The Legal Whiteboard

Losing the Law Business

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 20^th 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.

ReInvent Law is a Really Big Deal

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.

A Clockworks Approach to Lawyer Development from William Henderson

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]

Thoughts on the Future of Law from ReInvent Law - Silicon Valley

I had the privilege of attending ReInvent Law—Silicon Valley – on Friday, March 8.  Special kudos go to Professors Renee Knake and Daniel Martin Katz from the Michigan State University College of Law and to the Ewing Marion Kauffman Foundation for sponsoring the event and bringing together a significant number of thought leaders who are engaged in thinking about how to use technology to improve the access to and the provision of legal services in the United States and globally.

There were too many presentations to try to summarize everything that was shared during the day. Nonetheless, there were a few themes that showed up throughout the course of the day that merit attention as we think about where the market for legal services might be headed.

First, several people made presentations focused on the increasing importance of data analytics, knowledge management and process management.  These included Josh Becker of Lex Machina (discussing generating economic value from analyzing large volumes of patent litigation data), Kingsley Martin, of KMStandards and Sol Irvine of Yuson & Irvine (both discussing knowledge management relating to contract language to develop more efficient processes for drafting contracts), Karnig Kerkorian and Rudy Minasian of Velawsity (discussing process management tools to help solo practitioners by more efficient), and Sean McGrath of Propylon (discussing temporal data management tools that allow searchers to identity the effective language of regulations or statutes at a specific time) to name just a few.

Second, several people emphasized the need for broader access to legal services at affordable prices and discussed the use of process management and alternative structures to better meet the need for legal services for middle class people and small business owners.  These included Stephanie Kimbro of Burton Law (encouraging unbundling of legal services and greater participation in branded networks), Chas Rampenthal of LegalZoom (imagining what legal services might look like if a major retailer decided to offer legal services), Raj Abhyanker of LegalForce (discussing process management and data management as key to growth of Trademarkia (predecessor to LegalForce)) and Charley Moore of RocketLawyer (discussing the needs of small business owners to have more affordable guidance regarding how to deal with regulatory structures and legal problems). 

Third, related to the access question, there was significant discussion of the constraints of Rule 5.4 and the revolution taking place in the United Kingdom following the authorization of Alternative Business Structures for providing legal services.  Presenters discussing the evolving legal services market in the United Kingdom included Ajaz Ahmed of Legal365.com (discussing a legal services market ripe for disruption from businesses focused on client service) and Andy Dawes of Riverview Law (discussing the growth of its fixed fee model of providing services to corporate clients).

In addition, our own Bill Henderson made a presentation on the training model that might be necessary to better prepare lawyers to be effective in the new normal, with greater emphasis on data analytics, knowledge management and process management in addition to traditional legal knowledge and relationship skills.

One of the most thought provoking presentations for me was the presentation by Colin Rule of Modria regarding the growth of Online Dispute Revolution.  Modria is an outgrowth of the dispute resolution components of EBay and PayPal where 60 million disputes have been resolved in an “extrajudicial” context, with many being resolved only through use of software (without the intervention of other humans).  This prompted me to realize that if one reconceptualizes the access to legal services issue as an access to justice issue, there may be a variety of more efficient ways to offer people access to justice that might completely bypass the current legal system. 

There was much to think about regarding a legal services market that is facing the reality of disruptive innovation.  What the conference highlighted for me is that change is happening and that there are a number of very bright, very thoughtful people who are trying to invent the future by taking advantage of data and technology to find better, more efficient, more affordable ways to provide legal services to a broader array of clients.  Not all of the innovators in attendance at the conference are going to have an economically viable model, but some of them will, and that will mean some of them will be winners, and some of those who continue to do things the traditional way are going to be losers.

[posted by Jerry Organ]

"LPOs Stealing Deal Work from Law Firms"

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]

What is the Significance of Major Combinations between Canadian and U.S. Law Firms?

Law firm consolidations are in the air.  Over the last couple of weeks, two major Canadian law firms have entered into combination agreements with U.S./UK counterparts. 

1. Norton Rose (a British firm with a major Canadian presence) is merging with Fulbright & Jaworski, creating a firm with 55 offices and 3,800 lawyers.  Details here.
2. Fraser Milner Casgrain is combining with SNR Denton (US-UK firm that swallowed up the legacy Sonnenschein law firm in 2010) and Salans, which is a European law firm original formed in France. The resulting firm will have 2500 lawyers in 79 offices and 52 countries worldwide.   Details here. 

In the video interview below, Jordan Furlong, a Canadian lawyer, journalist and consultant (Law21), views these developments as the beginning of a major sea change.

To my mind, the consolidations we are witnessing have a lot to do with flat worldwide revenues. Law firms become uncomfortable places when they are not growing. Yet, really big law firms seldom fail because failure requires that a large number of partners vote their feet. A 30-partner defection can be a lethal blow to a 500-lawyer firm, but not so much for a 2,500-lawyer firm. The larger number of lawyers provides managers with more time and latitude to figure out a longer term strategy. Big feels safer.  Further, once the consolidation is complete, the firm managers can thin the ranks of weaker partners, producing a stronger overall firm.  (That is the theory, anyway.)

[Posted by Bill Henderson]

What Would Happen If Nonlawyers Invested in Law Firms? Soon We Will Have Data

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]

The Rise of Legal Analytics, or the First Signs of Big Data in Big Law

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.

In the video below, reporters from the Boston Business Journal explain the services provided by these new data analytic companies (TyMetrix and Sky Analytics are briefly featured). 

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]

Straight Talk on the Woes of BigLaw, by Bruce MacEwen

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]

Hilarious Video on the Billable Hour

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]

Why Are We Afraid of the Future of Law?

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. 

Continue reading

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.

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]

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.

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

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

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

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

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

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

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

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

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

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

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

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

[posted by Bill Henderson]

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). 

[Note: The difference between the mean and adjusted mean in the 2011 distribution is due to the fact that law grads who fail to report their salaries tend to have have less lucrative employment; so NALP makes a prudent statistical correction --basically a weighted average based on practice settings.]

From a labor market perspective, the class of 2007 entry level salary distribution was extraordinary and anomalous.  Why?  Because we can safely assume that legal ability, however it might be defined, is normally distributed, not bi-modal.  So when such a distribution appears in a real labor market, something is significantly out of kilter. 

Why did the entry level market become bi-modal? As the legal economy boomed from the mid-90s through the mid-00s, many large law firms (NLJ 250, AmLaw 200) were trying to make the jump from regional dominant brands to national law firms.  For decades, going back to the early to mid-20th century, these firms followed a simple formula: hire the best and brightest from the nation's elite law schools. As they continued to enjoy growth, they reflexively followed that same formula.  Yet, by 2000s, the demand for elite law graduates finally outstripped supply. 

This micro-level logic ("let's not tinker with our business model") produced a macro-level bidding war.  This is how the right mode came to be.  Yet, because it was a macro-level phenomenon, clients, led by industry groups such as the Association of Corporate Counsel (ACC), reacted by saying, "Don't put any junior level lawyers on my matters --they are overpriced."  Outsourcing and e-discovery vendors have also eaten into the work that used to go to entry level lawyers.  So the volume of BigLaw hiring has collapsed, hence the melting of the right mode. For a more detailed overview, see NALP, Salary Distribution Curve.

Long Term Structural Change in Big Law

That said, it is not just the entry level market that is under stress -- the fundamental economics of Big Law are also changing.  Consider the chart below (from Henderson, Rise and Fall, Am Law June 2012), which shows that revenues per lawyer at AmLaw 100 firms has gone flat and moved sideways since 2007, breaking a pattern of steady growth that dates back to the pre-Am Law 100 days.

Stagnant revenue is a source of enormous worry for law firm managers.  Without higher profits to distribute--and growing the top line is the usual profitability fomula--their biggest producers might leave, causing a run on the bank ala Dewey, Howrey, Wolf Block, etc.  So the dominant strategy now has nothing to do with entry level hiring.  Rather, the goal is to keep and acquire lateral partners with portable books of business.  After all, clients aren't protesting the value of most senior level lawyers. And seniors lawyers are plentiful, thanks to the excellent health of baby boom lawyers and the poor health of their retirement accounts. 

This strategy may work fine for this fiscal year, but over the middle to long term, BigLaw is going to get older and dumber.  Further, this dynamic produces substantial ripple effects on legal education -- albeit ripple effects that feel like tremors.

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]

More Job Market Data Showing a Structural Shift

The U.S. Census Bureau just released its 2010 data for the County Business Patterns (CBP) dataset.  CBP compiles payroll and employee headcount data by sector for all employers operating within the U.S.  CBP is what is know as universe data.  It is not a sample; it's a census.

The news for the legal sector is not good.  Law Offices (NAICS 54111), which comprise 93.1% of the U.S. legal services industry, shrank by 21,600 jobs between 2009 and 2010.  Total payroll also sank by $113 million.  As shown on the chart below, the high water mark for U.S. law office employment was in 2004 (1,122,723 jobs). That was eight years ago, four+ years before the recession hit.

There is another sector, called "All Other Legal Services," that is relatively small yet worth paying attention to because it continues to grow.  Using 1998 as a base (the first year of the NAICS coding system) the chart below compares Law Offices to All Other Legal Services (NAICS 541199):

"All Other Legal Services" seems to be doing pretty well, adding jobs while the number law office jobs declines.  What is in "All Other Legal Services"?  Almost certainly registry services for contract lawyers (doing e-discovery on a temp basis) and the domestic operations of legal process outsourcers.  See here.  The average job in this sector pays less than $46,000 per year compared to $79,900 in the law office sector.

What does all this mean?  For law firms, it means a brutal competition over marketshare.  Survival will require innovation. Yet, many lawyers are in denial.  For law schools, it means the same thing -- there are too many law graduates chasing after a shrinking number of opportunities.  

We legal educators have a really hard time getting our head around this changing market -- naively, we think the solution is a grand idea that will surface during an academic conference.   That's not going to happen. Instead, to survive, each law school is going to have to get more than its proportionate share of high quality jobs for its graduates -- you don't have to outrun the bear, just the other law schools. 

The key drivers here are: (a) what we teach, (b) how we teach it, (c) relationships with employers, and (d) relationships with alumni -- our best, friendliest windows on the real world.  To turn this corner, a school needs great leadership that can move recalitrant faculty toward a difficult and complex new reality.  Good luck!  Time to get back to the work of Indiana Law.  For additional analysis, see The Hard Business Problems Facing U.S. Law Faculty.

[posted by Bill Henderson]

More Complex Than Greed

That is the title of an essay I just published at The Am Law Daily.  It is on the demise of Dewey & LeBoeuf, which officially filed for bankruptcy yesterday.  I wrote the essay because I think the lessons drawn from the Dewey collapse are all-too-likely to follow the "lawyers are greedy" storyline.  This problem is bigger than our collective flaws as lawyers and as people.  Below are the first two graphs:

Dewey & LeBoeuf, an amalgam of two storied New York City law firms that merged in 2007, has died.  Understandably, this has prompted a lot of soul-searching among lawyers.  One storyline that will attract many followers is that large law firm lawyers, long viewed as the profession's elite class, have lost their way, betraying their professional ideals in the pursuit of money and glory. This narrative reinforces that lawyer-joke mentality that lawyers just need to be become better people.

And that narrative is wrong. Yes, we all need to become better people, but that still won't begin to cure the larger structural problem affecting large U.S. law firms. At its core, Dewey's collapse has less to do with individual moral failings than with aging organizational structures that worked remarkably well for over a century yet, but for a variety of reasons, now inhibit law firms' ability to adapt to a changing legal marketplace. 

Full story here ...

[Posted by Bill Henderson]

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.

In 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]

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

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

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

Continue reading

What Do Dewey & LeBoeuf Partners Owe Their Staff?

A story in the Am Law Daily has a chilling quote from a soon-to-be ex-Dewey & LeBoeuf employee. "I've been here 14 years," she said. "They never apologized. They never explained what was going on to us. It's very disrespectful to the staff. It's always about the lawyers. It's never about the staff."

What do Dewey & LeBoeuf partners (and recent ex-partners) owe their staff?  I’m not talking about technical calculations based on the federal WARN law.  I am talking basic principles of human decency that have to be followed in order to look one's self in the mirror each morning—what our non-professional parents or grandparents would tell us to do. 

I suspect that 95% of people (and lawyers, who are people too) would sign on to this list:

• Guarantee the timely distribution of all paychecks and corresponding 401K contributions
• Guarantee the eventual payment of unused vacation and personal time
• Explain the status of health insurance and prevent any interruption in coverage
• Say “I am sorry this is happening to you.  We wish we could rewind the clock and do things differently so we could have avoided these problems for you and your families."

The reality, however, is near the opposite.  No apology. No explanations.  And an eventual bankruptcy filing that will convert hundreds of longtime Dewey & LeBoeuf staffers into unsecured bankruptcy creditors who will likely have to hire a lawyer to get a percentage of what they are actually owed. 

If (rich) Dewey & LeBoeuf partners seem to be falling short, it is all-too-easy to chock up this behavior to greed and moral failure--and I am sure this behavior will be amply recounted in the final Dewey & LeBoeuf post-mortem.  Yet, moral fortitude is no match the sheer size and geographic dispersion of the Dewey & LeBoeuf partnership.  As a simple matter of logistics, it is near impossible for the firm's most well-meaning partners to coordinate an effective plan for treating all the staff fairly.

A story in the New York Times (here) reports on an ex-partner who is starting a fund to assist staffers, apparently seeding it with $10,000.  His moral impulse is spot on.  But the task of fully delivering on the impulse is pretty staggering. Some questions:

1. Are all the partners kicking in, or some?  Many Dewey & LeBoeuf partners have probably never met each other—what a task!  
2. If I am a partner, how much is this going to cost me?  Well, it depends upon who steps up and on what terms. 
3. Are the partner contributions pro rata or proportional to income and status in the firm?  Apparently, the true incomes of Dewey & LeBoeuf partners was a deep mystery, though the differential reportedly approached 20 to 1.  What is fair is at odds with what is workable.
4. Every Dewey & LeBoeuf staffer, not just the ones who worked with me?  Dewey & LeBoeuf had 1,000 non-lawyer employees. The needs, obligations and liabilities could run into the tens of millions.
5. Who has all the information on employee benefits, and who is going to pay that person to calculate all the payouts and communicate with staffers?

Somewhere between question 1 and question 4, most of us would conclude that were embarking on a fool’s errand—we, and our families, would drown in the task of helping others.  So we would put our heads down and focus our own situation.  And despite a pounding conscience, the less advantaged are left holding the bag on a mess that, objectively, the lawyers created.

Ironically, this disgraceful state is a byproduct of several decades of prosperity and growth. And its unraveling perfectly parallels the voice, exit and loyalty framework articulated by the famed economist Albert O. Hirschman in his 1970 book, Voice, Exit and Loyalty.  The framework runs  roughly as follows.

In relatively small organizations or communities, problems and disagreements can be resolved through voicing one’s concerns to fellow stakeholders.  Further, if exit is expensive or impracticable, voice is the only option. Ideally, dialogue and cooperation ensue, thus benefiting all parties and producing a reservoir of loyalty. 

In larger organizations, however, a governance structure based on voice can be too messy and time consuming, so decisions are delegated to smaller group.  Unwise or imprudent decisions are curtailed by the exit or the threat of exit by key stakeholders.  So exit can produce quite stable and healthy organizations.  Yet, when leadership fails to take corrective action in response to exit, the organization can slowly, or quickly, self-destruct.

Today, virtually every firm in the Am Law 200 operates on exit principles as expressed in the market for lateral partners. In the case of Dewey & LeBoeuf, the most significant shock to the system was the realization within the partnership that the firm’s leadership had failed to level with them regarding the financial health of the organization.  The firm was long past the point where an out-of-use voice could serve as a corrective (26 offices, 10 countries!).  Further, the reservoir of loyalty had run dry.  So the partners rushed for the exits.

Ironically, many Dewey & LeBoeuf staffers probably took solace in working for an old-line prestigious law firm with international offices; they inferred they were safe.  Now they are collateral damage, treated with less respect than the staff of Big Box store closing in an aging suburb.

What happened at Dewey & LeBoeuf could happen at any Am Law 200 law firm, albeit some have deeper reservoirs of loyalty than others. I worry that the so-called “elite bar” has given up on voice, or is woefully out-of-practice in speaking openly and frankly to those with power.  Further, I worry that too many Am Law managers only listen to the views of rainmakers. That is especially pernicious if the rainmakers are overpaid, as they appeared to be at Dewey & LeBoeuf, because the exit of the rank-and-file lawyers can also destroy a firm.  

Regardless, all of us lawyers need to take note of the deplorable treatment of the nonlawyers in the building--hundreds of people who kept the enterprise running and contributed to the professional treatment of clients.  The treatment of the Dewey & LeBoeuf staff (or Howrey a year earlier, or Brobeck or Heller) is utterly incompatible with self-image of an elite, prestigious law firm.  Increasingly, we are confusing profitability with estimable conduct.  The evidence is indisputable that this error in judgment destroys firms and destroys lives.

[posted by Bill Henderson]

"The Death Spiral of America's Big Law Firms"

That is the title of an essay posted on blog of the The Atlantic magazine.  Jordan Weissman, a journalist who formerly worked in the business operations side of a major law firm, reviews the profitability of the most elite law firms pre-crash (2001-2007) and post-crash (2007-2010). [See charts below]  The slide into lower profitability is what is causing the run-on-the-bank at Dewey LeBoeuf, a storied firm on the brink of collapse. 

Dewey LeBoeuf, like the Howrey firm which failed slightly over a year ago, are almost certainly on the lefthand side of the 2007 to 2010 profitability chart.    Weissman's conclusion is pretty simple: the industry is running out of gas.  More failures are likely.  Unfortunately, I agreed.

For the record, legal education's problems are no less severe.  There are not enough qualified students to fill the number of 1L seats, so as an industry, our revenues (akin to law firm profits) are going to go down.   The entire legal services and legal education industry is undergoing a major disruption.  All of this talk of structural change is going to move from the abstract, where we contest it the premise, to the concrete, which induces panic among the unprepared.  It is going to be very tough.  Our character is going to be tested. 

Paradoxically, making decisions based on our professional values rather than self-interest will be the key to survivial.  More on that later.  I have to prepare for the Lawyer of the Future Conference at Pepperdine University School of Law.

[posted by Bill Henderson]

Three Blog Posts that Explain Structural Change

Three 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]

A Reply to the Empiricists at NWU Law

My blog post from last week, "Too Good for BigLaw: The Statistician Edition" has resulted in a minor kerfuffle with some of the distinguished empiricists at Northwestern Law.  See Dan Rodriguez, Law School Sorting and the Partnership Track:  Northwestern Empiricists Weigh In, Word on the Streeterville [The Blog of NWU Law Dean].  NWU Law folks were not impressed with my analysis.  Dan Rodriguez was gracious enough to send me the link at the same time his post, quoting the views of his colleagues, went live.  He has also encouraged me to reply publicly. 

I am happy to do that.  Let me start with big picture issues.  Then, for those folks with the curiousity and stamina to wade through arcane details--and experience tells me this is a small group--I will directly address, point by point, the the issues raised by Kate Litvak and Max Schanzenbach.  But at the outset, I will say that I am not conceding any ground.

Big Picture

First off, it is important to understand why this topic generated so much traffic.  See Above the Law, ABA Daily Journal, TaxProf, Instapundit,  Adam Smith. 

It all started with a provocative blog post by Vivia Chen, the columnist for The Careerist.  Vivia reviewed hiring and promotion data from the NLJ 250 Law School Hiring Survey and noted that elite law school graduates were becoming partner in very low numbers when compared to the hiring pipeline. Vivia editorialized on the numbers in a way that played into readers' fragile egos and insecurities.  Of course, that is her job, which she does very well.

In a nutshell, here is why people care -- or more precisely, get anxious -- about this topic:  it is conventional wisdom that graduation from elite law schools produces better career outcomes.  When that expectation is countered by actual marketplace data, people are surprised.  See, e.g., Bruce MacEwen,  "The Best & The Brightest" at  Adam Smith Esq. (leading blog on law firm economics).  Surprise is the first reason this issue got so much play.  Emotion is the second.

Emotion matters because very few lawyers and law professors are dispassionate on this topic.  When it comes to conventional wisdom on law school pedigree, we all have horses in the race.  Because we are human beings, we lawyers and law professors don't wait for balanced market data to develop our own entrenched worldviews.  When the conventional wisdom favors us, we go with it -- albeit we aren't really conscious this is happening. So when data upset the apple cart and potentially make us look complacent, our passions get aroused. 

The folks at Above the Law have built a entire business model around such predictable lawyer foibles.  The more chum thrown in the water, the higher the ad revenues.  It's just that simple.

Vivia's primary point, stated through metaphor, is that regional schools (such as Chicago Loyola) seem to be making partner at higher rates than the elite schools (such as Chicago).  This is a reasonable inference because the ratio of associates hired to partners promoted appears to be consistently high for elite law schools and very low for a large number of regional law schools.  This very point was made independently by Bruce MacEwen, who is a very sophisticated guy who advises law firms on strategy.

That said, there was ample opportunity for readers to draw spurious inferences from Vivia's metaphor-driven blog post.  Thus, to avoid any school-specific claims (a 1-year crossectional sample is not suitable for such a purpose), I pooled the schools by U.S. News ranking, drawing a line between elite and non-elite at the T14 mark.  Why T14?  Because these schools have played a closed loop of musical chairs for 20 years in the U.S. News rankings.  These schools would be viewed by most employers as "national" law schools.  

Here is what the data showed:

• Pipeline in:  53.7% T14, 46.3% non-T14
• Partners Promoted: 29.4% T14. 70.6% non-T14.

That is, well, an enormous skew. In 2011, for every 5.43 elite grads hired, a senior associate from an elite school makes partner.  For non-elite schools, that corresponding statistic is 1.95.  Vivia found these numbers surprising and somewhat counter-intuitive.  So did Bruce MacEwen, Above the Law, ABA Journal, etc.

There are ways to break down these numbers to gain additional insights, but the key point here is one of magnitude.  Elite law graduates are supposed to be smarter and more capable -- no one expects these folks to be on short side of any race, tournament or desired outcome.  The magnitude of hiring/promotion gap is the surprising fact that needs to be explained.

I had observed roughly the same skew several years ago (pooled 2007 and 2008 data) and alluded to it in this article, "Why is the Job Market Changing," Nat'l Jurist (Nov. 2010).  I also follow other relevant studies, such as The After the JD, which have noted differences between elite and non-elite graduates.   So I had a head start in thinking through possible explanations. I thus offered five theories, all of which could work in concert, to explain the large skew in the data:

1. Selection effects
2. Differences in first jobs
3. Intergeneraional privilege
4. Influence of admission criteria on the associate pipeline
5. "A Better Plan B" for elite grads

So, to be very clear, I am not using the NLJ 250 data to support the above theories.  It is the reverse: I am offering the above theories as a likely explanation for the very large skew between elite and nonelite grads.  Framed as a open-ended research question, it might be written, "why are elite grads not becoming BigLaw partners in numbers commensurate with hiring patterns and general presumptions of their higher ability?"  That is a mystery and a puzzle.

Statistics Minutiae  [After the jump ...]

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