The Legal Whiteboard

Metrics and Legal Ops Professionals

In a recent post, I urged readers to visit a legal department with a large legal operations staff.   The goal?  To see the future of modern corporate law practice.  Fortunately, Bloomberg Law recently videotaped a legal ops panel moderated by Amar Sarwal of the ACC.  It contains a conversation rarely if ever heard in law schools or bar associations.

The three legal departments profiled are AIG (insurance), Marsh & McLennan (diversified financial and professional services), and GlaxoSmithKline (pharma).  Note the enormous emphasis on metrics, data, and technology.  Note also how the services of law firms are being put through a procurement process. 

What is more important for lawyers: where you go to law school or what you learned? (Part II)

If you're trying to maximize the financial value of an undergraduate degree, it is better to bet on course of study than college prestige.  Indeed, prestige is largely irrelevant to those who major in engineering, computer science, or math.  In contrast, prestige does matter for art & humanities grads, albeit the financial returns are significantly lower than their tech counterparts.  

These are some of the takeaways from Part I of this blog post. Part I also presented data showing that law is a mix of both: financial returns have been high (cf. "red" tech majors) and prestige matters (cf. "blue" arts & humanities crowd).  

The goal of Part II is to address the question of whether the pattern of high earnings/prestige sensitivity will change in the future. I think the answer to this question is yes, albeit most readers would agree that if law will change is a less interesting and important question than how it will change.  Speed of change is also relevant because, as humans, we want to know if the change is going to affect us or just the next generation of lawyers.

Shifts in the Legal Market

There are a lot of changes occurring in the legal market, and those changes are altering historical patterns of how legal services are being sold and delivered to clients. In the past, I have thrown around the term structural change, yet not with any clear definition.  To advance the conversation, I need to correct that lack of precision. 

In economics, there is a literature on structural change as applied to national or regional economies (e.g. moving from a developing nation to an industrial nation; or moving from an industrial to a knowledge-based economy).  Investors also focus on structural change within a specific industry because, obviously, large changes can affect investor returns.  When I have used the term structural change on this blog, it has been much closer to investor conceptions.  Investopedia offers a useful definition even if it's somewhat colloquial: 

Definition of 'structural change': An economic condition that occurs when an industry or market changes how it functions or operates. A structural change will shift the parameters of an entity, which can be represented by significant changes in time series data.

Under this definition, the legal industry is certainly undergoing structural change.  The proportion of law graduates getting a job in private practice has been on the decline for 30 years; over the last 35 years, the average age of the licensed lawyer has climbed from 39 to 49 despite record numbers of new law school graduates; the proportion of associates to partners has plummeted since the late 1980s.  See Is the Legal Profession Showing its Age? LWB, October 12, 2014.  Since the early 2000s, long before the great recession, associate-level hiring has been cut in half. See Sea Change in the Legal Market, NALP Bulletin, August 2013.

Likewise, among consumers of legal services, there is a lot of evidence to suggest that lower and middle class citizens can't afford a lawyer to solve life's most basic legal problems, thus leading to a glut of pro se litigants in state courts and many more who simply go without things like contracts and wills.  This troubling trend line was obscured by a boom in corporate legal practice, albeit now even rich corporations have become more sensitive to legal costs -- the sheer volume and complexity of legal need is outstripping their budgets.  In response to the lag in lawyer productivity and innovation, there is a ton of investor-backed enterprises that are now elbowing their way into the legal industry.  See A Counterpoint to "the most robust legal market that ever existed in this country", LWB, March 17, 2014.  

The impact of all this change -- structural or otherwise -- is now being felt by law schools. Applicants are down to levels not seen since the 1970s, yet we have dozens more law schools. It has been said by many that law schools are losing money, albeit we have zero data to quantify the problem.  Based on my knowledge of my own law school and several others I am close to, I am comfortable saying that we have real changes afoot that affect how the legal education market "functions or operates."

There is a sense among many lawyers and legal academics that the legal world changed after 2008. None of the "structural" changes I cite above are pegged in any way to the events of that year.  

What did change in 2008, however, was the national conversation on the legal industry, partially due to the news coverage of the mass law firm layoffs, partially due to important books by Richard Susskind and later Brian Tamanaha and Steve Harper, and partially due to a robust blogosphere.  This change in conversation emboldened corporate legal departments to aggressively use their new found market power, with "worthless" young associates getting hit the hardest.  This new conversation in turn exposed some of the risks of attending law school, which affected law school demand.  But alas, this was all fallout from deeper shifts in the market that were building for decades. Let's not blame the messengers.

Dimensions of Change

I am confident that the future of law is going to be a lot different than its past. But I want to make sure I break these changes into more discrete, digestible parts because (a) multiple stakeholders are affected, and (b) the drivers of change are coming from multiple directions.

Dimension 1: basic supply and demand for legal education

To unpack my point regarding multiple dimensions, let's start with legal education. Some of the challenges facing law schools today are entirely within the four corners of our own house.  Yet, legal education also has challenges (and opportunities) that arise from our connection to the broader legal industry.  This can be illustrated by looking at the relationship between the cost of legal education (which law schools control, although we may blame US News or the ABA) and entry level salaries (which are driven largely by the vagaries of a client-driven market).  

The chart below looks at these factors.  My proxy for cost is average student debt (public and private law schools) supplied by the ABA.  My income variables are median entry level salaries from NALP for law firm jobs and all entry level jobs.  2002 is the first year where I have all the requisite data.  But here is my twist:  I plot debt against entry-level salary based on percentage change since 2002.  

If a business nearly doubles its price during the same period when customer income is flat, demand is going to fall.  Thus, the sluggish entry-level market presents a difficult problem for legal education.  Sure, we can point to the favorable statistics from the AJD or the premium that a JD has historically conferred on lifetime earnings, but law professors are not the people who are signing the loan papers.  The chart above documents a changing risk/reward tradeoff.  To use the frame of Part I, the red dots are sinking into the blue dot territory, or at least that is the way prospective students are likely to view things.

Fortunately, smaller law school classes are going to be a partial corrective to low entry-level salaries.  The biggest law school class on record entered in the fall of 2010 (52,488); in 2014, the entering class had shrunk by over 27% (37,942). When entry-level supply is reduced by 25+%, upward pressure on salaries will build.  Yet, the composition of the legal economy and the nature of legal work is clearly changing.  Further, the rate of absorption of law school graduates into the licensed bar has been slowing for decades.  See Is the Legal Profession Showing its Age? LWB, October 12, 2014. It would be foolhardy to believe that time and fiscal austerity alone are going to solve our business problems. Instead, we need to better understand our role as suppliers to a labor market.

Dimension 2:  The content of legal education

The content of legal education is not necessarily fixed or static.  We could change the content, thus affecting how the market responds.  

To provide a simple example, one of my students is starting work this fall at Kirkland & Ellis.  From a financial perspective, this is a good employment outcome.  He will be moving to Chicago with his girlfriend who just received her MS in Information Systems from IU's Kelley School of Business.  The MS from Kelley is a very "red" degree.  It can also be completed in one year (30 credit hours).  Well before she graduated, this recent grad had competing offers from PWC and Deloitte, both in the $80,000 range.   For many Indiana Law students, an ideal post-grad outcome would be $80K in Chicago at an employer who provides challenging work and high-quality training.  Yet, my student's girlfriend got this ideal outcome in 1/3 the time and likely 1/2 the cost of an Indiana Law grad.  

Perhaps we should consider cross-pollinating these disciplines. A huge portion of the legal profession's economic challenges is attributable to flat lawyer productivity -- customers are struggling to pay for solutions to their legal needs.  Information systems are a huge part law's productivity puzzle.  Below is a chart I use in many of my presentations on the legal industry.  The chart summarizes the emerging legal ecosystem by plotting the Heinz-Laumann two-hemisphere model against Richard Susskind's bespoke-to-commodity continuum. [Click-on to enlarge.]

The key takeaway from this diagram is that the largest area of growth is going to be in the multidisciplinary green zone -- the legally trained working shoulder-to-shoulder with those skilled in information systems, statistics, software development, and computational linguistics, to name but a few.  These are "red" disciplines.  Do law schools want to be part of this movement?  Let me ask this another way -- do law schools want to be relevant to the bulk of the legal market that needs to be rationalized in order to maintain its affordability? Harvard grads will have options on Wall Street for the foreseeable future.  But 98% of law schools operate in a different market.  Further, some HLS grads, or students who might qualify for admission to Harvard, might prefer the big upside rewards that are only available in the green zone.  In short, a new hierarchy is emerging in law that is still very much up for grabs.

If an academic wants to better understand the rapidly changing nature of legal work, I would urge them to visit a large legal department with a substantial legal operations ("legal ops") staff.  These are the professionals who have been empowered by general counsel to find ways to drive up quality and drive down cost using data, process, and technology.  These are the folks who are making build-versus-buy decisions, putting pressure on law firms to innovate in order to hang on to legal work, and experimenting with NewLaw legal vendors. 

I am finishing up a story on legal ops professionals for the ABA Journal.  (By the way, legal ops exist in law firms as well as legal departments and green zone legal vendors. The role is most developed, however, in legal departments.)  My editor flagged the issue that virtually all of the legal ops people in the story did not graduate from prestigious law schools (or any law school).

My only response is that legal operations people have specialized skills and knowledge (often "red" but sometimes involving EQ) that others lack; without these skills, they can't do the job.  Legal ops people live in a world of outputs and metrics.  For example, are legal expenses and settlement amounts trending down over time -- yes or no? If so, by how much?  How much internal staff time does it take to negotiate a revenue contract? How much of this process can be automated? What will it take to get our staff to accept the new system?

As these examples show, a legal ops person is typically going to be evaluated based on measurable outputs -- do they get results? Where someone went to law school is an input that is likely irrelevant to the question.  The only qualifier is whether the curriculum of that school provided valuable, specialized domain knowledge -- most likely non-legal red skills but also skills related to teams, communication, and collaboration. 

Dimension 3:  The value of pedigree to the customer 

Law has historically been what economists call a “credence good.”  This means that a layperson has a difficult time assessing quality.  As a result, proxies for quality, such as pedigree or prestige, have historically been very important when hiring a lawyer or law firm.  

One of the reasons that the field of legal operations is gaining momentum is because it is creating tools and systems that enable clients to look past credentials to obtain information on things they really care about, such as cost, outcome, and speed of delivery. There are now companies coming into existence that are gathering data on lawyers' win-loss rates. See Another Example of Using Big Data to Improve Odds of Winning in Court, LWB, April 12, 2015.  Sure, apples-to-apples comparisons are very difficult to make -- every case is unique in some respect. But the amount of money at stake is large enough that the data challenges will be surmounted.  When that day arrives, we won't opine on the value of pedigree to legal outcomes; we'll just calculate it. More significantly, clients focused on outcomes will change their buying patterns.  Early returns I have seen suggest that the value of pedigree to legal outcomes may be close to negligible.

Do any of us care where the engineers who designed our smart phones went to college? Not really. We just care how well the smart phone works. 

In this respect, the future of law is likely headed in the direction of Google (a pure red company).  In the early days, the founders of Google favored grads of Caltech, Stanford and Berkeley.  But over time, the company learned that prestige of graduate school was a poor predictor of job success. Because Google lives and dies by its outputs, the company changed its hiring model to attract the most qualified engineers.  See George Anders, The Rare Find: How Great Talent Stand Out 1-5 (2012) (telling the story of how data changed the attitudes of Google founders regarding elite credentials and altered the Google hiring model).

I have lived long enough to know that the changes I describe above are not necessarily going to be welcomed by many lawyers and law professors.  If a group benefits from a lifelong presumption of merit, it is natural that group will resist evidence that the presumption is not fully warranted. Indeed, much of the skepticism will be rooted in subconscious emotion.  If the presumption is dashed, those of us in the elite crowd will have to spend our days competing with others and proving ourselves, or even worse, watching our kids soldier through it.  We have little to gain and a lot to lose in the world we are heading into.  Yet, behind the Rawls veil of ignorance, how can we complain?

So with the red-blue crosscurrents, is law school still worth the investment?

That is a relevant and reasonable question that many young people are contemplating.  I will offer my opinion, but markets are bound to follow their own logic. 

This is a time of enormous uncertainty for young people. Education clearly opens doors, but tuition is going up much faster than earnings.  Further, competition among knowledge workers is becoming more global, which is a check on wages.  Of course, if you don't invest in education, what are your options?

I am generally on the side of Michael Simkovic and Frank McIntrye that the education provided by a law degree, on average, significantly increases lifetime earnings.  See The Economic Value of a Law Degree (April 2013).  How could it not?  The law is too interconnected to every facet of society to not, on average, enhance the law grad's critical thinking skills. Nearly 15 years of out of law school and I regularly use what I learned at Chicago Law to solve problems and communicate solutions, particularly in my applied research work with law firms and legal departments. While my Chicago Law credential has value independent of the skills and knowledge I obtained (the red AJD bar chart in Part I strongly suggests that), I can't deny the additional value of the actual skills and knowledge I obtained to solve real world business problems. It's been substantial.

In general, I also agree with Deborah Jones Merritt that there is significant evidence that the entry-level market for lawyers is weak and oversaturated.  See What Happened to the Class of 2010? Empirical Evidence of Structural Change in the Legal Profession (April 2015).   The class of 2010 is not faring as well as the class of 2000.  Indeed, the lead economist for Payscale, Katie Bardaro, recently noted that wages are stagnating in many fields, but especially in the legal profession. "More law schools are graduating people than there are jobs for them...There’s an over-saturated labor market right now. That works to drive down the pay rate.” See Susan Adams, The Law Schools Whose Grads Earn the Biggest Paychecks in 2014, Forbes, Mar. 14, 2014. 

In the face of these stiff headwinds, I think law schools have an opportunity to pack more value into three years of education. See Dimension 2 above.  To be more specific, if you are a protege of Dan Katz at Chicago-Kent, you will have a lot of career options. Ron Staudt, also at Chicago-Kent, has quietly built a pipeline into the  law and technology space.  Oliver Goodenough and his colleague at Vermont Law are making rapid progress with a tech law curriculum.  And at Georgetown Law, Tanina Rostain and Ed Walters (CEO of Fastcase) provide courses that are cutting edge.  

But absent these types of future-oriented instruction, what is the value of a JD degree as it is commonly taught today? That value is clearly positive; I would even call it high.  But whether the value is sufficient to cover the cost of attendance is likely to vary from law grad to law grad.  Lord knows, in a world of variable tuition based on merit scholarships and merit scholarships that go away after the 1L year, the swing in cost can be a $250K plus interest.

What is killing law school applications these days is the lack of near certainty among prospective students that the time and expense of law school will pay off.  The world looks different than it did in the fall of 1997 when the vast majority of the AJD respondents entered law school. Tuition and debt loads are higher and high paying entry-level jobs are harder to obtain.

So what is the solution?  For students, it's to bargain shop for law schools, which is bad news for law schools.  For law schools, it's to add more value to an already valuable degree.  Some of that value will come in the form of red technical skills that will make lawyers more productive.  In turn, this will prime demand for more legal products and services.

Size of the US Legal Market by Type of Client

Washington, DC.  The AALS Section on Professional Responsibility hosted a vigorous discussion today on the evolving ethical duty of competency, a topic partially inspired by the recent changes to Model Rule 1.1 cmt. 8 (requiring lawyers to stay abreast of the "benefits and risks associated with relevant technology").  As part of this panel, I showed a chart on the size of the US legal market, which was promptly tweeted by CALI 's Director of Community Development, Sarah Glassmeyer, a law librarian who is a total data subversive in a style and manner I fully support.

Well, despite a less-than-optimal photo angle, the chart was retweeted and favorited, so I figured I ought to just post the actual chart here. [Click on to enlarge]

In a competitive market, the threshold question, asked by potential entrants and those who might finance them, is often the same: "what is the size of the available (or addressible) market?" Because lawyers and law schools are feeling unprecedented economic pressure, I thought it would be worthwhile to run this exercise for the U.S. legal industry and break it down by type of client.

The figures above are estimates of 2014 receipts going to organizations and individuals in the business of providing legal services.  My calculations are derived from US Census Bureau data. They exclude the cost of in-house and government lawyers.  More granular calculation details will be laid out in a forthcoming publication.

At today's AALS Professional Responsibility session, technology was framed as an ethical issue. And that is certainly right:  technology can deliver enormous cost and quality benefits to clients, so we have both a fiduciary and professional duty to be up-to-date.  Yet, there is a flip-side here that is crucially important -- to ignore or fall behind on technology is to run the risk of commercial ruin. This axiom applies to lawyers in private practice and to law schools that want employers to hire their graduates. 

Building upon that theme, I used the Market Size chart to make two points today, one based on the high-end corporate market (right side of chart) and the other directed toward the individual consumer market (left side of chart). 

Re the corporate side, the data show that a relatively small roster of large corporations are spending vast sums each year on legal services -- more than $10 million per year for a publicly held company.  Because large national and international corporations are awash in a sea of growing legal complexity, they are turning to technology, process, and data to keep legal costs in line with overall company revenues.  From the perspective of a large corporate client, the typical junior law firm associate has little to offer.  A more seasoned partner or counsel is a better value, but this is by virtue of experience rather than technology or process.  As a result, law firm hiring remains stagnant, and more legal work is being taken in-house or given to LPOs or New Law legal service providers like Axiom, Elevate, or Novus Law.  It may take a generation for the law school--law firm--legal department supply chain to come into a reasonable alignment.  Right now, it's broken.

Re the individual retail market, the $232 annual legal spend per citizen means that there is not enough money go around to pay for all the legal need.   If a middle-class professional couple with kids has a contested divorce, that could easily chew-up $50,000 to $100,000 in legal fees.  A DUI is likely to cost $1,500.  A worker's comp claim might be 30% of an award.  Probate work runs well into the thousands.  In reality, most citizens go without.  One of our co-panelists today, retired US Magistrate Judge John Facciola, made the claim that 83% of American never talk to a lawyer to help them with a legal problem.  "The middle class is largely gone from federal court."  To my mind, technology is the only vehicle for tapping into a large latent market for legal services.  LegalZoom, Rocket Lawyer, Modria, Shake, and many other legal technology companies all see the potential here. And so do the venture capital and private equity firms that are funding them. 

 Today's panel was one of the most lively I have ever attended at AALS, owing in part to my excellent co-panelists but also an audience that asked some great, tough questions.  Many thanks to Andy Perlman (Suffolk Law) for organizing a terrific session and Natasha Martin (Seattle) for her skillful moderation of the panel.

What Ails the Large Law Firm? Will the Real FutureFirm Please Stand Up

Five years ago this April, I helped organize a novel experiment on how to reengineer the modern law firm.  The occasion was FutureFirm 1.0, a collaborative competition in which teams of law firm partners, associates, and in-house lawyers to create a strategic plan for the fictional firm of Marbury & Madison (M&M).  The goal was a new business model that would enable the firm "to survive and thrive over the next 20 years."  See M&M Fact Pattern.   

We planned FutureFirm 1.0 in the fall of 2008, but by April 2009, things looked pretty unstable.  Deal flow had ground to a halt, and corporations were reluctant to fund noncrucial litigation.  Law firms in turn were rescinding offers to thousands of law students.  Further, the specter of law firm failure hung in the air.  Suffice it to say, the timing was not right for sharing the results of FutureFirm.  As a result, my analysis of the event, "What Ails the Large Law Firm?  Will the Real FutureFirm Please Stand Up," was never published or circulated.  

With five year anniversary of FutureFirm 1.0, I decided to uncork my time-in-a-bottle essay and post it on SSRN and JDSupra.  

Having not read this essay for five years, I am surprised at how well the FutureFirm analysis holds up.  Yet, the biggest takeaway from my FutureFirm experience is not the specifics of the analysis, but acclimating myself to the permanence of new change dynamic, much of which I can see through the participants of FurtureFirm 1.0.   

• Two law firm partners subsequently left to start their own boutiques, one of which is aggressively moving into managed services in South Africa.  
• Another law firm partner became a judge in King County, Washington (Seattle).
• Several summer associates joined BigLaw only to leave within three or four years to become sophisticated in-house lawyers who are themselves driving change.
• Several people in all roles have switched over to the business side.  Indeed, new legal businesses are actively being planned.

In the spring of 2014, the new normal is here to stay, and it has no froth.  FutureFirm was probably a fringe activity back in 2009.  Now, an event like FutureFirm would be one of the key places to go for answers.  Indeed, I have very serious senior in-house lawyers at Fortune 100 companies who want to run this type of colloborative competition to help better design tomorrow's legal departments.  So stay tuned for that.

I hope you are sufficiently curious to do a bit of time travel and give "What Ails the Large Law Firm?" a read.  I would welcome your thoughts and feedback. 

Is Axiom the Bellwether for Disruption in the Legal Industry?

I think the answer is yes.  For the last several years, I have been an avid watcher of Axiom's growth, but this article in Friday's Houston Business Journal finally convinced me that the top-end of the legal industry is changing and that Axiom is setting the standard for disruption.

On a surface level, many of the facts in the HBJ article are unremarkable.  Axiom opened its Houston office back in May 2012.  Since then, it has grown to 30 lawyers  and expects to add another 15 over the next 12 months.  Yet, during this same period, the boom in the energy sector has caused several national and international law firms to also open offices in Houston, including Reed Smith, Dentons, Katten Muchin, and K&L Gates, 

Axiom and large law firms are definitely targeting and servicing the same clientele -- Fortune 100 legal departments. The substance of their work is also very similar -- sophisticated, complex legal work related to disputes, transactions, and compliance.  But in many cases, the solutions offered by Axiom are radically different.

Okay, now a reasonable expectation of any reader is likely to be, "Now explain that difference."   Back in 2010, Axiom's CEO Mark Harris told Law Practice magazine that Axiom was "trying to invent a whole new category of law firm.  When you’re doing that there is no vocabulary [to describe your business model]." 

In my experience, the opaqueness of Axiom's business model actually works to its advantage.  Specifically, it encourages Axiom's primary competitors (large law firms) to put Axiom in a box based on an outdated caricature.  That, in turn, gives Axiom more running room to fully implement the "whole new model."  Let me start with the caricature; then I will do my best to explain what the company actually does. 

The Inaccurate Axiom Caricature

In its early years, Axiom was described by many as a high-end "temp" service for legal departments. See, e.g., Peter Lattman, Axiom: A Different Kind of Legal Practice? WSJ Law Blog, Nov. 27, 2007 (describing Axiom as having developed "a niche as a provider of high-end temp services to blue-chip corporate clients").

The simplified version runs like this.  Lawyers working in large law firms trade-in their partner status, or shot at partnership, for more autonomy and a better work-life balance.  By brokering relationships between legal departments and skilled but disaffected lawyers, Axiom ditches the "class A" overhead and reduces the allocation of legal fees that would otherwise support record law firm profits.

Under this caricatured model, all parties are made better off -- the client (who gets the same quality work, but cheaper), the lawyers (who get off the billable hour trend mill and are able take vacations again), and Axiom (which collects a fee).  The caricatured model also enables large law firms to dismiss the Axiom model on the belief that only a small tranche of legal work is at risk of being siphoned away.  And that work is lower margin and price sensitive -- so-called "commodity" legal work.  Finally, the lawyers leaving for Axiom are not the heavy-hitter equity partners who control client relationships.  Hence, the analysis is complete: Axiom represents zero threat to the BigLaw model.

Yet, if brokering lawyer services was originally the core of Axiom's business, they have subsequently expanded their offerings.  Back in 2007, Axiom was #73 on Inc magazine's list of fastest growing companies, with revenues of $17 million per year and 1000%-plus growth over three years.   Since then, its revenues have grown another ten-fold.  Earlier this year, Axiom took $28 million in outside investment, which it plans to invest in technology. See Mark Harris of Axiom Answers Hard Questions, Legal Whiteboard, Sept. 25, 2013.

With this kind of growth, and the backing of very serious venture capital funds, perhaps its time to check the assumptions surrounding the Axiom caricature.

The "Managed Services" Business Model

Based on my own discussions with Axiom management and several articles on the topic, see, e.g., Adam Smith,  ABA Journal, Strategic Legal Technology Blog, the fastest growing part of Axiom's business is its "Managed Services" practice. 

Part of the managed services practice is analyzing and redesigning workflows so that in-house lawyers have the cost and quality information needed to make better sourcing decisions. Because Axiom is helping to redesign the workflows, including the specifications for sourcing decisions, it is well-positioned to do much of the resulting work -- indeed, unless it can manage both the design and execution of the work flow, Axiom can't warranty the results.

What is the goal of the workflow redesigns?  To reduce legal risk and legal cost at the same time, primarily through process, measurement, and feedback loops.  Virtually the entire law firm and law school universe is stuck in a mental frame that believes that better, faster, and cheaper are in permanent tension with each other.  This is because our mental frame of reference is based on artisan-trained lawyers working in a traditional office environment with Word, email, and a searchable bank of forms and briefs. 

Yet, when systems engineers, information technologists, and project managers because equal members of the team, "better, faster, cheaper" becomes a straightforward problem that can be solved through a four-part continuous process: design, execute, measure, repeat.  

Much of the key design and execution work at Axiom is done by nonlawyers who formerly worked for global consulting businesses.  See, e.g., this opening in Axiom (Chicago) for Project Management Director of Managed Contracts. 

Indeed, the head of Axiom's Houston office is Brian Bayne, a business development professional with an MBA from the University of Dallas.  Before joining Axiom, Bayne worked for IBM.  Here is how Bayne described Axiom to the HBJ:

"The heart of what motivates us as a company is to be seen as an agent of change ... . We want to be a leading voice for transition in the industry. It really is a new way of doing business and offers a completely different value proposition that most law firms are not in a position to do."

Is Axiom a Law Firm?

Over at the E-Lawyering Blog back in April, Richard Granat did a very careful job trying to answer this question, and concluded that the answer was "no." In fact, Axiom is a Delaware C-Corp with nonlawyer investors as equity shareholders. 

So, how is Axiom getting around the Rule 5.4 ban on fee-splitting with nonlawyers?  The answer to this question has a lot to do with the nature of outsourcing and managed services within legal departments.   A general counsel for a corporation controls the legal functions of the company. Because he or she can't do all the work themselves, they hire in-house legal staff and outside counsel.  In recent years, legal departments have also contracted directly with LPOs, particularly on matters related to e-discovery and M&A due diligence. When it comes to non-law firm options, such as LPOs, the general counsel and his or her staff are "supervising" the work within the meaning of the legal ethics rules.

When a general counsel of a corporation uses a managed service provider, such a Axiom, they are diverting a tranche of work they control.  The value of the managed service provider is process expertise plus economies of scale and scope.  Axiom, through a contract with the legal department, manages some of that legal workflow that supports in-house lawyers in their counseling and compliance roles.  Yet, the buyer of the managed services is himself a lawyer, and that lawyer is ultimately responsible for advising the corporation on legal risk. 

On one level, Axiom is a niche business.  As Granat notes, "If you don't have an in-house counsel, then you can't use Axiom's services. Not being a law firm, Axiom cannot provide services to the public (individuals or organizations) directly."  Yet, this niche accounts for a huge proportion of the entire legal services market.  In this American Lawyer article, one of Axiom's venture capital investors, opined "With a worldwide legal market that is a trillion dollars each year, there is plenty of running room to build a successful business."

Ultimately, the value proposition very simple.  As an in-house lawyer, you can educate yourself on the Axiom managed services approach and be comfortable that, through process and measurement, you have a solid handle on this tranche of the company's legal work, likely within budget.  Or you can have the CYA coverage of a brand name law firm and continue to do battle with your CFO over rising legal fees. If you were an investor, which approach you would bet on?

So Axiom can't help you with your divorce, will, or personal injury case.  Don't worry,  Jacoby & Meyers, Legal Zoom, Legal Rocket, and others are trying to tap into that market.  See Legal Futures, Nov 8, 2013.  In the meantime, Axiom may be gunning to be a service provider to your large corporate employer.

The Last Days of a Bloodless Revolution

I am sure that a state bar regulator, taking a very formalistic approach, can take issue with Axiom's construction of Rule 5.4, which prohibits profit-sharing between lawyers and nonlawyers from income generated from the practice of law.  But the purpose behind Rule 5.4 is to preserve lawyer independence so that the quality of the underlying legal advice won't be compromised by the nonlawyer's pursuit of profit.

In the case of Axiom, however, the person making the buying decision is a highly sophisticated lawyer who is struggling to manage his or her organization's legal needs within a budget.  Stated bluntly, the GC of a multinational corporation does not want the kind of consumer protection that a formalistic construction of Rule 5.4 would provide.

A betting person, such as a nonlawyer Axiom investor, would likely conclude that the bar regulators are not going to pick a fight with the largest corporations headquartered in their jurisdiction.  Why would they?  The subtext of economic protectionism would set them up for ridicule in the legal and mainstream press--who, exactly, is being harmed besides the law firms who are losing market share?  And is there a principled basis to distinguish LPOs from managed services? 

Expect to read more about state regulators in the "risk factors" section of Axiom's S-1 registration statement if and when Axiom decides go public.  I think these risks will likely remain hypothetical, but as my friend Ed Reeser is known to say, "That is just my opinion.  I could be wrong."

Truth be told, the nonlawyer revolution in U.S. legal services is occurring right now.  And there is a good possibility that the whole revolution will take place without a single shot ever being fired.

Back to Houston

The HBJ reporter asked a local Houston legal recruiter about the future prospects for Axiom.  The recruiter commented that he was "[n]ot sure how well they will do in Texas, given the conservative nature of the legal business here." 

In my own experience, general counsel in Texas are among the most innovative and entrepreneurial in the country.  The General Counsel Forum was originally founded in Texas as a state-level organization, and it is now rivalling the Association of Corporate Counsel (ACC) in terms of eduational programming for in-house lawyers and sharing best practices and benchmarking.

Lawyers as a group may be conservative, but within that distribution there is a small cadre of innovators and early adopters.  Although most people don't change their behavior in response to abstract ideas, innovators and early adopters are at least drawn to the possibility.  Not every idea will be successful -- indeed, the trial and error of the innovators is often a basis for dismssing them as fringe players.  Yet, when an innovation produces a significant leap forward, the resulting success eventually sets off a widespread diffusion among the broader population.

There is a rich sociological literature on this topic, which was pioneered by Everett Rogers in his 1962 book, Diffusion of Innovation.  It turns out that self-interest is often inadequate to overcome inertia and prejudice, at least in the short- to medium-term.  The classic example is hybrid seeds, which have a host of advantages for producing more bountiful, disease-free crops.  Yet, that innovation took decades to take hold among farmers.

Looking for another example?  In the early 1980s, Bill James was publicizing the benefits of his stats-driven approach to baseball.  The advertised benefits were clear -- "you can win more baseball games."  Isn't that what every baseball team wants?  But what's the cost?  "Well, you'll have to change the way your evaluate talent."  For nearly twenty years, the implicit answer of the baseball establishment was "no, that price is too high."   Within the last decade, however, the stats-driven appoach has become commonplace in baseball and in other sports as well. The innovation has become diffuse.

I suspect that Axiom's senior management fully understands these dyanmics.  Looking at the distribution model from Everett Roger's book, if you are trying to sell your unproven innovation, you are literally wasting your time trying to sell to your wares to 85% of the market. Indeed, if you are in the very early stages of innovation, 98% of the potential buyers are likely to be resistant to your pitch. 

The problem here is not economics --  its human nature.  This may be hard for many lawyers to believe, but lawyers, including general counsel, are human beings.  And human beings are prone to a series of predictable reactions when presented with various stimuli, such as new ways to perform their work.  Rather than process the merits of the idea, many human beings, including lawyers, will instead gauge the reactions of the market leaders.  If the market leaders react with approbation, the early and late majority become willing to actually engage with the idea. 

What this means is that the merits of a good idea are not enough to ensure its success, at least immediately.  This is a key practical insight that the reformer/innovator class seldom grasps.  Without understanding Roger's Diffusion of Innovation curve, an innovator's success becomes a function of timing and luck -- that is the story of Bill James. 

But if you understand the diffusion process, it is possible to construct a filter that locates the innovator/early adopter class.  And if you study their beliefs and problems, you can more effectively tailor your pitch. This approach saves time and money and holds the team together in the belief that they will ultimately be successful.

So, where is Axiom on the Rogers Diffusion Curve? 

My best guess is the "early adopters" stage, as Axiom has relationships with roughly half of the Fortune 100 and is working hard to widen those relationships with more ambitious projects.  Their goal, as best as I can tell, is to generate a clear proof-of-concept that they have solutions to the risk/cost conundrum that plagues so many legal departments and causes them to blow their budgets.  With sufficient market testimonials, and as in-house lawyers with exposure to Axiom migrate to other legal departments, the broader legal market will begin to tip. 

I find the Axiom story refreshing, primarily because the legal market has fallen under the spell of the fast follower strategy.  In my travels, I often encounter the attitude "Let someone else prove that it can be done differently and better and then we will follow."  When virtually the entire market adopts this worldview, incumbent institutions begin to relish the false starts of others and a general sense of complacency begins to set in.  Frankly, I find this whole dynamic unprofessional is the classical sense of that word -- i.e., at variance with professional standards and conduct.

Axiom, in contrast, is on the brink of demonstrating the benefits of the first mover advantage in law.  This is bound to have the beneficial, balancing effect on the rest of us.

Related posts:

• "LPOs Stealing Deal Work from Law Firms", Feb 6, 2013.
• Mark Harris of Axiom Answers Hard Questions, Sept 25, 2013.

Legal departments in India and U.S. appear to be evolving in same direction

There is an interesting article in The Times of India business section that says, essentially, large Indian corporations are realizing that legal strategy and compliance are too important to not elevate these functions to the C-Suite.  As a result, the pay, influence, and prestige of in-house positions in India are now very much on the rise.

This is the same evolution that has occured in the U.S. over the last two to three decades, albeit the evolution appears to be occuring in India at a much faster pace.  So any temporal gap in structure is unlikely to be permanent.

This dynamic reminds me of my visit to India in 2009, when Marc Galanter and I spend time with several law firm leaders.  One of the most striking features we noticed is that all the name partners were alive and very much in their prime.  (In the U.S., the equivalant year would have been roughly 1940.)  These lawyers very much enjoyed being engaged on the future of India.  And unlike the U.S. or U.K., where the market is now defined by league tables, the topic of money never came up -- granted these Indian lawyers were all making plenty of it.  

One of the things most on the minds of the Indian law firm leaders was how they could create a vital, useful organization that would survive them.  So, much to our surprise, the India law firm leaders discussed things like Kaplan Balanced Scorecard for determining partner compensation (based on the work HBS Professor Robert Kaplan).  Another leading law firm, Nishith Desai, constructed its entire firm based on the best practices of professional services firms worldwide. This was the result of a 20-year reflection on this topic by the firm's founder, who is also still in his prime.  See Nishith Desai, Management by Trust in a Democratic Enterprise: A Law Firm Shapes Organizational Behavior to Create Competitive Advantage, Wiley Journal of Global Business and Organizational Excellence, Sept/Oct 2009.

It was almost as if the Indian bar was skipping 100 years of evolution and instead decided to converge immediately on the state of the art.  Well, the same may be happening in India legal departments.

Wondering what a Kaplan Balanced Scorecard looks like?  Here is a good sample.

 

Measuring the Value of Law Firm Pedigree

General counsel from large legal departments are becoming increasingly skeptical of the value provided by leading brand-name law firms, such as the AmLaw 20 or the Magic Circle.  That is the conclusion of some compelling research just posted on the HBR Blog Network, the online idea forum run by Harvard Business Review.

The research was conducted by AdvanceLaw, which is a company that vets law firms and lawyers on an as-requested basis on behalf of legal departments.  Some of AdvanceLaw's clients include Google, Nike, Sherwin-Williams, Lenovo, Towers Watson, Mastercard, Panasonic, eBay, Mastercard, Deutsche Bank, McDonald's, Molson Coors, Nestle, Heinz, Clorox, Unilever, CSS, Starwood Hotels, etc.  

AdvanceLaw is a good example of what Richard Susskind calls a "closed legal community."  See Tomorrow's Lawyers, chapter 5.  Some essential background on AdvanceLaw is discussed below. But I am sure readers want to see the data first. The reported research was based on responses from 88 general counsel, who answered two questions:

1. How does law firm pedigree affect their buy decision for a high-stakes matter? 
2. Is law firm pedigree associated with more or less client responsiveness?

Below are the results posted on the HBR Blog Network:

Readers are probably wondering, "Who is AdvanceLaw and why are they asking these types of questions?"  I have some intel on this topic.

AdvanceLaw was formed four years ago by Firoz Dattu, a Harvard-trained lawyer who spent time in BigLaw (Paul Weiss).  Firoz eventually found his way to the Corporate Executive Board, which a publicly traded company (NYSE: CEB) that specializes in subscription-based research organized by industry and function.  CEB uses the aggregated research for value-add services such as benchmarking and best practices.  

Because they specialize in factgathering for strategy and management,  CEB has a long history of employees leaving to start niche businesses.  That is what happened here.  Firoz helped launch, and ultimately ran, the General Counsel Roundtable (GCR), which is a CEB functional group that cuts across industries.  I have been to a GCR meeting (it is invitation-only for outsiders).  Suffice to say that a persistent theme of conversation was controlling legal costs without compromising quality.  A seemingly tall order, right?

Firoz started AdvanceLaw because of perceptions by general counsel that they were being overcharged and underserved by large firms in the major markets.  Any GC who has reviewed data from TyMetrix would quickly draw the same conclusion, as a large firm lawyer with 20-years experience in, say, Minneapolis often has a lower billing rate than a second-year at a mega-firm in NYC.  AdvanceLaw has positioned itself as a trusted advisor that can provide reliable guidance in shopping for value outside the big brand-name firms. 

So how does this service work?  As noted earlier, AdvanceLaw is an example of a closed legal community.   To get into the AdvanceLaw network, prospective law firms are run through a rigorous RFP process that evaluates things like expertise, innovation, quality, compensation systems, and track record on diversity.

If a firm makes the AdvanceLaw cut, they start getting assignments from participating legal departments.  But here is the enormous differientator.  Feedback is collected by AdvanceLaw and shared with the law firm and other AdvanceLaw legal departments.  What is the effect?  

• For law firms, changing their behavior to (a) protect their reputations, and (b) get more work. 
• For legal departments, to the extent they are getting value, migration of their legal work out of pedigreed law firms in the major markets to lower cost yet high quality regional and super-regional firms.  The savings are roughly 30-40% with no loss in quality and better responsiveness. Some of the winners in the AdvanceLaw tournament are listed here. 

AdvanceLaw also has a globalization overlay, which has been created with GC assistance.    For instance, in Argentina and India, AdvanceLaw works with quite prominent firms who also exhibit efficiency. In the UK and Canada, the firms are substantial players, but are slightly less pedigreed than the Magic Circle and Seven Sisters, respectively.  

So let's boil down AdvanceLaw's business model into its simplest terms: It gathers information so they legal departments don't pay excessive prices for the CYA (cover-your-ass) benefits of hiring high-prestige Big Law.  

CYA still matters, of course.  But through AdvanceLaw, pedigree is being given a more accurate valuation.  A likely large second-order effect of AdvanceLaw is the acceleration of AFAs through AdvanceLaw firms, as feedback (on quality) and publicity (to drive volume) is what is needed to make that transition.  

Susskind is right.  Closed legal communities are going to be major disruptors in the legal marketplace. 

"Big Data is the Big Opportunity" for Legal

So says a just published article in the Global Legal Post by Sandeep Sacheti, an executive with Wolters Kluwer Corporate Legal Services.   The article is called "The legal industry's new reality."

Perhaps the key insight is that "data by itself is useless. To extract value from it, you need the ‘three Ts’:  talent, technique and transformation.  

• Talent.  "When you start out, you don’t need the top experts to start making sense of your data. You may just need people with curiosity, good statistical skills and a desire to learn. These are the kind of people who will quickly see how data can be managed and packaged to solve problems. And once they do, they will want to get better at it."

• Technique.  "Big Data needn’t mean Big Complexity. ... [A]nalytical techniques can be sophisticated, but it’s also possible to keep it simple – especially at the start of the journey. Get the basics right first, and then you can become more advanced as you get better at it."

• Transformation.  "Becoming a data-driven legal team – law firm or corporate – is a journey. Change is slow, so don’t expect an overnight transformation. The best approach is to bring the whole organisation with you - if everyone from the partners and CEOs to the interns buy into your data strategy, it will start delivering returns faster."

So who will be the big winners when it comes to Big Data?  Definitely some start-ups become they they don't have to transform -- it's a clean sheet operation from the very beginning; they also have more patience and tolerance for trial and error.   Yet, BigLaw is sitting on top of a lot of the essential data, so there will be some winners there too.  To my mind, it will turn on the ability of some BigLaw shops to leverage talent and technique into some early victories that will aid the tranformation project.  If it works, it will be a case study in strategic leadership and effective change management. 

By the way, Wolters Kluwer Corporate Legal Services is a sophisticated place.  They own TyMetrix, which is the perhaps the best current example of BigData operating in the BigLaw ecosystem.  TyMetrix's Real Rate Report is being used to agressively control lawyer billing rates.

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]

"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]

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]

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]

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]

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