (see "Diversity by the Numbers," July 2012), is based on the 2005-06 edition of the NALP Directory of Legal Employers. The NALP Directory is a city-by-city guide for several hundred law firms that  participate in the on-campus interview (OCI) process.  This information includes a breakdown of lawyers by firm, branch office, title, and race/gender/GLBT status.  (See full article for overview data.)

The aggregate-level statistics are not every encouraging--less than 5% of partners at these corporate firms are minority.  These are the type of bleak statistics that frame the diversity discussion.  Yet, when the data are disaggregated, we see racial subgroup making substantial partnership inroads in specific geographic markets.  For African-Americans, it is Atlanta and Washington, DC; for Asians, it is L.A., San Francisco, and Pacific Northwest/Rocky Mountain region; for Hispanics, it is Houston, Dallas, Miami and L.A.  Further, these partnerships disproportionately in AmLaw 200 firms.

The map and table below expresses these geographic variations using a location quotient methodology.

Nalp2012julyfigures

(Note: CSA means "Consolidated Statistical Area", a geographic area defined by the U.S. Census Bureau.  Among other things, CSAs are very large metropolitan area labor markets.)

In the map above, the emphasis on large metropolitan areas is deliberate.  Among the 600+ law firm in the 2005-06 Directory, 64.2% of their attorneys worked in the top 10 metropolitan markets; these same markets also accounted for 74.8% of hiring at the NALP firms.

A Location Quotient (LQ) is a tool for identifying relative surpluses or shortages of an economic activity within specific locations.  If, for example, the percentage of female partners in New York City is the same as the entire US market, the location quotient for female partners would be 1.00.  In fact, the LQ for female partners in New York City is .87.  This means that are 13% fewer female parters in New York City relative to the total base of New York City partners.  Likewise, the LQ for African American partners in Atlanta is 2.67.  This means that there are 167% more African American partners in Atlanta relative to the total Atlanta partnership base. Cells in Yellow are underrepresented by more than 10%; cells in blue are overrepresented by more than 10%.

The implication of this analysis is that significant diversity tends to exist in pockets that follow distinctive demographic patterns.  These significant pockets rebut the pessimistic view, held by some, that minority partners lack the skills and ability to be successful in large corporate law firms.  Quite the opposite is true -- minority lawyers' willingness to enter a market and persist at a firm is likely influenced by number of people from the same minority group who have ascended to the partner level.  If you are a African American lawyer, the wind is at your back in DC or Altanta, but in many branch offices in Dallas, Phoenix or Boston you will be breaking barriers.

This brings up the issue of pipeline, which is a precursor to any hoped for progress on partner diversity. 

To look at pipeline-to-partner issues, I created separate regression models to predict the % minority associates within a law office (not the firm as whole).  I ran the model separate for African American, Asians, Hispanics, GLBT and females. Each factor below makes an independent contribution to a larger pipeline of diverse associates.

  • Geography matters.  Diverse associates are disproportionally going to the same market where their same subgroup has been successful becoming partner.  African Americans to Atlanta and DC; Asians to the west coast; Hispanics to the major markets in the Southeast and Southwest.
  • Large Firms.  Large firms are more successful recruiting diverse associates. This could be salary, prestige, recruitng resources.
  • Large Offices.  Bigger branch offices are more successful.  This could be recruiting resources or a more appealing variety of practice areas.
  • % of Diverse Partners.  This is the critical factor -- for every category, % of partners is associates with higher % of associates.  This is independent of size and geography!  Further, there is zero crossover effect. 

Quoting from the full article, "The takeaway from the above analysis is both simple and frustrating.  We would have more African American (or Hispanic or Asian or Female or GLBT) associates if only we had more African-American (or Hispanic or Asian or Female or GLBT) partners.  But getting more diverse partners will be slow going until we become better at retaining, rather than just recruiting, diverse associates.  The first generation of diverse lawyers will, by definition, not have the benefit of diverse mentors.  And in many firms, or at least branch offices, the first generation has not yet arrived."

I am really grateful to NALP for giving me access to this unique dataset.  It caused me to think much more deeply on how lawyer development can be used to create greater diversity in the huge number of branch offices where there is no critical mass of diverse partners.  It short, it is all about creating a competency model and evaluation system--i.e., a roadmap--that makes the path to partnership more explicit.  Why am I bullish on our ability to make progress on partnership diversity?  Because these systems simultaneously advance profitability and diversity.  The article recounts one such example.

[posted by Bill Henderson]

July 27, 2012 in Data on the profession, Important research, Innovations in law, Law Firms, New and Noteworthy, Scholarship on the legal profession | Permalink | Comments (0)

Tuesday, July 17, 2012

UK's Legal Services Board Releases Study on Individual Legal Consumer Market

LsblogoWith 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]

July 17, 2012 in Cross industry comparisons, Current events, Data on the profession, Innovations in law, Scholarship on the legal profession, Structural change | Permalink | Comments (1)

Sunday, July 15, 2012

A Picture of the Melting Right Mode

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). 

Nalp07_11comparisons

[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.

Amlaw25 years

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.

Endgame

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]

July 15, 2012 in Current events, Data on legal education, Data on the profession, Innovations in law, Law Firms, New and Noteworthy, Structural change | Permalink | Comments (2)

Friday, June 29, 2012

What is the "Ignite" Format of Presentation?

Ignite rules are simple:  a talk with 20 PowerPoints that advance automatically every 20 seconds.  Six minutes to make your point.  It you don't know your material, it's a disaster.  If you are prepared and you understand how to connect with your audience, you educate and inspire -- in a word, you ignite the audience.

Below is an example of Ignite done very well, by Michael Bossone (Miami Law, co-founder of Law Without Wall).  This presentation just got a rousing ovation at the Law Tech Boot Camp in London.  I saw it happen live.  It was awesome.

Kudos to Dan Katz, Renee Newman Knake, and Michigan State Law for putting together a program chock full of substance on the application of technology to the law. 

[posted by Bill Henderson]

June 29, 2012 in Current events, Innovations in law, Innovations in legal education, New and Noteworthy, Video interviews | Permalink | Comments (0)

Saturday, May 12, 2012

LegalZoom Files for IPO

LegalzoomLegalZoom plans to go public.  According to the company's Form S-1 registration statement, which was just filed with the SEC, the company had $156M in revenues in 2011, with profits of $12 million. Here is the first line of the prospectus: 

We believe that everyone deserves access to quality legal services so they can benefit from the full protection of the law. Our mission is to be the trusted destination where small businesses and consumers address their important legal needs and to be our customers' legal partner for life.

Well, LegalZoom seems to be making progress. 

We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of our surveyed customers said they would recommend LegalZoom to their friends and family, our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formed using our online legal platform. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depth of the services we provide to our customers.

RomeI recently rented a car on a business trip.  The radio was tuned to the Jim Rome Show, a national sports radio talk show that is carried by more then 200 stations nationwide.  During my two hour drive, I heard at least four LegalZoom radio commercials.

What is LegalZoom's long term play?  Based on the S-1, it is to use its trusted brand to build a network of "legal subscribers" who obtain legal advice from licensed attorneys.  As LegalZoom says,

We are not a law firm, and we do not provide legal advice. We provide self-help legal documents at our customers' specific direction and teneral information on legal issues generally encountered. Independent, licensed attorneys participate in our attorney network to provide services to our customers through our legal plans.

LegalZoom is seeking $120M for general corporate purposes.  Sheppard Mullin and Latham & Watkins are listed on the S-1 registration statement.  Think LegalZoom is no big deal?  If so, I would encourage you to read my previous post.

[posted by Bill Henderson]

May 12, 2012 in Current events, Innovations in law, New and Noteworthy, Structural change | Permalink | Comments (1)

Lots of Jobs for Law Graduates -- just not Grads in the U.S.

This story is fresh off the newswire: "Law firms are no more the preferred destination for fresh law graduates looking for jobs.  With outsourcing catching up even in this industry, legal process outsourcing (LPO) companies are now bagging a large number of graduates."  A law professor opines, “There is a rising trend of students opting for LPOs. The nature of work is changing and these places offer good packages and work culture. ... [P]romotions also come faster in LPOs.”

Wonderful news.  But the story was written for the Hindu Business Line.  The law graduates went to school in India.  Why are the LPOs become more attractive jobs for Indian law grads?  Probably because (a) LPOs are increasingly focusing on process and technology, engineering out the drudgery work, and (b) process and technology are creating a sustainable competitive advantage within a global industry -- and that can support higher salaries.

MindcrestIn the same story, Rohan Dalal, the Managing Director of Mindcrest, a U.S.-based LPO with headquarters in Chicago, pegged the annual growth at 30% per year [remember that number]. 

Dalal explains his hiring philosophy: "There are very few lawyers available in India who are experts in the laws of the US or the UK, which constitute a bulk of our clients. In general, therefore, we prefer to hire younger legal talent, whether fresh or a few years out of Indian law schools." (Historical note: Paul Cravath explicitly focused on new law school graduates in building his firm.  Why?  He did not want to undo the bad habits and fixed ideas of other (inferior) employers -- he too had a process.)

The president of Mindcrest is a former partner at McGuireWoods, an AmLaw 200 law firm.  According to its website, Mindcrest now has 600 employees.  How many are in the U.S.?  We have no idea -- but we can triangulate data from other sources in order grasp the magnitude of changes occurring as a result of companies like Mindcrest..

So consider the following, which I believe signals a true structural shift.

Chart 1 below is generated from County Business Patterns data.  It summarizes U.S. Law Firm employment according to the North America Industry Classification System (NAICS), which is how the U.S. Census Bureau groups and categorizes economic activity.  The NAICS went into effect in 1998, replacing the Standard Industrial Classification (SIC) system, which reflected an industrial economy rather than one driven by information and services.  The advantage of County Business Patterns (CBP) is that it is not a sample -- it is "universe" data.  CBP covers everyone working in the U.S. who received a W-2.  Law firms, as shown below, comprise a 1.1 million employee sector.  [click on to enlarge]

Slide1
The key takeway?  Law office jobs peaked in 2004 -- four years before the collapse of Lehman Brothers.  Total employment in law offices (NAICS 54111) totaled 1,123,000 jobs, which was 92.2% of the larger legal services sector (NAICS 5411).  Since the high water mark in 2004, the sector shrank by 26,100 jobs (at least through 2009).

County Business Patterns, however, has another catch-all category called "all other legal services" (NAICS 541199).  Mindcrest's employment (just the domestic) is almost certainly included in this catch-all.  Chart 2 below compares change in total employment from base year 1998 for "Law offices" and  "All other legal services." [click on to enlarge]

Slide2
The takeaway from Chart 2 is that "All other legal services" is growing very quickly, albeit from a much smaller base.  When Law offices were shedding 26,100 jobs after the 2004 high water mark, the "All other legal services" category added 5,800 new employees.  It is worth noting that the average 2009 salary in All other legal services are 40% lower than in law firms ($46,800 versus $78,500).  [more after fold]

Continue reading

May 12, 2012 in Current events, Data on the profession, Important research, Innovations in law, Law Firms, Legal Departments, New and Noteworthy, Structural change | Permalink | Comments (2)

Saturday, April 14, 2012

What is Law Without Walls? Why does it matter?

LWOWI am spending the weekend in Miami at the Law Without Walls (LWOW) ConPosium. What's LWOW?   Not an easy question, but here it goes:  LWOW is a completely new forum and methodology for teaching, learning, collaborating and -- most importantly -- spurring innovation in legal education and the legal services industry.  Twelve U.S. and foreign law schools are involved, with Miami Law taking the lead.  LWOW is part law school class, part idea laboratory, part networking venue, and part case competition.   I struggle in vain to find an adequate metaphor.

What's a ConPosium?  It's LWOW's annual penultimate event.  Over the course of the weekend, students present their "Projects of Worth" to a large audience of students, lawyers, law professors, regulators, business executive and entrepenuers.  The presentations are evaluated American Idol-style by a panel of experts,  including -- yes -- a handful of venture capitalists.  Thanks to the efforts of LWOW founders Michele DeStepano and Michael Bossone, the weekend also is an amazing aesthetic experience -- a theater of sofas and overstuffed chairs, inspiring music, multi-media stimuli, and a nonstop train of cleverly presented ideas from students, professors, judges and the audience.

As an educator, the most exciting facet of the LWOW format/methodology is that it pressures law students to be creative and economically viable.  (Understatement: these topics are generally not covered in law school, especially the latter).  Not all ideas are good; and good ideas by themselves are not enough.   As the venture capitalists tell us, nine out of ten good ideas fail due to lack of execution.  To survive, hard questions have to be asked, and the answers provided have to be realistic and accurate.  And then there is follow-through.  That requires passion.

LWOW is a grand experiment.  20 years from now, the DNA of a lot of innovation in legal education and legal services will be traceable to the seemingly impractical ideas that were trial-ballooned here.  And one or two may be brand names in a few short years.  So cool.

[Posted by Bill Henderson]

April 14, 2012 in Current events, Innovations in law, Innovations in legal education, Structural change | Permalink | Comments (0)

Friday, April 13, 2012

Three Blog Posts that Explain Structural Change

StructuralchangeThree recent posts from nonacademics do a good job of explaining how and why the legal services industry is undergoing a massive structural change:

Jordan Furlong, Law 21, in a post entitled "Losing the Confidence Game":  "Here are six observations about the legal marketplace for you to consider, each supported by a news report filed just in the last few days ... ."  Furlong is a Canadian-trained lawyer, journalist, and consultant.  He is one of the most networked observers of the legal services industry I know.

Ron Friedmann, Strategic Legal Technology, in a post entitled "Does BigLaw have a Future?"  The answer is yes, but in way that is hugely disruptive to our settled views of how things work.  Ron, who has worked at the intersection of law and technology for 30 years, writes: 

Some firms may fade, some may implode, but others will thrive. Thriving, however, requires thinking and innovating. Some are doing so as these examples and data illustrate:

  • I count 10 firms that operate low cost, centralized service centers, some of which provide lawyer support as well as business services. ... 
  • About a dozen firms, perhaps more, have industrialized their approach to e-discovery and document review.
  • Several firms now take project management seriously. ... 
  • Three firms now offer alternative staffing models, arguably competing with staffing agencies. ...
  • About one-half dozen firms have publicly announced partnerships with legal process outsourcing (LPO) companies.
  • I understand about a dozen firms now have pricing specialists to deal with alternative fee arrangements.

Patrick Lamb, The New Normal, in a post entitled "A 'Valorem Dozen': The Ingredients of One New Normal Law Firm."  Lamb, a talented trial lawyer and former large law firm partner, lays out the how-to kit for alternative fee boutiques.  At a minimum, running an alternative fee shop requires slaying inefficiencies, embracing market forces, and developing a broader set of skills.  Here are some of Lamb's bullet points:

1) Sell what is valuable to your clients. No client has ever gone to a law firm looking simply to buy time. They go to lawyers to solve business problems that involve some legal issue. ...

3) Embrace the $60-per-hour-lawyer. ... [Y]ou can get great lawyers at a much lower price[ ]. You don't need to have these lawyers as employees, you just need to have access to them when you need them, for as long as you need them. ...

9) Collaboration is key. Most large firms, indeed most firms of any size, are a collection of silos ... We believed that if our senior people brainstormed and collaborated together, great things would happen and we would produce work and results better than any of us would do alone. ...  Hindsight shows that we were right on the money on this issue.

Folks, structural change in the legal profession is happening very quickly.  We legal educators need to spend a substantial portion of our time talking to people working in the legal services industry.  Every conversation should expand the list of who to talk to next.  And we need to put our pet theories and ideas on the shelf and just listen to what these lawyers and legal service vendors have to say.  Otherwise, in five years, traditional legal education is going to look like General Motors circa 2008. 

[Posted by Bill Henderson]

April 13, 2012 in Blog posts worth reading, Current events, Innovations in law, Law Firms, Structural change | Permalink | Comments (0)