Strategic Legal Technology

Two New York Times articles on Monday make me think that lawyers have more in common with media moguls than I thought.  

Solving Equation of a Hit Film Script, With Data explains that

“The same kind of numbers analysis that has reshaped areas like politics and online marketing is increasingly being used by the entertainment industry…. Now, the slicing and dicing is seeping into one of the last corners of Hollywood where creativity and old-fashioned instinct still hold sway: the screenplay.”

A consultant performs a statistical analysis on a draft screenplay that compares its content and characters to successful screenplays. Based on the differences identified, the consultant suggests substantive changes to improve the odds of success. Of course, “many top screenwriters… [reject] statistical intrusion into their craft.”

Sound familiar? Much like screenwriters, many lawyers view themselves as creative geniuses: “How dare someone try to tell me how to do or improve my work - I am an artist.” In my view, however, most legal matters are more similar than lawyers think and therefore even easier to analyze statistically than are screenplays. A range of tools exist today that can help analyze and standardize documents and, more generally, improve the delivery of legal services, ; examples include KM Standards, Exemplify, DiligenceEngine, Docracy, HighQ Solutions, and Neota Logic.

Lawyers, unlike screenwriters, however, do not have studio chiefs breathing down their necks. Studios have a big incentive to maximize the likelihood of success and, since they bankroll production, can often get their way. Law firm management is NOT to partners as studio chiefs are to screenwriters. If clients were to BigLaw partners as studio chiefs are to screenwriters, then we would see faster uptake of products that both improve the efficiency of producing and quality of legal outputs.

Perhaps the bling blinds clients… Coincidentally, another article the same day turns on the “artiste mentality”. For Media Moguls, Paydays That Stand Out reports that CEO pay per $100k of market cap in media far exceeds that of other industries. Part of the explanation:

“Compensation experts say executives who negotiate in the rarefied air of glittering celebrities may begin to see themselves as magical themselves… ‘It infiltrates your thinking,’ said James Reda, a consultant at Gallagher Benefit Services specializing in executive compensation. ‘They begin to think of themselves as deserving as much as the talent.’ Of course, we all think we are worth more than we are paid, but that’s where boards and corporate governance come in. Or not.

‘These companies have historically weak boards and super aggressive chief executives,’ said Alan Johnson, a compensation consultant. ‘And I think the boards get dazzled by interacting with celebrities and going to parties.’ ”

Sound familiar? Perhaps BigLaw partners indulge in some magical thinking as well. And perhaps they dazzle their clients. Granted, we live in a super star, winner-take-all economy. In the New Normal, partner super star status may be at risk for all but the top dozen firms. Beyond those firms … we may see the equivalent of studio chiefs and effective boards work their wonders. If it is not the GC doing so, increasingly, it will be the corporate procurement office.

One reason that clients of large law firms want alternative fee arrangements (AFA) is to drive efficiency. The right AFA structure motivates firms to maximize productivity. In AFA World, what does productivity mean and can firms improve it?  

In Billable Hour World, “productivity” means annual hours billed per attorney. Elsewhere, it means “output per hour.” In a firm, think of output as briefs per hour, documents reviewed per hour, transaction documents written per hour, and so forth. In AFA World, firms that keep lawyer headcount steady but finish more matters per week or month make more money.

One driver of lawyer output per hour is support staff. The more “non core legal work” lawyers delegate to staff, the higher their output. Many firms, however, have cut support, at least in the form of secretaries. Until about 20 years ago, the typical lawyer to secretary ratio was 2:1. Today, 3:1 is the new 2:1. Many firms now drive it as high 5:1 or 6:1. In AFA World, that trend may have to reverse.

Consider an April 4th Business Week article that asks Where Have All the Secretaries Gone? It reports that companies have cut too many assistants. Now, highly compensated professionals spend too much time on low value tasks such as copying and booking travel. More assistants would improve overall productivity and pay for the extra cost.

The profit-maximizing amount of lawyer support in AFA World will be an empirical question. The answer lies in field work, data collection, and analysis. It lies in determining when lawyers should type and edit and when they should delegate that to assistants. It lies in figuring out who should do quantitative analysis, create presentation, conduct research, and format documents.

My guess is that higher secretarial ratios will still prevail in AFA World but firms will add other types of assistants, for example, business analysts and presentation specialists. Even for core legal work, firms might find that shifting some work, for example, “heavy” legal research” to specialists makes sense.

Smart firms will also ensure that their attorneys get really good at using core technology properly. That means training them to type and/or dictate and to use Microsoft Word, Excel, Adobe, and PowerPoint effectively. If you think lawyers are already good at this, look around and then read a series of articles in Law Technology News by D. Casey Flaherty, corporate counsel for Kia Motors America: Tech Drive - As part of beauty contests, Kia Motors’ corporate counsel tests associates to assess technology skills (Dec 1, 2012); Kia Motors Tests Outside Counsel Tech Skills (Jan 24, 2013), Kia Motors Tests Outside Counsel Tech Skills, Part II (Jan 25, 2013); Monica Bay Interviews D. Casey Flaherty at Legal Tech NY (video, Jan 30, 2013).

BigLaw today still seems to manage support for Billable Hour World. Firms have cut and re-jiggered staff but from what I see, they have not fundamentally analyzed or re-thought support. If AFA World arrives, law firms will have to re-visit their staff arrangements yet again.

A New York Times article last Monday, More Cracks Undermine the Citadel of TV Profits, offers the legal market lessons on how unbundling can shake-up established players. 

With the growth of media delivery options, consumers no longer must buy bundles of channels from cable companies. They can watch what they want, when they want, on the screen they want, without buying more than they want. Incumbents fight this trend but the bundle likely will not survive:

“[T]he concept of the bundle has been foundational. Ads go with editorial content in print, commercials go with programming on television and the channels you desire are paired with ones you did not in your cable package. People were free to shop for what they wanted, as long as they were willing to buy a bunch of other stuff they did not [sic]…. though bundles may be a handy way of protecting things, they also tend to obscure the weaknesses within. Those flaws are becoming more apparent as the practice of bundling comes under attack…. once the consumer decides, it doesn’t matter what stakeholders want. They can’t stop what’s coming…. The advent of the Internet presented an existential challenge to bundles. Once consumers got their hands on the mouse and a programmable remote, they began to attack the inefficiencies of the system…. Change often comes very slowly, but then happens all at once.”

Substitute a few words and this could describe the market for corporate legal services. BigLaw still dominates but the unbundlers have arrived:

• Alternatives to law firm such as legal process outsourcing (LPO) providers, document review companies, and Axiom Law and its competitors. (For an excellent discussion on Axiom, see Richard Granat’s April 8th post, Is Axiom Law a Law Firm?)
• New types types of law firms such as boutiques (BigLaw expertise without its overhead) and new model law firms such as Clearspire (US) and Riverview Law (UK), which offer fixed fees and lower overhead.
• Law firms that offer unbundled services: Several US firms offer document review service from low-cost service centers. Multiple UK firms run their own alternates, with document review and paralegal support from low cost centers in Belfast, Scotland, or the north of England.
• The Big 4. At The Georgetown Law “Shrinking Pyramid” conference on April 12th, I tweeted ”@PaulLippe reports each Big 4 does $2-4B of ‘legal systems’ work adjacent to what law firms do. BigLaw lost out. #LawShrink”. (Note: that revenue likely dwarfs all the the alternatives combined.)

In the media market, consumers eagerly lap up unbundling. In the legal market, general counsels say they want lower cost so one might guess they too lap up the alternatives. But their appetite seems not nearly as voracious as media consumers. An April 19th Legal Week article (subs. req’d), Feeling the squeeze – GCs under pressure to cut costs are pushing for more value from their external lawyers, explains that, in spite of the drive for value, GC are surprisingly conservative about exercising the unbundling choice. It notes

“bringing more work in-house is the most preferable option to help cut legal spend… most GCs feel the easiest way of reducing legal spend is for law firms to cut their charge-out rates and offer alternative billing…. When it comes to outsourcing, in-house lawyers are still sceptical… [and] equally reticent about a new legal services venture set up by Carillion [an innovative ABS]”

So, will unbundling undo BigLaw? Partner profits in BigLaw remain healthy but under pressure. Firms have imposed cost controls and staff hiring freezes. Moreover, BigLaw continues to face an overcapacity problem, which drives a long-term issue of smaller new associate classes and the more immediate issue of “Suicide Pricing” (see Above the Law, Buying In: Suicide Pricing (16 Apr 2013 ) and Bruce MacEwen (Adam Smith, Esq.) in a Bloomberg Law interview, “Suicide Pricing” on Bloomberg Law (12 October 2012).)

As the Times notes, “change often comes very slowly, but then happens all at once.” Only time will tell if BigLaw will face the same challenges as Big Media. Even if it does, it’s worth noting that much of Big Media remains profitable. But the media players and industry structure keeps changing in unexpected and sometimes - for the players - terrifying ways.

Eric Chin of Beaton Capital recently wrote a nice analytic piece about the Charmed Circle law firms - the top NYC law firms. The Charmed Circle of BigLaw firms in the USA (April 9, 2013) presents an excellent financial analysis of these top firms. He invited commentary on his post. 

Today Bruce MacEwen, aka Adam Smith, Esq., published his views as a guest writer. Adam Smith Esq on BigLaw’s Charmed Circle (April 18, 2013) sets forth Bruce’s views that circle members shift over time and, separately, the challenge of Magic Circle firms entering the NY market.

My comments, Charmed Circle and the luxury goods market (April 12, 2013) ask just how ensconced their position really is, though I cannot reach a firm conclusion. Here is are my comments in full:

What’s happened in the luxury goods market…

Luxury stores and brands such as Tiffany and Hermes are subject to economic ups and downs but I have seen no evidence of fundamental changes in the buying behavior of their customers. Contrast the luxury goods market with retailers of consumer electronics in the USA, where the rise of Amazon and other online stores led to Circuit City (a major Big Box store) and other chains to go out of business and to Best Buy (the one surviving Big Box electronics store) having to re-tool its selling approach.

So the question I have is whether the Charmed Circle is more like the luxury sector, subject only to economic ups and downs, but facing no fundamental change in buying behavior, or more like electronics, where buyer behavior has permanently changed.

The way to gauge that would be understanding how much pricing pressure they face. And the way to answer that would be to know what their realization rate is, which we do not.

What this means for law firms…

We do know that that the many firms tracked by Citi Private Banking have seen realization rates drop by about 10 percentage points, from the 1990s average of about 93 or 94% to an average today of about 84%. If members of the Charmed Circle have experienced that drop as well, I think that would speak volumes about the sustainability of their growth and margins.

Even if they do face such pressure, however, I suspect their competitive position is safe for the foreseeable future. Two or three dozen law firms likely think they are in the top 10 firms that do not have to worry about their future, that the market for their “unique and branded expertise” is safe.

The fact is, however, that here is just not that much high-stakes, price insensitive work, where clients will pay premiums and buy the brand to sustain a large number of firms. But I think that sliver is large enough to sustain the Charmed Circle firms.

For me, the more interesting question in the US market is what happens to the firms that cannot lay claim as clearly to being the go-to experts for certain high-stakes work.

- - - -
My coda here is that I fear, as price and value pressure continue, that many firms face a squeeze. The brand of Charmed Circle firms will carry them quite a ways. But what of the AmLaw 20 to 100. Some have good differentiation but many do not. Time may be running out for some.

This is live post from the Georgetown Law conference, The Shrinking Pyramid: Implications for Law Practice and the Legal Profession. This session is Collaboration and Innovation in the New Normal. (As this is a live post, please forgive any typos or failures accurately to report speaker points.) 

The academics presenting at this session and their works:
Collaboration: A Challenging but Strategic Imperative for Today’s Law Firm, Heidi Gardner, Harvard Business School
Changing Career Models and Capacity for Innovation in Professional Services, Michael Smets, Aston Business School and Timothy Morris, Said Business School, University of Oxford; Namrata Malhotra, Imperial College Business School

The Moderator: Reena Sengupta, RSG Consulting
The Panelists: Kim Koopersmith, Chair, Akin Gump Strauss Hauer & Feld LLP;
Stephen Denyer, Global Markets Partner, Allen & Overy LLP

Heidi Gardner, Harvard Business School, Collaboration: A Challenging but Strategic Imperative for Today’s Law Firm

Studies teamwork in professional services firms. Worked 5 years at McKinsey. Over last year, has looked more at law firms and has collected data over this time.

A core tension exists. On the one hand, in PSF there is increasing specialization. People are rewarded for developing narrower and deeper expertise On the other hand, the market grows more complex and requires multiple types of expertise to solve problems. This is “differentiation v integration”. Collaboration Practitioners often suffer from the fallacy of uniqueness.

There are multiple challenges to collaboration in professional service firms. People in different areas of expertise have different world views and different vocabularies. Working across boundaries requires re-negotiating status (who’s in charge). That may sound simple, but it’s not. The “star culture” reinforces individualism and makes collaboration harder.

The “Performance Pressure Paradox”. On high stakes projects, collaboration is essential. But key leaders become risk adverse. This leads to bad group dynamics and weak team performance. This leads to using the most important knowledge less than they should. Because the senior people can’t let go of control, they collaborate less.

Yet the data show that average revenue per client increases significantly with growing collaboration across practices. Heidi looked at collaboration at the matter and client level. She found that on a project basis, cross-discipline and cross-practice collaboration drives up revenue. She has hypothesis that this also improves client stickiness.

Some research suggests that people who collaborate identifies more with their firm. This improves satisfaction and retention. It also institutionalizes relationships and the market knows this. So this lowers the portability of and value of individual practitioners.

So there are many reasons to promote collaboration… but it is not easy to do. Need to figure out what’s in it for the individuals.

Heidi is studying law firms - likes the fact that time is recorded because this provides very granular data on who is doing what. She has data for 8 years, spanning economic cycles, so research can generalize across economic situation. Over 500 professionals, over 150,000 person-project combinations.

Here are some findings from her research.. Collaboration leads to higher productivity. The more individuals a fee earner work with year one, the more they will bill in subsequent years. Cross-practice collaboration is a better predictor of revenue growth than within-practice collaboration. Adjusted r-squared of regression is 0.58 (RF: pretty good, not great).

So, how does collaboration help? Reciprocity is one mechanism: give work to a colleague now, more likely to get work in the future. Reputation is another mechanism: the more people with whom a lawyer works with, the more her reputation spreads through the firm. This can support higher hourly rates.

Collaboration benefits rainmakers. Heidi compared two nearly identical lawyers based on practice, graduation date, and hours billed. One with bigger network has 4x the revenue. But cause and effect is unclear.

Michael Smets, Aston Business School: Changing Career Models and Capacity for Innovation in Professional Services

Says that legal is a perfect storm now. While clients demand novel solutions, the knowledge behind the novel solution becomes a commodity quickly. This requires constant innovation in law practice substance. Who does the innovation? It’s the lawyer talent. On the talent side, there is war of people, a challenge of work-life balance, and question if new generation is willing to work as hard.

Innovation in law firms has three dimension: legal solutions, operational changes (service delivery), and business model innovation. Lawyers, if they do any innovation, is in legal solutions (substantive law). Research focuses on legal solution innovation and the professional talent that drives it.

Discusses how to turn talent into service delivery…. One option is knowledge leverage (knowledge management systems). Another is via leverage: senior lawyers guide junior lawyers. Leverage drives the shape of the pyramid. To convert talent and leverage to service delivery requires billing hours. Talent faces pressure to bill many hours. The incentives for this: direct compensation, deferred comp, life-long career, and human development capital.

Most of the legal solution innovations comes from top of pyramid. But the pressure to bill hours at all levels dampens incentives to invent new solutions. The up or out pressure also hampers innovation. Political pressure to assimilate, social pressure against maniac hours.

The tensions in the model have led to creation of new permanent positions: counsel (Legal Director (UK?)) who are salaried, experienced lawyers with no rainmaking responsibility but firm-related bonus; permanent associate but smaller bonus; professional support lawyers who are experienced and support billing lawyers who get salary only.

Suggests that more junior lawyers are motivated to innovate legal solutions to develop their own business. With experienced lawyers in non-partner positions, the juniors can tap their know-how to do so. This frees up partners to sell more work since they no longer need to spend so much time on creating new legal solutions. [RF: not sure I got this right and if I did, not sure I agree it’s right. Missing link for me is how often does legal innovation win business versus providing good solutions with better service delivery.]

In summary: innovation capacity is linked to career model; consistent operating model enhances innovation capacity; innovation hinges on requirement, motivation, and ability; use new capacities strategically, not ad hoc; new career models can create a win-win situation for firm and staff.

Panel Discussion

Koopersmith agrees in part and disagrees with presentations. Akin Gump values cross-selling - that’s the best news for promotion to partner and higher compensation. Does not look for exponential benefit of cross-selling. With respect to shape of organization: we have associates, staff attorneys, off-track associates, senior counsel, and partners. Does not see the non-partners as the ones driving legal solution innovation. Also, junior lawyers often have innovative ideas.

Denyer agrees but says almost all of the legal solution innovations has come from non-partners. Often, doing that is key to associate becoming a partner. Also, UK firms have always had to operate on a cross-border basis, which has meant a lot of collaboration. We have been forced to look for ways to innovate because there are so few others way to differentiate. Contrasts UK to US; in former, he says fewer opportunities to become highly specialized (RF: not sure I followed this entirely).

Denyer is surprised not to hear more about comp structures, specifically lock-step v eat-what-you-kill as issue in innovation. Heidi says she sees a wide range of collaboration behaviors within the same firm and so it’s not clear comp structure drives this. Koopersmith thinks that lock-step would drive more collaboration and innovation because less worry about who “owns” the innovation.

Heidi often hears lawyers say “my clients won’t pay for collaboration”. Denyer thinks this must be lawyers at clients who are very focused and non-collaborators, not the GC. Koopersmith: says this is like hearing “it’s all about me", which is not what managing partner wants to hear - or what client wants to hear.

Audience member points out some GCs say cross selling is their biggest bane. Koopersmith responds that the attitude is right reaction to _bad_ cross selling. Good cross selling means really understanding the client, working closely with them, identifying potential opportunities, and offering new service in context of deep and trusted relationships.

Discussion of role other professional can play in cross-selling, collaboration, and innovation. One Dutch firm was able to increases its China business through effort a non-lawyer professional. Akin Gump has Pricing and Analytics Director who helps identify client needs and focuses on putting together teams.

This post is a follow-up to my January 7, 2013 post, The Role of Data Driven Models in Law Practice. I offer here ideas about data that lawyers should consider collecting and analyzing to predict and reduce legal problems. 

In the earlier post, I discussed an article, In What Computer Models Can - and Can’t - Do, by Ryan McConnell (Baker & McKenzie partner), Dianne Ralston (Schlumberger Ltd. deputy GC), and Charlotte Simon (Baker & McKenzie associate). Their ideas intrigued me but I was disappointed that they seemed to conclude that, because of “noise", data models would not be helpful in their compliance practices.

To spur thinking about where data collection and modeling might help avoid legal problems and support compliance, I offer below a few ideas to consider. These may be hard to execute or may fail. My deeper concern is epistemological: how do we know what might work?

Am I the only one who thinks it odd - and wrong - that large corporate law and compliance departments seemingly conduct little or no research and development? Companies that employ hundreds of lawyers and compliance professional already spend a lot on law. Why not do some R&D to find ways to reduce cost? Granted, that R&D might yield poor results. Without trying, however, how do we know? Perhaps the research would lead to much lower ongoing legal or compliance costs.

So, here goes with some possibilities:

• The authors discuss the possibility of using job descriptions to aid in compliance bu conclude there is too much noise in that data. More data often solves noise problems, so why not aggregate job descriptions across companies - that could yield more insight into problematic positions or locations than any one company’s data. Thinking about ‘compliance as a utility’, there may be multiple opportunities for companies to share non-competitive data to improve compliance. Large data sets, as the authors observe, usually yield more reliable results.
• Companies have a very rich, extant store of data that may well yield compliance clues: e-mail messages, files, and databases. Subject to privacy and other potential legal limits, companies could analyze the e-mail headers to look for suspicious patterns of communication. Suspicious might include too much, too little, or unusual combinations of people in touch. Start by finding a known compliance problem and do this analysis retroactively to learn what analysis might be predictive.
• Going one step further with e-mail, companies could perform semantic analysis on e-mail content (not just headers) to look for suspicious substantive discussions. Already in the 1990s the US financial sector did this (using, for example, Assentor), to identify broker e-mail messages that violated securities rules. Today, with the predictive coding techniques developed for e-discovery, much more is possible - and affordable.
• Corporate data does not stop with e-mail. Databases to support operations, sales, and expense management may also yield pointers for where to look for compliance issues. With social media, the possibilities seem endless.
• If the data the authors cite, and if e-mail and corporate records do not suffice, then collect data. Compliance officers could consider web-based surveys. If that loses too much nuance, then they could deploy a team of low cost lawyers to make outbound calls to interview selected employees and systematically enter the interview results into a database for analysis. Who said we have to stop with off-the-shelf data?
• Models may never be 100% reliable. The question is whether they are reliable enough for triage. If a model can bucket outcomes into ‘almost certainly not a problem’, ‘almost certainly a problem, and ‘may be a problem’, then lawyers at least have some indication of where to look. A team of offshore lawyers could apply human judgment to refine model results and surface the most suspicious findings to inhouse counsel.”

These ideas are not even in the Big Data realm. All these ideas can be tested with tools that have been available for years. The floor is open for other ideas, Big Data or otherwise.

This post captures my live Tweets from the Ark Law Firm Pricing and Profitability Conference occuring now in NYC. This Tweet stream is from the keynote address, The State of Pricing in the Legal Profession Today, by Toby Brown, Director of Strategic Pricing & Analytics, Akin Gump Strauss Hauer & Feld LLP. 

Below are my Tweets in chron order minus the hashtag for this conference, #ArkPnP2013. @gnawledge is Toby’s Twitter handle (name).

@gnawledge has formed a legal group of over 200 people focused on pricing. LMA is home (in a SIG)

Fulbright survey found AFA declined. @gnawledge questions this. But partly depends what we mean by ‘alternate’

Pricing in legal is defensive - about holding on to what law firms have.

To do pricing in BigLaw, skills needed: 1. ability to interact w partners 2. willingness to embrace unknown.

RT @nicholasnv: Function of strategic pricing is to maximize profitabily firmwide, not just at the matter or practice levels.

“Pricing is utter chaos”. Some firms have very experienced pricing profs; others barely have anyone focused on it

Firms struggle where pricing function belongs in staff structure. @gnawledge not currently in a department at Akin Gump

Knowing what clients want is biggest success factor in good pricing. Ask clients “where does it hurt”.

At one client, the pain point was first year associates. The real answer was not to put them on matter.

The pricing person has to model profitability. Existing tools look backwards; tools for prospective profit analysis emerging.

The pricing person has to monitor matters - but lawyers don’t want to be held accountable. Must give them actuals v budget.

RT @joshuafireman: Profit drivers: Rates, realization, productivity, leverage @gnawledge

Each point drop in realization translates to a one to three point drop in margin.

Firms must rely more on leverage to maintain profits. Partners must push work down - but they worry about their hours.

Firms will have to adjust partner compensation to encourage appropriate pricing and profitability.

Pricing is chaotic on client side. A few companies, e.g., GSK, focus on paying market price.

Clients not yet very good at specifying scope. Some RFPs do not make clear what client really wants.

Client trust is broken. Angry at 1st yr associate comp + PPP level. Price pressure will continue until those change.

Very easy for clients to seek discounts. When clients freeze rates, class bumps stayed.

Legal procurement has had mixed results. GC + proc profs still struggle. Still focus too much on hours.

In rational markets, info widely available. Legal market lacks transparent pricing.

Firms + clients ‘are begging for some rationality in market’

Existing + new players beginning to provide legal market price data.

@gnawledge backing away from emphasis on phase + task coding.

Law firms don’t know what they sell. Matters not sufficiently characterized to compare + analyze.

Law has been ‘no stone unturned business”. Clients want fewer or cheaper hours. But they need to more explicit about it.

Pricing and legal project management will continue to grow as firms struggle with price and margin pressures.

Lawyers and legal market professionals need to learn to love statistics more. 

More In-House Lawyers Question the Billable Hour by ACC President & CEO Veta T. Richardson in Corporate Counsel magazine (13 March 2013) criticizes a finding concerning alternative fee arrangements in the recently published Fulbright Litigation survey. Her conclusion may well be correct but the evidence she cites does not, statistically speaking, directly rebut the finding she questions. In my reading, the time periods and questions ACC asked are not close enough to compare results directly.

My goal is not to weigh-in on the disputed finding, whether GC are increasing or decreasing their use of alternative fee arrangements. Rather, it is to discuss statistical validity.

Too many legal professionals are uncomfortable with numbers and more still with statistics. I believe that explains persevaration over predictive coding, failure of many legal market surveys to publish the number or demographics of respondents, and incorrect comparisons (see, e.g., my post, 2008 AmLaw Tech Survey.)

Ms. Richardson points out that ACC has a larger sample than the other survey. In general, larger sample sizes are better than smaller sample sizes. But a big sample that fails accurately to represent the population is not necessarily more reliable than a small one. Beyond sample size, the questions asked matter a great deal. Do any AFA studies directly ask about the dollar spend for which the respondent is answering the AFA question?

The point is, statistics is a nuanced science. It’s scary when legal professionals start arguing stats. Fortunately, the next generation of lawyers may do better. Today, Dan Katz, a professor of law at Michigan State University, posted his syllabus for his Quantitative Methods for Lawyers class.

This is a live post from the Reinvent Law Silicon Valley conference in Mountain View, CA. Please forgive any typos or errors in conveying what speakers say. 

Who Owns the Law? Ed Walters of FastCase

Government works are public so on its face, public owns the law. But Ed says it’s not so simple. If you think about ownership of the law in terms of traditional property rights, then for many years, Lexis and West have owned the law.

Says Westlaw walked into DOJ and stole the in-house KM system being built, Juris. West said in 1983 that it wanted to help DoJ maintain its system. As added bonus, West would add cites to Juris. When contract came up for renewal in 1993, West wanted 3x as much for renewal. West said original contract gave Westlaw ownership rights to any co-mingled content, which addition of cites did.

Fastcase, a legal research company, wanted to put Georgia code online. When Fastcase went to upload, saw a LexisNexis copyright notice. Ed checked with L-N, which said it did indeed own the GA code. b/c LN writes headlines, claimed ownership of GA code. Ed said, ok, so I want to license. Four months later, LN said never will we license the GA code to you. (A slide shows flipping the bird.)

No one, however, thinks that state statutes can be copyrighted. Turns out to be cheaper to re-write catch-lines in code so Fastcase did that rather than litigate.

Only Thomson Reuters and Reed Elsevier have claimed ownership of the law. Should we stand for this? Should we care?

Ed says best versions of state codes are now maintained in academia. They are visual and better than commercial versions. We should not force innovators to have to buy code to build innovative new products. We should care that citizens do not have unfettered access to the law.

Allowing the big companies, with the big bucks, to push around everyone on ownership of law stifles competition and innovation. But the law is ripe for revolution and re-invention. Since law is not under copyright, reinvention can happen even faster than in music or movies. Also, law has a deep inherent architecture that makes it a fascinating data set with which to work. Ed, as example, shows a data visualization of FastCase presents to help users find and understand the law. If the data are available, much innovation is possible.

Says he does not fully blame TRI or Reed b/c they put out good products. But states have more obligation to make the law both free and open. Free is not enough; open is key: it needs to be in open formats, authenticated, and available for bulk download.

Who owns the law? We do. Law is not jut dusty books. It’s an important achievement of human species. Law is moral document. We cannot cede ownership to private companies. Take our law back.

Earlier today I posted five Tweets that tell a short but compelling narrative of the sea change in the large law firm market in the US and other Anglo nations. 

1. Bruce McEwen, aka Adam Smith, Esq., wrote a great series of blog posts called Growth is Dead, now a book. Last week, Bloomberg Law interviewed Bruce for an excellent 12-minute recap.

2. Separately, ERM Legal Solutions posted an item last week that picks up on one Bruce’s key themes: the loss of law firm pricing power. Crossing the Chasm: Thinking Clearly in the Legal Pricing Crisis reports on a legal pricing conference and how firms and clients can bridge the pricing gap.

3. I was intrigued to read over the weekend a Legal Futures post (UK), UK LawNet raises bar with new client service standard. LawNet helps its smaller-law-firm members standardize their practices and client service, including “mystery shoppers” and ISO standards. Service principles vary little by customer size, so BigLaw canlearn service delivery lessons from LawNet.

4. I expect that these cross currents will the subject of much discussion this Friday (8 March 2013) at Reinvent Law Silicon Valley, which , I will attend. It is a “conference devoted to law, technology, innovation, and entrepreneurship in the legal services industry.” It focuses on new ways of operating in the legal market. It’s hard to imagine a conference like this attracting some 400 legal market participants a few years ago.

5. Capping off my Tweet stream, I noted that the Washington Post published on Sunday Value Added: Home is where Potomac Law Group wants its workers, about a DC-based “new model law firm”. It is growing rapidly by tapping the market of experienced lawyers who don’t want to work full-time. I have spoken to founder Ben Lieber, featured in the article and he was a panelist on a session I moderated on new model law firms last fall. Ben is one of many lawyer-entrepreneurs now creating new and more cost-effective ways to deliver high-quality legal services. I expect PLG and other large-firm alternates will prosper given all the changes we see.

The short story told by these items: BigLaw faces growth and pricing challenges, smaller firms are innovating in process and staffing, and whole conferences and classes of individuals and organizations now focus on better ways of working that improve the client value proposition.

I could end on a doom-and-gloom note, citing two large firms that last week laid off staff or lawyers. That is, indeed, part of the narrative. The more important message for large law firms, however, is that they have an opportunity to flourish in a time of change. The answer is simple in concept but hard to execute.

Large firms must differentiate, revamp pricing, improve process, adopt project management, and improve service delivery. Success in those undertakings gives firms a shot at gaining share and at least maintaining profits at current levels.

Management must remember though that, unlike the old days, they cannot put into place a strategy and let it run on auto-pilot. With demand flat and completion growing, firms will need to adjust strategy and operations regularly. The growing market we experienced until recently was dynamic in a way that covered a multitude of missteps. Mature markets are dynamic in different ways – the players must constantly angle for advantage. And mature markets may not forgive execution sins. It will be interesting to see how many firms succeed in this new narrative.

On Sunday I spent time sipping a coffee outside of Berkeley Law School. I was struck by its facade, pictured below, and what it signals about lawyers. 

One entrance to the school is a monolithic concrete facade, broken only by two quotes (Cardozo and Holmes) on giant plaques, one above each entrance. The quotes are long and, the the font and spacing makes the text hard to read. The language is complex and hard to understand for the average person.

Here is my take on the subliminal message for law students:

• Expect to write long, dense prose for a specialized audience. If you can say something in a lot of words instead of a few words, that’s great. Don’t make things easy; don’t worry about the average person.
• Focus only on the words. Don’t worry that how you lay them - fonts or spacing - make the text hard to read. Great content stands on its own - it’s worth suffering through.
• There is no context for the law; instead, it appears on a giant blank slate. You can find it if you try hard enough and simply apply it. Never mind society, citizens, or business, focus on the words because you really operate in a vacuum.

I have nothing against a lot of text inscribed on walls. One of my favorite spots in Washington, DC is the Lincoln Memorial, where the Gettysburg Address is inscribed on one wall. On each visit, I look forward to re-reading it.

My only point is to think about the subtle messages law schools send to students. I hope that the current public debate about U.S. legal education leads to a new set of signals about what it means to be a lawyer.

Three news items caught my eye last week and help explain the challenges large law firms face. 

Citi Private Banking, which offers regular and reliable financial analysis of large law firms, reported on 2012 large law firm financial results in Citi: Firms Posted 4.3 Percent Rise in 2012 Profits (AmLaw Daily, by Dan DiPietro and Gretta Rusanow). The article content sends a much grimmer message than the headline. An extra push for Q4 collections explains some of the growth. That just steals from 2013 performance. Moreover, the report cautions about “survivorship bias": results look rosier when excluding failed firms (Dewey in particular). Net net, for 2012 “the Am Law 1-50 still finished 2012 flat to the prior year, and smaller firms still saw a decline vs. 2011″. The best Citi expects for 2013 is modest partner profit growth.

Two trends contribute to the struggles many large law firms face: (1) price pressure and (2) high quality alternatives to BigLaw that offer substantially lower prices. I’ll take these in reverse order.

One alternative is Axiom Law (see my July 2012 The Rise of Axiom Law post). The Wall Street Journal Law Blog, in Axiom Scores $28 Million Round of Funding, observes that

“Axiom’s attorneys perform corporate legal work for clients but charge lower prices than typical large law firms which are encumbered by high rents and other fixed costs. The company bills itself as an efficient alternative to traditional law firms whose lawyers–many of them BigLaw refugees–can provide sophisticated legal expertise.”

The company also offers “managed services” for document review and contract management. On a related note, late in the week, a much-Tweeted-about Bloomberg Law video interview of consultant Kent Zimmerman, LPOs Stealing Deal Work from Law Firms, reported that Axiom did all the work on one recent deal.

If clients care that Axiom Law is not a law firm, they can choose from many “new model law firms” that offer lower rates and higher efficiency than most AmLaw 200 firms. A particularly innovative one is Clearspire Law (see my several posts about Clearspire). Clearspire Law, issued a press release noting that

“Beginning with the 2013 opening of offices in the New York City, Los Angeles, and San Francisco areas - in addition to its existing Washington, DC headquarters - Clearspire plans to open offices across the US and increase its attorney roster by 50 to 100 new attorneys annually to keep apace with market demand. Future Clearspire offices are planned for Atlanta, GA and Chicago, IL.”

BigLaw partners still in the clutches of the “millionaire syndrome” can easily dismiss the alternatives. When I talk to managing partners and to large firm pricing professionals, however, I hear about the constant price pressure. On price pressure, I offer only an editorial note. The New York Times last week reported that Debevoise & Plimpton Drops Trusts and Estates Practice. I found one paragraph striking:

“Another issue in sustaining these departments is that individual clients bristle at billable rates that now reach more than $1,000 an hour. While big corporations grudgingly pay those rates, wealthy families often resist them.”

I immediately thought about the likely large overlap between wealthy individuals and corporate buyers of legal services. If wealthy corporate executives refuse to pay high lawyer rates out of their own pockets, how do they justify to shareholders that the corporation pays these rates? I leave that question to the ethics experts but it is worth pondering.

And speaking of pondering, what do all these developments mean for large law firm technology? We know that Axiom Law and Clearspire have invested heavily in technology. True, so has BigLaw. But in my observation, BigLaw spends IT dollars on maintaining and upgrading core infrastructure. In contrast, law firm alternatives spend their IT dollars on creating better value for clients. Over time, that can only widen the value gap.

In what is likely a pure coincidence but one could view symbolically, as Legal Tech New York begins today, articles today report on two large US law firms that have announced significant steps to reduce staff costs. 

The bigger announcement is Kaye Scholer Latest Large Law Firm to Shift Back-Office Operations to Less Costly Locale (Am Law Daily). Last October, I asked in a post, Will Pillsbury’s Nashville Service Center Trigger More BigLaw Cost-Saving Moves. The answer is yes. Enough large firms now have low cost service centers that we can no longer view them as outliers. What is particularly interesting is that Kaye Scholer is not that big - just over 400 lawyers. The setting up of a 100-person, multiple staff department center in Tallahassee was driven partly by a firm move in Manhattan and an effort to reduce real estate cost. Many firms operating in major metro areas face similar economics.

Also announced today: Offering Buyouts, Blank Rome Looks to Trim Secretarial Ranks (The Legal Intelligencer). The article reports on how older and younger lawyers use secretaries in different ways and at different ratios. Whereas more senior lawyers work in lawyer to secretary ratios of 1 to 1 or 2 to 1, ” associates are using secretaries at a rate of six or seven attorneys to every one secretary.” The firm expects to reduce its secretarial count by 30. It will set up a 12-secretary team in Philadelphia to serve most associates. (My 2003 article, The Future of Legal Secretaries, suggested that firms adopt secretarial teams.) In my experience, many firms still need to rationalize how they deploy secretaries.

Here at the New York Hilton, the venue for the annual Legal Tech show, e-discovery continues to be the dominant theme. Having registered for the show as a blogger, I have received a stream of vendor announcements. Most are about EDD and/or what strike me as incremental software upgrades. As large firms continue to open low cost service centers or rationalize staff support, I have to wonder if there a gap in the legal provider market.

A January 2013 Corporate Counsel article explores the potential of data modeling to support compliance with the U.S. Foreign Corrupt Practices Act. It’s great to see lawyers write about data and analytics, though I fear the article sends the wrong message. 

In What Computer Models Can - and Can’t - Do, authors Ryan McConnell (Baker & McKenzie partner), Dianne Ralston (Schlumberger Ltd. deputy GC), and Charlotte Simon (Baker & McKenzie associate) discuss the recent book The Signal and the Noise—Why So Many Predictions Fail But Some Don’t (by Nate Silver) and what it means for lawyers. The book “discusses sorting through empirical data and identifying signals that enable better decision making”.

The authors ask “can techniques developed in fields as diverse as weather forecasting and baseball management be applied to developing a risk-based compliance program?” and, more specifically, “how do compliance lawyers sort through the noise to create a valuable risk-based program?” [emphasis added] They examine several data sources that might support compliance and point out the “noise” problems with each:

• Lawyers could focus compliance training based on corporate job descriptions but the authors express concern about the accuracy of job descriptions and determining which pose the most risk.
• “[C]alls to a compliance department’s ethics hotline highlights other sampling issues", specifically that there may not be enough historic data or the calls may exclude some regions so you “will only get half the story.”
• A gift tracking system might highlight questionable spending but can never tell you the expense was “improper entertainment because it cannot reveal the intent”.
• The “new FCPA guidance notes that taking a risk-based approach is particularly critical with respect to due diligence procedures for assessing third-party relationships” but the authors see constraints in the “reliability of the data obtained from the third party to assess risk and, for initial due diligence purposes”.

The authors conclude

“The success of a risk-based model, however, will ultimately depend not on technology tools, but on the compliance lawyer’s ability to successfully analyze risk data and sort the signals from the noise. That lawyer must be adaptive, creative, and look beyond the data to see organizational and industry trends and risks. By helping us understand the limits of technology and how to use data, Nate Silver can make us all better compliance lawyers.”

Reading the article, you might conclude that lawyers should seek less data, not more. That would be discouraging, and I think wrong. I think a better conclusion is “get more and better data and improve the hypotheses and analyses”.

In my view, lawyers should work with corporate colleagues to identify additional existing data repositories or collect additional data and then to improve the models. The limitations of modeling are data quality and quantity, creativity and rigor in modeling, and validating model outputs. Tools are not a limit: a host of both legacy and newer “Big Data” software support many types of models.

To be sure, models have limits. We must, however, take a step lawyers frequently forget - specify the next best alternative. With compliance costs skyrocketing, will companies simply continue to hire more and more professionals? Aside from expense, will ever bigger armies of minders actually find enough compliance problems? The issue of alternatives here reminds me of the debate around predictive coding in e-discovery. Computerized document review has limits, but so does human review.

Data modeling likely applies to many areas of law practice. Many lawyers thus must grapple with the issues here. In my view, that means, for many, overcoming a fear of numbers and working with statisticians. As a profession, lawyers need to get smarter about preventive law. That means at least trying more modeling, at least enough to conclude it really does not work. I have seen no evidence that we are anywhere near that point.

[Background note: I have little compliance experience but extensive experience working with and drawing inferences from data, including stints as an econometrician and management consultant. ]

The New York Times reports today on big cuts at Citigroup. The article notes that the CEO called in all business unit heads and asked them “justify the costs associated with their operations”. Consider a similar scene at a law firm: the managing partner calls in all practice group leaders to justify their costs. 

Having trouble? It’s hard to imagine. Few practice group leaders - or managing partners for that matter - know the costs of their operations. That might not matter in an old-fashioned, large firm with lockstep compensation, a tight culture, and few in- or out- laterals. But most firms today pay partners widely disparate amounts, lose and hire partners regularly, and find cross-selling a challenge.

Many firms seems stuck between “collegiality world” and ‘profit world’. Actions, however, speak louder than words: partner de-equitization and staff cuts suggest they live more in profit world. And with alternative fee arrangements (AFA), we see some move to profitability analysis.

So my 2013 prediction, offered early, is that more firms will realize they really do live in profit world. They will need to start measuring practice and business costs more carefully. More importantly, they will need to act on what the data say.

Ten days ago I attended the Futures Conference, organized by the College of Law Practice Management and hosted by Georgetown Law (agenda). I report here highlights and lessons I learned. 

The New Normal of the legal market is all about value for the client. Value is in the eye of the beholder say the panelists in the Exploring the Nuance of Value session. Toby Brown, Director of Pricing, Akin Gump explained that he regularly talks to clients to learn what they mean by value. Sometimes it is lower cost, sometimes it is predictability, and sometimes it is regular, even payments.

Mark Chandler, General Counsel, Cisco Systems called value subjective. He explained this with a core microeconomics 101 concept: “consumer surplus”. Price is the intersection of the supply and demand curves (lines). The consumers constituting that part of the demand curve above and to the left of price intersection point would willingly pay more. So even in rigid classical economics, where there is a single market price, buyers assign different values to goods. I like that view. At core, Mark and Toby agree that law firms need to align how they think and work with law department needs.

Views differ on how best to deliver “value”. Some suppliers, er, I mean law firms, believe that delivering value means working and managing in new and less expensive ways. Four firms participated in a session on “New Model” law firms (which I moderated). All firms started in the last few years; all share the view that they must practice and or conduct business in new and different ways. A few panelist comments stood out for me:

• Just as business people cannot and should not meddle with law practice, “lawyers cannot meddle in how the business is run.” I also like what I consider two corollaries, “I have never met a lawyer in the business section of a bookstore” and “Why did we ever think that owners should manage?”
• Our value proposition: “Fine legal minds at one-half the rate”
• We built our firm with the view “Customer out, not partner down”.
• “We put our fees at risk”

Whatever their differences, these firms focus on delivering lower cost legal service. They have reduced the expensive downtown trappings of BigLaw and the huge staff support structures as well. They tap very experienced lawyers but manage them in new ways. Two firms explicitly separate business management from practicing lawyers. Two have invested heavily in technology to deliver lower cost, higher value service.

New Model law firms, however, have no monopoly on value. At least not according to the two InnovAction Award winners (see my separate real-time conference blog post on InnovAction for more details). The winners, Seyfarth (for Seyfarth Lean) and Littler (for Littler CaseSmart), both AmLaw 100 firms, say that big and established firms can innovate and deliver more value, that client’s don’t have to turn to New Model firms. Based on the innovations, I have to agree (though it’s not clear how many other firms are following in their footsteps).

With all the discussion of cost and value, it’s always helpful to remember that not everything that counts can be counted, at least not in dollars. Diversity consultant Vernā Myers gave a fabulous, dynamic presentation. She observed that diversity initiatives have taken a hit with economic tightening. As firms hire fewer new associates, they have become ever more credential conscious and risk-averse, which works against diversity. As firms hire lateral partners, they focus on nabbing big books of business, which favors older white men. A sobering reminder that lawyers need to remember that the drive for value cannot be focused only on pure dollars and cents.

You may wonder how technology plays into the value equation. As a conference co-chair, I saw no compelling topic on technology for the corporate legal market. In contrast, however, The Consumer Law Revolution session very much was about technology. The audience heard about a multitude of start-ups serving the consumer market. While these have much promise, the jury is, as they say, still out. We also heard about document assembly and interactive expert systems. Both have been available for years so it is not clear if they will have break-out moments. One panelist noted that given how many consumers cannot afford legal representation, it is morally reprehensible that lawyers deploy so few automated systems. I agree and would add that if general counsels were not cut of the same cloth as BigLaw, they might well call the limited used of tech by the AmLaw 200 scandalous.

As much as we hear about value and alternative fees and value, the change appears more evolutionary than revolutionary. In the session The New Normal from the GC Perspective, well-known ‘value advocate’ Susan Hackett of Legal Executive Leadership (and ex-ACC) made a forceful case for value and for change. Her GC co-panelists, however, on balance, seemed more concerned with expertise and cultural fit than explicitly reducing cost or redefining value.

Perhaps the biggest surprise for me was the session The Future of Managing Partners, which featured four managing partners. They focused mainly on culture and consensus. I heard much less about how these firms are adapting to the New Normal than I expected. I may, however, have been swayed by the Tweet stream. The Twitter conversation was quite at odds with the panelist comments. (Notes: 1. Archived conference Tweet stream here. 2. On day one, our hashtag, #COLPM, was the top trending term on Twitter!) The Tweets noting that the panel would not have been so different 30 years ago summed it up well. My favorite live moment was an audience question suggesting that “culture” is an excuse never to change. I’ve been there!

If I draw one, overarching conclusion from the conference, it is that the legal market is changing. It never changes as fast as I would like but the economic pressures are real. Enough clients now demand change and enough new model and traditional firms offer new approaches that I am confident we will continue to see real change. I am also confidant that large law firms that innovate to improve service delivery and client experience can maintain and gain share and profitability.

In my recent post, BigLaw Growth is Dead - Lower Cost Support Tipping Point?, I wrote about Bingham opening a support center in Lexington, KY and asked whether other large firms would take steps to reduce overhead. Conversations I had 10 days at the Ark Law Firm Pricing and Profitability Conference ago reinforced the importance of this question. 

BigLaw pricing experts explained how they factor overhead into their profitability analysis: most allocate it to fee earners on a sliding scale, more to partners than other lawyers and more to lawyers than to staff. They also confirmed that the average overhead per lawyer ranges between $200k and $300k per year.

In competitive markets, players wring costs out of operations. Post the economic crash, large firm face growing competition. That means more alternative fee arrangements (AFA) and more profitability analysis. And that in turn educates partners on the real cost of the fee earners. Will partners have a collective “a-ha” moment when they realize the impact of the enormous overhead? Perhaps that realization is a big factor in the growing number of boutique and “new model” law firms that compete both for high-stakes and every-day corporate legal work.

With such high overhead - it exceeds the comp cost of junior lawyers - BigLaw keeps open a “price umbrella.” That is, it creates the opportunity for competitors to gain share by selling equivalent or near-equivalent service at a lower price point. Price umbrellas tend to close absent a monopoly position, highly differentiated offerings, or supply-demand imbalances. Large firms have none of these to prop open the umbrella. Other commentators have noted that alternative to law firms are growing but BigLaw is not. And while data are sparse, I suspect boutiques and new model firms are also gaining share.

If this analysis is correct, then the question is whether the umbrella closes with a crash or slowly and gracefully. Either way, it seems likely we will see more cuts in law firm overhead.

Update (moments later). Minutes after posting this I came across the WSJ article, Law Firms Wring Costs From Back-Office Tasks, posted late Sunday. A meme at work?

This is live blog post from the Ark Group’s Managing Partner’s Law Firm Pricing & Profitability Conference. This session: The Buy-Side: Are You Selling What I Want to Buy? . [Please forgive any typos as I will post this as session ends]. 

Speakers:
Lynn D. Krauss, Assistant General Counsel Business & Finance Section, Law Department, Dow Corning Corporation;
Karen Dunning, Senior Director Legal Operations, Motorola Solutions, Inc.;
Lauren Trapp, Principal Program Manager Legal Operations, Motorola Solutions, Inc.;
Susan O’Brien, Principal at Sourcing Logics (former Manager, Legal Sourcing, Pitney Bowes),
Moderator:
Dr. Silvia Hodges, Adjunct Professor of Law, Fordham University School of Law (and Director of Research Services, TyMetrix)

Lynn Krauss

Why does procurement get involved in buying legal services? Often the CFO, CEO, or VP Procurement recognize legal spend is big and the company should get a handle on it.

At Dow Corning, lawyers evaluate law firms and decide on the acceptable set to consider. Procurement and Legal work together to articulate what services will be purchased, milestones, and deliverables. Procurement has much more experience than lawyers in scoping work. Procurement decides how the company will evaluate suppliers and how they will be paid. For example, they decide if an RFP is warranted or just a discussion with a couple of firms.

Criticality Grid (a 2x2) determines approach to purchasing. Axes are Spend and Number of Options

High Spend and Many Options: Market Driven
High Spend and Few Options: Strategic
Low Spend and Many Options: Standard
Low Spend and Few Options: Critical

Market driven means bidding (RFP). Fixed fees and aggregation occur in this quadrant.
Strategic means going after top firms and don’t expect same type of bidding; experience more important but cost still matters. Looking for a partnering arrangement. May or may not talk about fixed fees.
Critical area may not be a big spend but could be very important to company. More likely to go to a boutique firm because company wants the matter (or portfolio) to be important to the firm.
Standard: minimize company involvement and standard. Give work to low cost resources Example in this quadrant is contract review.

Law firms need to know in which a quadrant a project falls. That should determine how the firm tries to sell its services.

What procurement adds when it work with lawyers to buy services:
- Increased professionalism (engage strategic partners when necessary, do bidding process for repetitive work)
- Scope of work is better defined
- Payment terms articulated
- Increased emphasis on price / value
- Budgets established and then monitored
- Invoice may be reviewed multiple times
- Hourly rates may be fixed on discounted
- Selection of team at the onset
- Limitations on redundant work
- Supplier feedback

Motorola Solutions, Inc.

Motorola Solutions, Inc. has developed a repeatable procurement process. Will concentrate today on benchmark process and analytics. Use rate, spend, and attorney benchmark studies from TRI, CT TyMetrix, among others. Use a ‘visual ladder’ to show lawyer rates. Then creates a scattergram per law firm showing rates by lawyer, segmented by associate and partner and compare it to the CT Real Rate Report benchmark.

[See also Tweet stream for additional discussion.]

This is live blog post from the Ark Group’s Managing Partner’s Law Firm Pricing & Profitability Conference. Stuart J T Dodds, Director, Global Pricing, Baker & McKenzie Global Services discusses Navigating the Pricing Maze: Establishing a Pricing Capability/Function within Law Firms. [Please forgive any typos as I will post this as session ends. This post captures only certain highlights of his talk; I have Tweeted some other comments he made.]. 

Baker & McKenzie pricing and delivery framework:

• ‘Set’ the price: pricing and agreed fee approach
• ‘Get’ the price: value proposition and negotiation
• ‘Manage’ the price: ability to manage and delviery approach
• ‘Review’ the price: opportunity to improve service or margin

Stuart has seen more emphasis on Set and Manage so far but focus is shifting to Get and Review.

Where should law firm pricing function sit in the organization. Stuart is in Marketing, which lets him become engaged earlier in the intake process than if he sat in Finance. But says there is no one right answer for where pricing should sit. But all functions - finance, marketing, KM, strategy, and other staff departments - must coordinate on pricing.

Highlights the rising role of law firm knowledge management (KM) professionals. The KM teams are best positioned to help firms how to drive costs lower, do the work better.

Stuart is spending more time on legal project management now. Pricing is ultimately set by the market, so the firm cannot control it. But the firm can control how it does the work, which is in the firm’s control (and can drive profitability).

The essential skill set for pricing:
1. Very strong communication and stakeholder management skills
2. Commercial and entrepreneurial
3. Analytically strong
4. Intellectually curious
5. Not scared of technology

Getting started with law firm pricing:
1. Ensure strong and active leadership support
2. Start with specific product areas or relationship managers first
3. Set measurable objectives for the role (e.g., at the practice or client level)
4. Start potential initiatives with some current clients
5. Get some early wins
6. Capture and review the results, learn, communicate, and improve

In summary:
1. Doing nothing is not an option - it’s too important to ignore
2. Ensure organizational buy-in
3. Have at least one person own or support the pricing process
4. All the function to evolve - don’t try to do all at once
5. Do something.

This is live blog post from the Ark Group’s Managing Partner’s Law Firm Pricing & Profitability Conference. First up is Steven J. Harper, author, contributingeditor to The American Lawyer, and adjunct professor at Northwestern University’s Law School and former Partner at Kirkland & Ellis LLP. His topic: Thinking Beyond Short-Term Metrics. [Please forgive any typos as I will post this as session ends].  

Steven will describe how he became a commentator on the business of law after a long career in law practice. He started as full-time associate at K&E in 1979. One-half of 60th floor was the library, which has the ’state of the art Lexis terminal”. At no point during orientation, did he hear anything about billable hours. It was not on the radar screen at K&E in 1979. Of course lawyers billed time but it was not a topic of conversation. Lawyers worked very hard but the focus was not on hitting targets, though he did learn his billable hours at the end of the year. So what happened? What’s changed?

In 1985, American Lawyer published its fir Am Law 50 issue. It published partners per profit. Steven calls this a ‘watershed event’. In real terms, PPP doubled from 1985 to today. In 1985: leverage was 1.76; 80% of firms had single-tier partnerships; path to partner was 8 to 10 years; and there were no guarantees of partnership but “decent odds of advancing.” Today, leverage is 3.54 (2x in 1985); 80% of firms have 2-tier partnerships; 11 to 12 years to partnership; and fewer than 10% of associates make partner. [Note: leverage ratios denominator is only equity partners.]

More metrics: In 1985, top to bottom equity spread was 3 to 1; few firms had mandatory billable hour requirements; hourly rates were low enough that firms could take small cases the enhanced associate morale and training. Steven said as 2nd and 3rd year associate, he was able to lead cases - it was unusual then but it never happens today because of high hourly rates. Today, the partner comp spread exceeds 1o to 1 in many firms (Dewey has “barbell” approach [RF: bimodal distribution]); most firms have mandatory minimum billable requirements, usually 2000 hours per year; hourly rates have “soared” from 1998 to 2007.

And still more metrics: In 1985, firm incentives rewarded mentoring and other partnership qualities; firms valued institutional clients and encouraged inter-generational continuity; lateral partner moves were rare. Tells story about Fred Bartlitt, his mentor, who was interested in ‘building a practice’. Today, short-term metrics - billings, billable hours, and leverage - determine partner comp at most firms; as a result of these pressure, partners build client silos ‘because they eat what they kill’; ‘lateral partner hiring frenzy continues’.

So today, there is three-legged stool. Says first leg is billable hour is one and that there is much evidence of a movement away from billable hours, talk of AFA notwithstanding. 80% of AFA are discounts from hourly rates. 16% of big frim revenues from AFAs. Second leg is billings: partners need to build silos so partners can hang onto their clients and their billings. This also gives them portability to move laterally. Third leg is still-increasing leverage. I ask if leverage has really continued to go up: answer is that it’s been about steady since 2010 BUT there is more hiring of counsel and the average of partners has increased. Conference Chair Paul Lippe points out that Big 4 and McKinsey have mandatory retirement but in BigLaw, often those over 60 are the biggest earners.

The downside of the shifts:

• Five year associate attrition exceeds 80%. This means less client continuity.
• Associate morale has plummeted.
• Money has not bought partner hapiness.
• Billable hour regime has encouaged inefficiency and cost clients money
• Several large law firms are gone. (Heller Ehrman, Thelen, Howrey, Dewey.)
• Continuity in client relationships becomes problematic.

“Not everything that can be counted counts and not everything that counts can be counted.” The challenge: what set of metrics should we use? Steven points out that life is more than about money. Being in the “flow state” is what most professionals want but system today does not focus on providing this. So, he offers ideas for clients:

• Fight the lawyer’s instinct for precedent
• Turn the billable hour metric against itself. For example, do a histogram (my words) of associate distribution billable hour years. This would show which firms work too hard. This may or may not matter to clients directly. But suppose clients showed that for each fee earner, they could see prior 12 month billable hour total. Analogizing to limits on truck driver and pilot time on job, clients might sense the diminishing marginal utility of lawyer time. Discussion though if clients really care - audience member says clients only care about results. Steven says clients would sometimes care, depending on nature of work and circumstances.
• Force and reward inter-generational transition. Clients should want lawyers of multiple ages on cases for long term continuity.

Ideas for law firms:

• Create reweard structure for long-term institutional stability and client service
• Change partner comp to discourage building client / partner silos
• Partners need to remember how they arrived where they are - they should mentor
• Encourage a culture that creates ‘flow’

Last week I attended the 2012 International Legal Technology Association (ILTA) annual conference. Rather than summarize it - an impossible task - I offer my impressions and musings. 

Legal project management and alternative fee arrangements remain hot topics. This is not news, merely confirmation. Each year more of my KM friends ‘do LPM or AFA’. Each year, I meet more BigLaw professionals focused on pricing. Only one other legal market trend - law firms merging and globalizing - seems as powerful. Like that one, expect LPM and AFA to be on the agenda for years to come. For just one reason why, see Bruce MacEwen’s excellent blog post today, Growth is Dead: Part I.

E-discovery remains hot, judging by both the program and the number of EDD vendors in the exhibit hall. I still cannot explain why the vendor market has not consolidated. To help both customers and vendors through the complexities of matching requirements and capabilities, George Socha and Tom Gelbman continue to build and refine their service, Apersee.com, which allows vendors to specify capabilities and customers to select them based on multiple criteria.

The many EDD vendors compete vigorously for sales talent. I had an interesting conversation with Jared Michael Coseglia, president of TRU Staffing Partners, a search firm focused on legal technology and e-discovery. Jared points out that vendors constantly seek top sales talent outside their companies and bid up compensation. He believes vendors should grow their own talent and has interesting ideas about how to make that happen. So I look forward to hearing more from him.

Legal process outsourcing (LPO) was never big at ILTA. Recent years had at least one session focused on it, albeit not well attended. The one 2012 outsourcing session, based on the speakers (I could not attend), seemed more about tech outsourcing than LPO. Whether that reflects the market at large is unclear. A September 3rd Managing Partner article, Law firms are losing work to LPO providers, suggests LPO remains robust. I suspect ILTA participants lump LPO in with managed review services, which have grown rapidly.

Legal technology outsourcing, however, may be on the upswing. I spoke with the principals of Keno Kozie, who tell me that both their help desk outsourcing and managed services business are growing nicely. I remember a decade+ ago suggesting to a law firm that it outsource its help desk; the idea was shot down without consideration. Technology outsourcing may not be right for every firm but I do not understand how firms or CIOs can dismiss it out of hand.

I was sorry I did not have time to attend more sessions, especially the ones on knowledge management. Fortunately two of the best legal market bloggers live blogged many KM session: Mary Abraham at Above and Beyond KM and David Hobbie at Caselines.

Both the ILTA professional staff and the many member volunteers deserve tremendous thanks for organizing another fabulous annual conference.

Update: (5 Sep 2012)
Andrew Davis of Boxless in Melbourne, Australia asks in a comment “Just wondering what the mood was in relation to public cloud offerings such as Google Apps? Are law firms embracing those sorts of services, or are they holding back?”

My answer:

The great thing about ILTA is its diversity of topics. I did not spend time on the cloud topic but I know there were many sessions on it. Anecdotally, I know the topic is on the agenda for many CIOs but there is also a lot of concern about security.

I hear more firms are moving to NetDocuments, which arguably is one of the first cloud services - outsourced / cloud document management to replace legacy enterprise DM. (I recall two firms migrated to it about a decade ago and more since.)

If I were a CIO again and working for a firm interested in competitive advantage, I would be wanting to move as much of my infrastructure to the cloud as possible. That way, IT and the firm could shift focus from maintaining infrastructure to using tech for competitive advantage. This may be the minority view.

General counsels face pressure to reduce costs. Law firms must offer better value. The “new normal” requires doing five actions:. 

1. Do Less : Do only the amount of legal work commensurate with the legal risk. Lawyers likely spend too much time looking for little stones when seeing boulders suffices.

2. Improve Efficiency: For work that really needs doing, re-engineer the process, automate where possible, and project manage what’s left.

3. Delegate to the Lowest Cost Competent Resource: Delegate down and select the lowest cost resource at each level. Choices include staff attorneys, paralegals, contract lawyers, LPO providers, and timekepers in firm-owned, low-cost onshore or offshore locations.

4. Build Factories: Build factories for high volume work: low cost location, minimal overhead, automated, and right-staffed.

5. Reduce Overhead: With overhead in many US law firms over $200,000 per lawyer, firms still have opportunities to reduce overhead cost. Rationalize support and admin processes and centralize staff in a low cost location.

Anyone interested in the evolution of the legal market should read The Disruptive Innovation at Axiom’s Legal Outsourcing Division in the July issue of the The American Lawyer. 

Highlights of Axiom from AmLaw Article. Key facts and quotes from the article:

• Axiom is a C-class corporation, not a corporation, and has “more than $30 million in venture capital” in backing
• 2011 revenue of $130m, up 62% from the prior year. This revenue would place it around 170 on the AmLaw 200 list
• Axiom started as a legal staffing company and now offers outsourcing or “managed legal services” that account for 25% of 2011 revenue, up from 10% in 2010.
• Customers include Hewlett-Packard Co., Kraft Foods Inc., and Vodafone Group plc
• Axiom has 800 lawyers: 450 in the staffing group and 350 in the outsourcing group.
• “In the past Axiom often bragged about the average $225,000 salaries of its temp lawyers, who typically have 15 years of work experience and bill out at $150-$350 an hour”
• HP was looking for “efficient and cost-effective way to negotiate, draft, and execute sales-related contracts, licensing deals, and follow-on agreements” and choose Axiom from a filed of 17 bidders, including law firms
• Axiom has managed service centers in Houston, Belfast, and Chicago.
• Axiom “is attempting to pave a middle ground between legal process outsourcers and law firms (both traditional and alternative) by providing solutions to legal challenges that may rise above mere document review tasks but don’t require the bench strength and extensive talent infrastructure (read: cost) of an Am Law 200 firm.”

Axiom Growth and Margins. A few calculations on the data in the article reveal that the company’s 2010 to 2011 growth rate for staffing was 35% and for managed services was 300% (three hundred percent). As for margins, if staffing lawyers charge $250/hour, the mid-point of the cited range, and each bills 1,500 hour/year (my assumption), that yields $375,000 dollars/year per lawyer for a gross margin of 40% on the cost of $225k. I suspect net margins are healthy: The Axiom Law website reports the the company has 900 people. Less their 800 lawyers, that leaves 100 “headquarters” staff. So the company operates at a lawyer to staff ratio of 8 to 1 as opposed to Big Law, which is typically at 1 to 1. Furthermore, since Axiom staffing lawyers work at client sites, it has much lower occupancy cost.

The Future of Axiom Axiom has a big price advantage over Big Law. Clients, however, consider more than price. But for how long and for what range of work. Consider the answer Aric Press, ALM editor-in-chief, offers in his June 27th column about Axiom, Don’t Look Back. He cites innovation-guru Clayton Christensen to conclude:

“How much of the work by grand-firm lawyers fits the description of being repetitive and ripe for commoditization? More than most admit. And once Axiom proves adept (assuming it does) at that labor, why would it stop at the basic legal work that has made a generation of partners wealthy?”

Axiom also has another advantage over many law firms: it only has institutional clients. Lateral partner moves create an inherent tension between the interests of partners and firms. This gap may be shrinking, as Jordan Furlong pointed out last week in The dying cult of the corner partner. Nonetheless, it’s a gap that presumably does not exist at all at Axiom.

Conclusion. With high revenue growth, healthy margins, lower prices than law firms, and the ability to raise outside capital, law firm management should keep an eye not only on Axiom. And on a range of other alternative providers.

Last week the Association of Corporate Counsel (ACC) announced the 2012 ACC Value Champions, 12 winners of awards that recognizes “effectively driving value by cutting spending, improving predictability and achieving better legal outcomes." 

Amar Sarwal, VP and Chief Legal Strategist at CC, in his Top Ten Takeaways From Our First Value Champions Program blog post, synthesizes what we can learn from these early adopters of better ways of practicing law. My favorites in his top ten are:
-"The value conversation is happening everywhere.”
-"Fixed fees can drive the value equation"…. “But value is more than just fixed fees”
-"CEOs and CFOs care.”

The landing page 2012 ACC Value Champions lists the dozen winners and link to a page about each. In the table below, I highlight seven of the winners

Award Winner	Award Tagline	GOAL	OUTCOME
GLAXOSMITHKLINE	Committed Leadership Combines with Technological Innovation	Move “all outside counsel assignments throughout the world to value-based fee (VBF) arrangements”.	-"By the end of 2011, more than 68 percent of GSK’s external spend was through VBFs, resulting in extremely significant savings”.  -Reverse auctions to create fee competition; RFIs; metrics. -Technology: electronic reverse auctions -17.5% savings
LUCCHINI S.P.A.	Improving Decision Making through Better Legal Support	Reduce spending, budget reliably, improve efficiency, control matters	- Developed T&Cs for law firms, banned certain law firm charges, required advance quotes and uniform invoices -Technology: outside counsel data reporting system and process automation -35% savings
MEDTRONIC	Comprehensive Transformation Generates Impressive Metrics	Comprehensive transformation, including preferred providers, RFPs, AFAs, new process + tech, metrics	-Reduced number of outside firms from several hundred to 40 -Numerous alternative fee arrangements -Technology: new matter management and e-billing system and dashboard with metrics -40% savings over 2 years
RBC CAPITAL MARKETS AND MORGAN, LEWIS & BOCKIUS LLP	Managing for Continuous Improvement	Move to value based fees	-Fixed fees including paid monthly for life of matter, with risk sharing, and with caps -35% savings since 2010
ROCKWELL COLLINS AND SEYFARTH SHAW LLP	Lean in the Legal Department? Yes!	Predictable fees, consistency of processes, and a more efficient team	-Rockwell Collins–Seyfarth Lean consulting team had completely reengineered how the Law Group selects, engages, manages, and evaluates outside counsel."  -Outside counsel matters >$50k are all AFA (with success fees) -RFP process creates competition -$32.6M saved
THE HOME DEPOT	Fixed Fees, Efficiency Combine to Slash Spending	Move to fixed-fee and retainer arrangements	-"reduced annual legal fees by 45 to 55 percent since the start of the program in 2008. Additionally, the legal budget is more predictable” -"reduced annual legal fees by 45 to 55 percent since the start of the program in 2008. Additionally, the legal budget is more predictable”
TYCO INTERNATIONAL & SHOOK HARDY	Flat-Fee Arrangement Benefits Both Client and Firm	“reduce the company’s exposure and control costs while protecting quality service, responsiveness, and results”	-Firm shadow bills with ABA task codes to identify efficiencies -Apply early case assessment to reduce case count, cycle time, and cases filed -Over five years, case docket reduced 55%, new case filings declined 65%, and case cycle time shortened by 40%

 

Greg Lambert of 3 Geeks and a Law Blog and I exchanged e-mail and had a video chat via Google+ last week. I started with a question about aggregating Tweets - my own and others - into an e-mail to which folks who wanted my “Twitter news stream” might subscribe. We ended up covering quite a bit of ground about collaboration and Microsoft Outlook. We agreed to reproduce on our respective blogs our exchange, as does Greg at Why Are We Still So Reliant Upon Email?. 

RON
I am struck by how many people still rely on e-mail for news, as opposed to Twitter or RSS. When Jeff Brandt features my blog post in his daily PinHawk Legal Technology e-mail, I see a noticeable traffic spike on my blog.

That got me thinking about two ideas. First, why are so many people still so reliant on e-mail? Not sure I am up for tackling that. Second, is there a tool that turns Tweets into an e-mail. Both your Tweet feed and mine focus mainly on news items. I wonder if some folks who are not interested in Twitter would subscribe to a weekly digest of Tweets from one or more Twitters.

I was looking around for a tool and see that Twitter will soon enable sending Tweets by e-mail (http://blog.twitter.com/2012/05/best-of-twitter-in-your-inbox.html ). What I have in mind, however, would be a bit more curated, maybe using the Twitter favorite feature to tag my own and other Tweets. Then the tool would automatically mail those weekly to subscribers. I assume Twitter API would allow this but I’m not that techie.

Do you think that would appeal to anyone? Do you know if there is such a tool?

GREG
I was just thinking last week about why we are still so reliant upon email when there are so many better options out there, especially social media tools (whether Twitter, Google+, Yammer, or the 1000’s of other options.) I came to a similar conclusion of wonder if social media could somehow be embedded into the email systems and mimic email, while bringing in the best pieces of what makes social media so valuable.

My thoughts trended, however, to Twitters Direct Message option when it came to online discussions. [Tweets are public; a Twitter DM is private, to a single person.] I’d love it if I could embed a Twitter DM to a group of people, and have a structured conversation in Outlook (or gmail) and the familiarity of those interfaces, but using DMs as the conduit. I could keep the conversation short and clean, without the clutter of all the old message threads showing up in each response.
I also like the idea of a curated resource as well. People are always looking for well structured, curated information, and since we seem to be stuck in an email-centric world, this type of newsletter might be something that would appeal to those that want the benefits of a social media world, without having to actually go visit that social media world themselves.

RON

Greg, it was fun to connect with you “synchronously” after the exchange above so that we could test a Google+ Hangout. [A hangout allows real time video conferencing and text messaging among multiple people.] It’s too bad that Hangout requires video and seems inherently focused on real-time, synchronous communication. So it’s not the answer to an easy-to-use, persistent discussion area or forum.

Returning to your comments above, I have two concerns with your proposed approach. First, Twitter DM seems inherently “point to point” or “one to one”. I suspect a lot of engineering would be required to convert it to a forum or bulletin board feature. Moreover, Twitter users might be unhappy with such a change. I find an increasing number of my contacts use Twitter DM in lieu of e-mail. They probably would not want to clutter this clean, private, and uncluttered channel with discussions threads.

Second, do we want to take steps that encourage lawyers and staff to have even more reasons to stay in Outlook? I know it is the application where “lawyers live”. My hope, however, is that eventually there will be a better or different interface for working together as a group. I am not optimistic though. Even in the early 1990s, when I first evaluated discussion forums in a law firm, lawyers liked the concept but were too wed to their inboxes to use it.

We’ve now identified two unmet requirements. One is what I started with – converting Tweets (mine and those I follow) to a periodic e-mail to which non-Twitter-users could subscribe. I will leave this one to entrepreneurs in the Twitter ecosystem. The other requirement is your idea for better tools / interface for group discussion. I’m not sure I see answers. Moreover, I am not sure if the question is “do we need a new collaboration or communication tool” or “are existing tools fine, they have all the features anyone could ever want, and the question is just change management”. Your views?

GREG

Ron, I’ve thought about the limitations that happen when using the Twitter DM function and I was kind of hoping that the way it would show up in Outlook or gmail would be modified by an API or some type of intermediary program that would allow one-to-many communications (as long as you are connected to each of the Twitter accounts) and could go beyond the 140 character limit (although there is some benefit to keeping communications short.) Perhaps the Twitter DM function isn’t really the best method, but there should be some improvements in communications beyond the awful email threads that we live with now. I have heard of firms that use Outlook’s “To-Do” list, but I don’t think that it really is the answer here. Google’s gmail is kind of working around the problem by limiting the repeating thread information, but it is still not really as clean a communications tool as some of the social media tools are.

As for trying to move lawyers out of Outlook… that’s a big shift in culture for them and won’t be easy. I’ve mentioned that email is now the touchstone of the law firm. No longer do lawyers collaborate face-to-face (only when they have to), instead the collaboration is virtual, and unfortunately, via email chains. We all know of the problems associated with working as if Outlook is your common database. Even making the emails ‘better’ by shifting social media type content into email newsfeeds just reinforces the idea of Outlook being the best collaborative resource. The biggest problem is that Outlook is not a true collaborate tool, or at least not a very good one. Efforts should be made to move collaboration efforts off of Outlook, but that’s obviously easier said than done. It would make for an easier transition if we could create tools that allow the lawyers to believe they are still in Outlook, but that rewards them for inefficient and potentially risky work habits. The better approach would be to wean them off of Outlook, but that’s a project that would take years to accomplish.

Four mainstream media articles on Wednesday, 18 April 2012, about dynamic sectors of the economy offer potential lessons for BigLaw leaders. 

Sales Are Stagnant, but I.B.M. Earnings Beat Analysts’ Expectations in the New York Times reports that IBM revenues are flat but earnings up because the company is shifting to higher margin business.

Many large law firms also face flat or modest revenue growth. Most firms think the move to higher margin means more bet-the-company work. Yet a better path to margin improvement may lie in doing higher volume work more efficiently. Consider Online Education Venture Lures Cash Infusion and Deals With 5 Top Universities (NYT), which explains that leading universities are investing in online course delivery that will make classes available to thousands of students globally. Universities may be mission-driven but they need to make ends meet so I assume will eventually generate income from extra eyeballs. Premium work at low volume is not always the winning strategy.

Of course, margins are also a function of costs. Warming Up to the Officeless Office in the Wall Street Journal explains that growing numbers of workers no longer even have cubicles. Instead, in “free address” or “non-territorial offices", workers claim a desk or space at a communal table each day. This lowers occupancy and energy costs significantly; it also reduces e-mail traffic and speeds decision making. It might not work for lawyers but with many working virtually anyway, firms can adjust real estate.

Firms can also adjust other costs. They can emulate IBM, which taps” pools of lower-cost skilled workers, especially in India.” Law firms don’t have to go offshore today for lower cost labor - many smaller cities offer lawyers and business support staff at lower cost than major metro areas.

Business - and even education - changes daily. For those of who think BigLaw is not changing enough, a question is whether law firms can’t change faster or simply won’t. Carriers Warn of Crisis in Mobile Spectrum (NYT) illustrates the difference between “can’t” and “won’t", suggesting mobile operators can make do with their current spectrum allocation if only they invested in the right technology.

Law firms can change if they have the will. The tools and the strategies are not that complicated. The only question is how long before “will not” becomes “can”.

Every organization must decide whether to build or buy what it needs. Corporate law departments today are building more than they did and, when they buy, buying from different sources. Large law firms need to figure out the implications. 

Three blog posts and an article yesterday illustrate the shifts. Until the 1980s, most corporations bought most legal services from law firms. Today, many build instead of buy: the Wall Street Journal blog in In-House Lawyers Gaining the Upper Hand, Says ACC reports on a just-released ACC survey that finds in-house counsel hiring is up and the use of outside counsel down.

When GCs do buy today, their percent of purchases from small law firms is up. Bye-Bye Big Firm in Corporate Consel reports that “corporate lawyers are flocking to small firms.” The article offers anecdote, not data, but I suspect the data would confirm the trend.

And it’s not just small law firms that get more business today. Patrick Lamb, commenting on this article in Disaggregation pushing demise of BigLaw? notes that small firms are only part of the story and that law departments also buy from law firm alternatives such as legal process outsourcers (LPO).

These shifts contribute to the flat demand and price pressure large law firms face. Smart firms will adjust how they operate. Some are already in on the action. The Hildebrandt Blog post Eversheds Pilot Contract Lawyer Service Becomes Permanent reports that UK firm Eversheds’ pilot program of offering contract lawyers is now permanent. It sounds similar to Fenwick’s FLEX and to Berwin Leighton Paisner’s Lawyers on Demand. All three offer more flexible and lower price options to corporate clients.

With all the shifts, large law firms may need to re-think their own build v. buy decisions. Historically, they favored buying. On the lawyer side, they hired associates only. Today, they hire staff attorneys and “buy” (rent) contract lawyers. And some firms continue to experiment with more flexible staffing models such as working with alumni. On the technology side, firms are moving from owning infrastructure to renting it in the cloud or at data centers.

As law firms adjust their service delivery model with legal project management, process improvement, technology, and other tools, they may also need to adjust their staffing approaches, finding ways to buy / rent more than they build.

Recent reports of a mixed profit picture for large law firms is a good reminder that strategy and differentiation now matter. 

Last week the Hildebrandt Institute and the Law Firm Group at Citi Private Bank released their 2012 Client Advisory (PDF). I find most striking the “Widening Dispersion of Performance in the Legal Market,” which two charts illustrate: 2001-2007 Profits Per Equity Partner, Compound Annual Growth Rate and 2007-2010 PPEP CAGR. In the earlier period, all but one firm had positive growth and most clustered between 5% and 15% growth. In the more recent period, profits shrank at many firms and growth rates varied widely (from a low of almost -10% to a high of over 20%). AmLaw 100 performance data for 2011, which is trickling out at law.com, confirms the wide range of results.

Firms consequently can no longer take future success for granted. Jordan Furlong notes in a recent post, The Imaginary Normal, that the possibility of failure is the real normal. He points out that the there was nothing “normal” about ever-rising BigLaw rates and profits.

Where does this leave BigLaw? Large firms can either control costs or increase revenues to improve profits.

Cost Control
Some firms, even very profitable ones, have taken bold moves to control costs. The Hildebrandt-Citi report sums this up nicely:

“growing number of firms to move parts of their support and other functions to lower cost locations. Following the earlier examples of Orrick (in Wheeling), Clifford Chance (in India), and Baker & McKenzie and White & Case (in Manila), we have seen WilmerHale opening facilities in Dayton, Pillsbury opening in Nashville, and Allen & Overy and Herbert Smith both opening and expanding facilities in Belfast. [Such centers start with support functions] but they often quickly grow to include a wide variety of other activities, sometimes including litigation support, basic document drafting, and some legal research.”

I expect this trend to continue, as I suggested in my January Law Practice Today article, The Impact of Legal Process Outsourcing (LPO) You Might Not Have Noticed.

Revenue Growth

Revenue growth today is largely a battle for market share. Winning that means differentiating. Lateral hiring to change the mix of practices is one strategy but has risks. Retired Kirkland & Ellis partner Steven J. Harper blogged last week in The Lateral Bubble that firms may face unexpected troubles with so many lateral hires.

Only so many firms can occupy the uppermost niche. I suspect that some 30+ firms think they are in the top 10. Firms with a realistic self-assessment of their market position likely will promote their legal prowess but differentiate in other ways: via their business practices and business models. This likely means more adoption of and public emphasis on process improvement, project management, automation, knowledge management, collaboration systems, and other tools that (1) enable them to deliver more value and (2) objectively differentiate themselves.

The tough news for some law firm partners may be good news for experienced and innovative law firm managers, whose talents will be in higher demand.

Lawyers are at last working to improve legal processes, that is, how they actually do work. An overlooked process may well be communicating with clients. 

Communication as a process became clear from two recent items I read. Litigation Predictions: Plain Speaking and Clear Thinking by William J. Connolly and Andrew J. Morris in ACC Docket, November 2011 (subscription required), provides practical advice on how lawyers should discuss litigation risks with clients. The authors explain that just saying “you have a 60% percent change of winning” raises three problems. First, unless a client faces multiple similar cases, it’s hard to understand what that single probability measures. Second, this probability - whether or not accompanied by another common measure, expected value - does not communicate the range of possible outcomes. An 80% chance of winning may be irrelevant if there is a 5% chance of a company-killing outcome.

And third, our word choice influences how we think and how we decide. The authors suggest that instead of saying “60%", you say “60 outcomes out of 100″ to emphasize thinking about multiple possibilities. Not long ago, I might have scoffed at that suggestion. But I recently read Thinking, Fast and Slow by Daniel Kahneman. Kahneman, a Nobel Laureate, demonstrates that we are much less rational than we think. One manifestation of our less-than-perfect rationality is that phrasing hugely affects our decisions.

One of his examples looks at two alternate ways to convey data to doctors: (1) 90% who receive this treatment survive OR (2) 10% who receive this treatment die. Doctors’ decisions depend very much on the word formulation even though logically, the two are equivalent. (The book is filled with many such fascinating examples.)

So, where does that leave lawyers? As a profession, we need to re-consider and improve how we communicate legal choices to clients. Even where the client is in-house counsel rather than a lay person, lawyers must understand the communication process and improve it. For now, I can only raise the issue; I cannot offer solutions.

Technology likely will play a big role in improving communication. I am surprised that the ACC article does not mention litigation risk analysis and decision trees as a way to improve communicating about litigation risks. Decision trees can force us to consider systematically all outcomes.

Other tools can help communicate legal choices and decisions more clearly. I am not a Mind Map person but I suspect some would say they help. Other visualization tools exist today or may emerge that would help us improve how we communicate risks, issues, and choices.

Improving communication with clients will benefits lawyers in multiple ways, not least because better communication supports effective alternative fee arrangements. Win-win AFA require joint lawyer-client clarity about the contours of the problem and the range of potential outcomes. Law firm pricing experts already seek good budgeting and project management software. To that wish list, we can add new and better communication tools. Let me know what you find!

I spent most of this week at Legal Tech New York. E-discovery dominated and is amply covered elsewhere. I’ll report here on a few products that caught my eye. Plus the most important legal news of the week had little to do with LTNY. 

Contract Management. Corporations continue to have an opportunity to improve how they manage contracts. I looked at two contracts software companies exhibiting at LTNY. Upside Software is a long-established and leading contract management system provider. Its software helps companies manage “contract creation and negotiation, performance, compliance and risk management, amendment and renewal processing, and event management.” Seal Software discovers (finds) contracts by spidering corporate storage locations. It also automatically extracts key terms and fields from any contract it finds. Its affiliated Dolphin Contract Manager then helps manage the full contract lifecycle. Contract management software companies typically target corporations but I’ve long suggested that forward-thinking law firms have an opportunity to create value for clients by taking a more active role in helping clients manage contracts.

Project Management. Legal project management is hot. So I was pleased to spend time with ERM Legal Solutions, whose software offers a very systematic approach to managing complex projects. The company has pilots with some large law firms. Stay tuned for a deeper dive on this product.

Process Improvement and Control. Managing projects is one thing, improving and automating a process another. Onit helps “business and legal teams become more efficient at what they do so they can streamline operations, control costs, gain visibility into projects and reduce company risk. Solving everyday problems with simple solutions is what we do.” Their software makes it easy to automate commons processes.

News Beyond LTNY. In the US, on Tuesday, a press release announced that Nixon Peabody Establishes Preferred Vendor Relationship with Pangea3. Arguably, this is bigger news than anything announced at Legal Tech. To my knowledge, this is the first large US law firm to announce publicly it is working with a legal process outsourcing (LPO) provider for document review. Across the pond, UK legal reform, which just went live, yielded a noteworthy transaction: publicly-traded Australian law firm Slater & Gordon will acquire UK law firm Russell Jones & Walker. Both firms focus on the consumer market; nonetheless, this deal bears watching for its broader implications on the global legal market. For an excellent analysis of the deal, see Slater & Gordon and Russell Jones & Walker tie up confirms law firms as business-savvy innovators, not ‘merge or die’ desperadoes by Edge International consultants Sean Larken and Chris Bull.

Large law firms are merging again. The Wall Street Journal has a lead article on the trend today. I wonder though, just who mergers help and how mergers improve value for clients. 

Over the holidays, I had a conversation with partners from several large law firms. Most asserted that because their firms had become bigger, they - individually and collectively - were more efficient. I conceded that larger firms had the potential to cross sell more than smaller firms but beyond that, it was not clear how they were more efficient. Though they honestly believed their views, when I pressed, I heard no satisfactory explanations.

Stark Choice for Lawyers— Firms Must Merge or Die in the WSJ today reports that at “least 60 mergers occurred in the U.S. and abroad last year, the highest level since 2008 and a 54% jump from 2010″ (per Altman Weil data). As I read it, merger mania better serves clients by offering more offices and more practices in one entity. And the article closes, quoting Frank Burch, global co-chairman of DLA Piper, saying “More people now appreciate that there are real benefits of scale.”

In my view, this article describes but does not explain. So let me try to fill in the gaps, specifically, examining the benefits of scale. I can think of four potential scale benefits. I’ll take these one at a time.

1. Offer Clients a Broader Range of Services

Perhaps buying legal services is like buying software: the decision between a single, integrated package versus assembling the best-of-breed on your own.

Some general counsels might prefer the integrated package - more practices, more offices, more states, more countries. They can buy more from one firm and, at least in theory, the firm manages the delivery of multiple services as a single whole. This would favor mergers and big firms. Other GCs, however, might prefer to buy the best lawyers and firms and act as general contractor to integrate the effort. This approach does not favor mergers.

The question is ultimately empirical. Unfortunately, I don’t have data to answer this question. But I have heard plenty of clients say “I hire lawyers, not law firms”. And many large firms have struggled to manage both large matters and large client relationships.

2. Improve the Efficiency and Effectiveness of How Lawyers Work and the Value They Create for Clients

It is not obvious that lawyer efficiency and effectiveness (let’s call this “value") improves as firms grow in size. Let’s look at a few key value drivers and if they improve as firms get bigger:

• Technology. It is possible that larger firms can offer more specialized, customized, and feature-rich technology to support higher value. But when I think about large firms that have developed their own technology, not many come to mind. Ones that do include Mallesons, Reed Smith, and Bryan Cave. Whatever benefit a merger might offer in the future has to balanced against the often multi-year effort to integrate disparate systems across the merged firms.
• Knowledge Management (KM). KM offers the potential for lawyers to create more value if they can tap best practices, work in standardized ways, access relevant prior work product and precedents, and locate relevant experience within the firm quickly. Large firms do invest more in KM than small but smaller firms have the advantage of proximity and partners actually knowing each other. Moreover, the KM efforts of larger firms are quite variable, with some hardly investing at all. So size is no guarantee of a KM benefit.
• Training.The more experience a professional has, the more value she typically creates. Good training can accelerate and sometimes substitute for experience acquisition. The open question is whether larger firms are better at training than smaller ones.

3. Reduce the Cost of Providing Support for Lawyers

Lawyers require a lot of support. The cost of overhead - occupancy, secretarial support, HR, marketing, IT, finance, etc. - at many large firms is over $200,000 per lawyer. When assessing mergers and bigger firms, the question is whether the cost per lawyer of key support functions drops. It’s not obvious to me that it does:

• Occupancy. If anything, bigger firms are known for having bigger and fancier offices. My guess is that occupancy cost per lawyer does not vary much by firm size. Sometimes merging firms can reduce occupancy cost because one firm has a long lease and empty space in a city where the other firm has not extra space and has lease that is almost up. That’s called luck. What would really drive occupancy cost down are policies and measures to allow lawyers to work virtually so that offices can be smaller and less numerous. Mega firms have no advantage over simply large firms to do that.
• Technology. On and off over the years, I’ve looked at IT cost per lawyer data across firms. I don’t recall seeing any downward slope in a scatter chart plotting cost/lawyer against number of lawyers.
• Secretarial. I’ve spent a lot of time over the last five years talking to law firms about their secretarial ratios. The data are all over the place. Driving the ratio of lawyers to secretaries higher, which reduces cost, is a function of culture and will, not size.
• Other Support Functions. In theory, other support functions could see scale efficiencies. My view is that the proponents of mergers and size should produce data showing that they, in fact, do end up with lower per lawyer costs for a range of support functions. And they also need to account for the fact that sometimes scale has bad consequences. For example, a purely domestic firm does not have to incur the overhead associated with managing transactions in multiple currencies.

4. Generate More Income for Rainmaking Partners

Rain-making partners certainly benefit if they can make more rain within a firm than if they have to refer work outside the firm. I’m reminded of 1994 book by Galanter and Palay, Tournament of Lawyers: The Transformation of the Big Law Firm, which argued that rainmaking partners had to be able to spread their “excess” business-generating ability over a larger number of lawyers. That same general theory would apply to rainmakers seeking to cross-sell more services.

The ability to do so certainly benefits the rainmaker. Whether that truly benefits clients I don’t know. Separately, given a different set of ethics rules, namely a lifting on the ban of referral fees, size would matter much less.

Conclusion

I have long wondered if larger law firms truly create more value. The WSJ article raises but does not answer the question. Returning to Mr. Burch’s quote “More people now appreciate that there are real benefits of scale.” I’d love to hear him explain exactly what he means and provide the data to support this assertion.

Dear General Counsel:

You face ever-increasing pressure to control and predict cost. Here are steps I suggest you take to accomplish this: 

1. DETERMINE WHAT PROBLEM YOU NEED TO SOLVE

Are you trying to reduce risk? Reduce cost? Improve service to your internal clients? Gain a seat at the table? Protect your job? The problem for which you are solving drives what you should do. I’ll assume that reducing cost is high on your list and address the rest of my advice to that goal.

2. DECIDE HOW MUCH LAW IS ENOUGH

The fastest and perhaps easiest way to reduce cost is to do less law. Work with your clients to define risks and trade-offs; educate them on the cost of legal service. You may find that you can reduce your spend by not addressing every issue that comes your way. Impossible you say? If don’t decline to deal with some issues, are you doing your job? So all I am suggesting is that you more systematically decide where to draw the line. Of course, doing less law runs counter to other goals such as reducing risk or protecting your job. So make sure your executive peers are on board with your strategy.

3. CHOOSE THE RIGHT RESOURCES

For issues that really do require legal attention, make sure you choose the right resources. Build or buy is always a good place to start. If you regularly retain outside counsel for similar issues, consider pulling that work in-house. For work you keep in-house, decide if you can assign a paralegal or other professional instead of a lawyer. For work you send out, choose the firm wisely. Can you use a mid-tier national or strong regional firm instead of a high-end, big city firm? Can you identify your efficient law firms and send them more work? Can you can unbundle tasks, for example, use an LPO or managed review provider for high volume work?

4. MEASURE WHAT YOU DO

Get religion about metrics. If you do not use e-billing, start. If you do, remember that it is more than an invoice management system. Get a data analyst to review two years of outside counsel bills: assess which firms are efficient and allocate more work to them. Remember to include judgments, fines, or settlements when you analyze costs. And finally, don’t be satisfied because your spend is comparable to a benchmark group. Unless your peers rigorously analyze and manage their own spend, emulating them proves nothing.

5. GET MORE FOR LESS

The best way to lower cost is to work smarter. For all work - inside or outside - make sure you apply process improvement techniques, legal project management, the appropriate technology, and knowledge management. Ask your law firms how they improve process, use LPM, deploy technology, and rely on KM. You may learn a few tricks. If you don’t, you may well be working with the wrong firms. (As you consider firms, think about what managing partners must do.)

***

As general counsel, your job is not just managing legal risk. It is also managing legal cost and scarce resources. If you can’t do that, others can.

Happy New Year

I have been doing e-discovery, nee litigation support, since 1989. In the last few years, I have seen the legal market diverge into two new worlds of electronic data and discovery (EDD). How does each look and what does it mean for its inhabitants? 

[Note: This article was first published in slightly different form in InsideLegal Thought Leaders Digest, College of Law Practice Management Issue, October 2011.]

The Old World of Ignorance and Denial World

In the old world, still with us sadly, lawyers and law firms seem unfamiliar with e-discovery. I wish I could say “uncomfortable” but discomfort suggests a degree of familiarity that is absent.

I often hear stories about lawyers who are shockingly unaware both of the legal rules and practical issues of EDD. At conferences, the handful of judges known for their grasp of and decisions on EDD say many litigants (and judges) are clueless about EDD. For example, in October, I attended the Masters Conference, an EDD event. In the session More on E-Discovery Certification, the panelists bemoaned how many lawyers and other legal professionals lack even basic EDD know-how.

I offer two hypotheses to explain the old world. One is ignorance. It’s hard imagining, however, a lawyer missing the hundreds if not thousands of articles, conferences, and advertisements about EDD over the last half-dozen years. Even general legal publications and mainstream media cover it. If, in fact, more than a few lawyers have missed all this, perhaps we as a profession have an even bigger problem to fix.

Another possibility is denial. Some lawyers seem to think digital data is unimportant or that the rules of civil procedure regarding EDD somehow do not apply to them. The willing suspension of disbelief is fine when enjoying a movie, but not for professional pursuits.

Old World inhabitants take a big risk, namely judicial sanctions and malpractice. And let’s not forget ethics: Model Rule 1.1 requires competent representation. Failure to at least consider the role of EDD in a contentious matter arguably violates the rule.

Education is the cure. It is readily and widely available. Now, persuading this world’s inhabitants that they need it… well, that goes beyond my expertise.

The New, Real World

Fortunately, many lawyers and law firms live in the New World. In this real world, they know about and regularly engage in EDD. However, its inhabitants may not yet have noticed that after a period of rapid evolution, their world is entering a new, slower phase.

EDD became a big deal around 2002 or 2003. I characterize its early days as the Wild West. Technology debates loomed large, for example: file formats (TIFF, PDF, or native); review systems (hosted or in-house); and productions (include metadata or not). Litigators and commentators alike hung on every word of the few judicial decisions. The Federal Rules were up for review and were amended in 2006. Vendors came – and they came and they came, from copy shops, Silicon Valley, and points in between. Smart law firms saw opportunity and built document review empires, generating huge profits, while others put their heads in the sand and ignored EDD. Corporate law departments struggled with information governance and retention policies.

Two events in October caused me to realize that the New World has vastly slowed down. EDD today has matured; it has become a business battle. Of course, not every debate is resolved, but the areas of contention have narrowed considerably.

First, when I was at the Masters Conference, I had many private conversations with EDD experts, some leaders in the field. They confirmed that the market is maturing and consolidating, even if it is still growing, even if debates on computer-assisted review loom large.

The Wild West has been tamed. Now, it’s a matter of case law development and convergence on a few technologies and processes. The action today seems more in the realm of marketing than of solving fundamental problems. (It’s just a matter of time before mythological belief in the reliance on human review falls by the wayside.)

And second, days after the conference, in the October issue of Corporate Counsel magazine I found a two-page ad for WilmerHale’s Discovery Solutions offering, at www.wilmerhalediscoverysolutions.com. This site describes in detail, including pricing, the firm’s approach to e-discovery and document review. The reference to the firm’s low-cost (relative to Washington, New York, or Boston) Dayton service center is via a listing of lawyers in Dayton. This is a substantively impressive site; more importantly, it reflects that marketing and positioning have become primary.

WilmerHale competes for e-discovery and document review with other large firms and vendors. To illustrate, here is my “unaided recall” list of firms (i.e., ones I happen to remember) with dedicated e-discovery practices:

• Pillsbury
• King & Spalding
• Morgan Lewis
• Orrick 
• Fulbright
• LeClair Ryan
• Hughes Hubbard
• Ryley Carlock & Applewhite

Yet law firms have no lock on this business. In fact, in the Wild West days, the vendors dominated. I first started seeing a change in 2007: my blog post Coming E-Discovery Battle between Vendors and Firms noted the emergence of law firms with their own EDD capabilities. I even encouraged this trend with my white paper that year called 4 Ways an eDiscovery Attorney Can Make Your Firm More Successful, suggesting that law firms consider hiring lawyers specializing in EDD.

Law firms listened. They built EDD capabilities to compete with their clients’ in-house EDD capabilities and a still-long list of vendors. So as I see the EDD market, the real action is no longer fundamentals, but a battle for market share based on pricing and feature mixes.

One of my recent Twitter exchanges helps makes the point. I asked re WilmerHale “Do other firms have dedicated #eDiscovery sites?,” to which leading UK EDD expert Chris Dale responded “any firm not doing something similar within 2 years is dead for #ediscovery work.” I think Chris is right.

Any firm that litigates will need not just to understand e-discovery, but also to have the capability to do it. Owning is one option, outsourcing another. Either way, firms that litigate will need this expertise and capability.

Many lawyers are “outstanding”. Clients take that for granted. They also take for granted decent technology and process. So law firms need to persuade ever-more-sophisticated clients that the firm can do the EDD work cost effectively. Go ahead, tweak your process, tune your technology, but make sure you have the right business strategy and marketing.

As EDD capabilities grow and converge toward standards, competitive differentiation is increasingly hard. Price, service, and marketing become the keys to winning. Okay, I am forward thinking. We may not be quite there yet but, to paraphrase Churchill, in the New World, we are way past the end of the beginning.

Two recent general counsel surveys give us an indication of the current state of legal market. Do you want the good news or bad news first? 

Below I highlight survey findings by Altman Weil and Corporate Counsel magazine. The italicized leaders are my words / interpretation of specific survey findings, quoted or paraphrased.

Here’s my take away: The bad news is that for all the talk by general counsels about controlling cost, I see little evidence of success in the data. The good news is that GC still have plenty of opportunity to do better. And while law firms may have less to worry about than they think, ones that offer creative and value-enhancing services have a good shot at gaining share.

The survey highlights:

Altman Weil recently released its 2011 Chief Legal Officer Survey. Findings include:

• Budgets Up. More than one-half of law departments had higher budgets in 2011 than in 2010, with the median up 7%.
• AFA Limited. “84% of law departments report using some non-hourly fee arrangements… Non-hourly fees accounted for 14% of total fees”.
• Light Pressure on Law Firms. CLOs do NOT think law firms “are at all serious about changing their service delivery model, rating them a median 3 on a 0 to 10 scale.” But on the same scale, they assess themselves at 5 for pressuring firms.
• Limited Law Firm Evaluation. “Only 35% of law departments regularly and formally evaluate outside counsel”.
• Big Opportunity to Expand Offshoring. 10% “offshored some of their legal work in 2011, and 91% expect the amount of work offshored to stay the same or increase next year.”

Taking Your Measure in Corporate Counsel Magazine (1 Dec 2011), reports on its GC survey (click on PDF link in article for survey details). Findings include:

• Limited Use of Metrics. “Only a third of respondents said their departments had set up performance measurements and benchmarks.”
• Budgets Up?? The survey found 27.6% of departments cut their 2011 budgets; of these, the weighted average cut was 9.1%. The survey does not report on whether the 70%+ that did not cut had increases and, if so, how much.
• AFA Limited. 75%+ “of legal departments surveyed are initiating talks with their law firms over alternative fee arrangements, but these rarely bear fruit”

So why the title “New Surveys Show Still More Talk than Action by Law Departments?” Altman Weil’s survey found that the highest 2012 priority for law departments will be controlling costs. This has been a high priority for several years but the I just don’t see it reflected in the actions GCs reported in these two surveys.

How much “law should we do?” Companies seeking to reduce legal spend need to start by asking this question.  

General counsels may invest too much solving legal problems. Today, GC control cost measures include moving work in-house, establishing alternative fee arrangements (AFA), and adjusting the resource mix. These answer the question “what is the best and cheapest way to do legal work?”. The better first question is “what work do we need to do?” After all, avoiding legal work altogether reduces expense far more than doing it at lower cost. ("There is nothing so useless as doing efficiently that which should not be done at all.” - Peter Drucker)

The problem is that we lack a good analytic framework to answer the question. We may be doing too much or too little law. Business managers, working with lawyers, need to make risk-adjusted decisions about which legal work is really necessary. This will be hard.

Consider a related question: defining the value of legal services. GCs struggle with this. The ACC Value Challenge does not define value. Pfizer, which has fixed annual fees with a couple dozen law firms, struggles with this question according to a recent College of Law Practice Management conference presentation. And UK law firm Nabarro recently issued a report, General counsel: vague about value?, which finds GCs have trouble defining value. (NB: excellent read overall.)

If GCs cannot value legal services, I suspect they will find valuing legal problems even harder. Without the ability to do so, however, how can we know the right amount of legal work to do?

One example of how we might “do less law” is settling more law suits. Mark Ohringer, General Counsel of Jones Lang LaSalle Americas, Inc., said, also at the COLPM conference, that if it becomes clear that a dispute is well-grounded, his company investigates and, if something did go wrong, writes a check to fix the problem rather than litigating. If more in-house counsel took this approach, total spend (fees plus settlement plus judgment costs) likely would drop.

Two recent New York Times articles about healthcare provide an interesting contrast and perhaps some ideas. Sports Medicine Said to Overuse M.R.I.’s (28 Oct 2011) reported that 90% of the shoulder MRIs of “perfectly healthy professional baseball pitchers [who] were not injured and had no pain” showed abnormalities. The next day, Considering When It Might Be Best Not to Know About Cancer explained that some experts propose less screening for some cancers because early detection does not reduce mortality and the test have risks.

Could lawyers be doing too much scanning, screening, and treating as well? How would we know? What are the right metrics? Tough questions. We need to start developing a rigorous and quantifiable framework to ask and answer them. My guess is that technology will play a role, for example, tools to analyze BigData or decision trees to support litigation risk analysis.

A group of large law firm knowledge management professionals of which I am a part recently conducted a survey of legal project management (LPM). Thirty firms participated; here are highlights I found interesting and some comments. 

In 2010, only 40% of the firms had started an LPM initiative. By this year, 62% had and, counting firms that anticipate starting in the next 12 months, the percent goes up to 80%. Given where we were in 2008 - probably close to zero - this is impressive growth. But dig a little deeper and the picture is mixed. The survey has findings that point in both directions. (All stats below are for firms with an LPM initiative.)

Positive signs include:

• Leadership supports LPM. My categorization of free-text answers to an open-ended question about the role firm leadership finds that in 75% of firms, leadership plays an important role. With that much senior support, new initiatives are more likely to succeed.
• Three quarters of firms have “officially launched” LPM.
• The drivers of LPM - specifically, 75% of the firms cite both client demand and the need to meet budgets and AFA - likely will not diminish anytime soon.
• Though LPM may be nascent, it is already affecting how firms practice. About 40% of firms report that that LPM has catalyzed other changes such as using more technology, adopting Lean or Six Sigma techniques, or shifting to lower cost resources.

In contrast, there are negative signs:

• Only 40% of firms have hired anyone into a new position to support their LPM. Given that many lawyers need to help to do LPM, this may not bode well.
• Only one-third are marketing their LPM initiatives to clients. I would have guessed more would advertise LPM to clients. The explanation may lie two other findings: (1) only 40% of firms doing LPM report tangible successes to date and (2) almost all firms say that fewer than 25% of lawyer and fewer than 25% of new matters use LPM. I take heart from some comments saying it is still early days but these are troubling outcomes for LPM advocates.

Additional interesting findings:

• Roll out strategies include a single practice, a small group of lawyers across practices, multiple practices and firmwide. I was surprised that almost one-third of the firms with an LPM initiative are rolling it out firm-wide.
• Of the firms with an LPM initiative, KM plays a leading role in 20%, a participatory or advisory role in 65%, and no role in 15%.
• Only 40% of firms hired a consultant to help with their LPM initiative.

On balance, I would say these findings are very encouraging for LPM believers. Both the introduction of technology and marketing in large law firms arguably took about a decade. So LPM is off to a fast start in comparison.

This is a live post from the College of Law Practice Management Futures Conference. This session is Future View: Do You See What I See?. 

[As with all my live posts I try to capture the highlights of what panelists discuss and report accurately. Any of my own editorial comments appear in square brackets preceded by my initials, RF.]

Moderator: Sally Fiona King, SNR Denton
Panelists: Ross Fishman, Ross Fishman Marketing; Dave Hambourger, Seyfarth Shaw LLP, Janet Taylor Hall, Integreon, Chris Murray, Jones Lang LaSalle Americas, Inc.; Chris Petrini-Poli, HBR Consulting

Sally King Introductory Remarks
The new normal is clear, all prior bets are off, innovation is the order of the day. Law firms are under tremendous client pressure to reduce costs. Total demand for legal services is down. Clients are more sophisticated. Twenty years ago, the only GC lever was spend inside or outside. Today, the GC has many options to adjust and control costs. The GC is aided today by e-billing data stream, which provides insight that allows GC to compare and contrast law firms, determine who has is efficient and who is not. One GC told Sally recently that quality is a given - he cares about cost. Many law firms chase the same assignments. Realization rates are down - they average 84%. Profitability is down.

Some of the questions to consider today:
How should firms improve profitability and ensure their survival?
What should we make of alternatives such as LPO and Lawyers on Demand?
Should law firms embrace? If so, how?

Janet Taylor-Hall re LPO

Q: Where does Integreon expect to grown. What is happening with LPO. Can you tell us more about CMS Cameron McKenna?

Janet Taylor-Hall: Discusses the move from “LPO 1.o” to “LPO 2.0″. The company has grown from 10 legal professionals a few years ago to 750 today. This gives a sense of how LPO has scaled tremendously. These lawyers do work for both GC and law firms.

CMS Cameron McKenna, #13 law firm in UK, has outsourced its entire middle office to Integreon except for some very senior managers, marketing, and secretaries. The lessons learned: it’s not easy to do this outsourcing, either for the firm or the outsourcer. But it’s working because both sides are collaborating. If you talk to Duncan Weston, the managing partner, he explains he decided to outsource because he wants partners focused on clients and client relationships, not on any operational issues.

Ross Fishman re Marketing

Q: How are firms changing the way they market? What are some unsual moves recently? Do you have any insight on CMS Cameron McKenna?

Old advice: Law firms need to avoid brochure cliche. New advice: Law firms need to avoid website cliche. Marketers are fighting the same battles and having the same conversations about marketing for the last 20 years. “Boring cliches still prevalent.”

Notes that in smaller communities law firms have even more opportunity to differentiate themselves because there is less competition so even less emphasis on marketing and positioning. These smaller firms now target BigLaw work. With recession, they now have a shot at success. Large firms now fact skilled spin-offs, litigation boutiques, and competition from other small players. Dave Hambourger notes that yesterday the GC of Jones Lang specifically said he wished more small firms would pitch him.

Small firms still need to build their brand so that if big clients come calling - or if they call on big companies - the buyer has some awareness of the firm. Some of the small firms target specific niches or geographies.

Brochures are dead or very small; big brochures are all on the web now. Brochures moving to mobile device. But they are still boring. Has not seen any useful firm apps.

Social Media: expresses some skepticism about social media. Law firms are not the Chicago Bears or Justin Bieber. Clients don’t form emotional attachments to law firms. So social media has a different function for law firms. Law firms are not inherently interesting; firms must make themselves interesting. But several in audience say that younger generation “swim in the Facebook waters” and that longer term, firms have to find way to play in social media.

Search Engine Optimization (SEO): this will be key for law firms.

Chris Petrini-Poli re Law Firm Strategy

Q: Law firms are changing the way they do business. Given survey you just conducted, what advice do you have for law firms?

Law firms have vast number of acceptable options. They have to choose the right ones. Clients are requesting pro-active interface, asking for new billing and fee ideas. Firms can capitalize on this.

Peer Monitor Index came out yesterday. Demand dropped, expenses are up.

Strategy worked stopped at many law firms in the recession. That is worst time to stop strategic thinking. Firms made many cuts in recession but did not make truly fundamental changes in operations - that is beginning to happen now. Is there a “Tier 2″, a way to fundamentally change how law firms operate? Sally asks about Six Sigma. Chris says firms have not really embraced it in any meaningful or wide-spread way. Janet says in UK, now firm has gone as far as Seyfarth has - but more lawyers today do know what Lean means.

95% of law departments report they are taking active measures to control outside counsel spend. Number one is keeping work inhouse. Inhouse headcount is up. AFA is second biggest. But law departments split 50-50 if alternative fee arrangements really work or save money. Average hourly rate paid to top three firms has gone up. This suggests that GC still willing to pay for premium advice. Sally notes however that even premium firms have realization issues, which suggests that clients may be willing to pay for expensive partners, but not for the overhead (meaning junior associates).

Chris Murray on Space Costs

Q: After people, leases are most expensive cost. Real estate in US is about 8% in US and 12% in UK. Up significantly from past. How are firms dealing with this?

Firms are outsourcing, developing more flexible space.

Client-Facing Space: Conference room utilization has not gone down. Most firms have moved to central conference centers - this allows higher utilization. Many firms used movable walls that go up into ceiling. These are sound-proof. Allow more flexible space utilization. More law firms now provide concierge services for visitors. Some firms focus on consistency of client experience across their global footprint (e.g., be able to plug computer in any office). There is a move toward food service in a common area. This allows more diverse food offering and reduces expenses. Firms not worried about clients mixing because they mix in reception and rest rooms anyway.

Practice Space: Not designed for client visits. Lawyers spend about 50% of their time in “quiet, reflective work”. 35% is in collaboration. This drives design. Many law firms now have coffee areas adjacent to conference center - both a client and practice amenity. In US, outside of lawyer offices, no walls should be fixed. In UK, move to open office landscape even for lawyers. American lawyers demand quiet unlike lawyers elsewhere in world. For one firm, had design sound-proof lawyer offices. In UK, cites examples of 2 firms that started with open lawyer space and a year or two later, built walls. Jury is still out on open lawyer space. In US, interior lawyer offices are becoming a viable option, especially with glass walls, and LEED requirements.

Practice space includes “teaming rooms”. Some are used to store paper, still [RF: !!] but firms are moving away from paper, but it’s still a slow process. More firms are putting in “convenience stairs” so that lawyers can more easily interact across floors. Firm developed lingo: “stair conversations”.

Support Space: As staff ratios go down, less use for interior space. Many firms moving to secretarial teams. The secretaries sit together and serve a group of lawyers. In one firm, a 3-secretary team support 21 lawyers. As secretarial ratio goes up (lawyers to secretaries), hard to find ways to use the space. The more a firm can consolidate support and centralize, the easier it is to plan space. Deciding what support staff can move offsite can be hard.

Dave Hambourger on Technology

Q: Tech is expensive still. How do we harness recent developments? What has the best potential to change the way we work? How should firms protect against firms that force upgrades by refusing to support older versions?

In past, firms would reject outsourcing out of hand. That attitude is gone today. That does not mean cloud solutions are automatically accepted, but they are not automatically rejected. Law firms realize they provide advice and documents; they don’t have to run servers. Lawyers think that inhouse solutions are more secure but Dave points out that cloud providers specialize in what they do and may, in fact, offer better security.

By offloading core services to the cloud (or other outsourcing solutions), IT management can focus on strategic solutions. Slowly emerging is an attitude that good enough is good enough - the tech does not have to be perfect.

Mobile Devices: CIOs historically fought outside services such as social media and mobile devices. Today, the “secret CIO” is the managing partner. He or she brings in a mobile device and wants it to work with firm IT infrastructure. So CIO has to make mobile devices work. Lawyers choose their own mobile devices so if firms enable the devices, the training issue goes away. Lawyers will use services such as Dropbox. CIOs have to figure out how to let lawyers use these services while minimizing risk. Devices are only getting more capable so lawyers will use them even more.

Re managing vendors who strong-arm upgrades: Little to do concerning Microsoft. If legal-specific, you can negotiate with vendors.

This is a live post from the College of Law Practice Management Futures Conference. This session is What is the Future of Price: Defining Value in Value Billing, Part II. 

[As with all my live posts I try to capture the highlights of what panelists discuss and report accurately. Any of my own editorial comments appear in square brackets preceded by my initials, RF.]

The Moderator: Ronald Staudt, IIT Chicago-Kent College of Law
The Panelists: Toby Brown, Vinson & Elkins; Lisa Damon, Seyfarth Shaw LLP; Paul Lippe, Legal OnRamp; Mark Ohringer, Jones Lang LaSalle Americas, Inc.; and Ellen Rosenthal, Pfizer

Lisa Damon, Seyfarth Shaw LLP

Seyfarth Lean Background: About 6 years ago, clients started asking for alternative fees. Lawyers just guessed and, more importantly, were pricing inefficient services. Management wanted to understand how lawyers did the work, re-engineer the process, become more efficient. This led to Lean Six Sigma. It was hard to absorb for lawyers. Ended up keeping parts of it and jettisoning parts. Project management was especially important.

Lean Six now pervades Seyfarth. “Hard to articulate the extent of the change at the firm.” Lean has allowed the firm think differently about how it practices. One element of Lean firm kept is “DMAIC": Define, Measure, Analyze, Improve, Control. Especially important is to find and fix the root cause.

Applying root cause of law firm problem today is how firms compensate lawyers. This is not for today but illustrates how Lean will ultimately affect law firm management.

When applying Lean to clients, meet with clients, lawyers, and law firm staff. Lawyers will say what they do but then the staff say what the _really_ do. This shows where the waste in the process is. In law, firms are motivated to bill so much until the client fires the firm. Lean and DMAIC avoids this.

The firm has client-facing project managers (PMP certified). This helps matters stay on track.

Data is incredibly important to Lean and Seyfarth. A new matter starts with data analysis. Client comes with a problem; the firm starts with work value per matter, illustrating with a scatter gram comparing value and work. Another key tool is process mapping. Some clients are not interested in this but many are. The more sophisticated clients understand that the process mapping removes inefficiency at both the firm and the client.

Observes that in typical firm, partner only sees what work a lawyer did at the end of the month. At Seyfarth, time keeping is daily. Firm will share this will clients, though many don’t want it because they are on value billing. But this lets project managers and partners see what work is being done.

Firm is working on a scorecard that will eventually change the compensation system. It’s based on the ACC value challenge. Beginning to use this to change partner evaluation and compensation; will eventually cascade down to associates.

Toby Brown, Vinson & Elkins

Made a transition from knowledge management to alternative fee arrangements a few years ago. Has been involved in hundreds of AFA arrangements.

Frequently hears “the question", meaning which AFA and how much? Tries to analyze past matters but the data are not very good. A varian on this question is “which one works?” Points out that there is no consistency. The success keys are trust and communication, not the specifics of the AFA structure.

The benefit of AFA is to become a trusted adviser in a long-term relationship.

Keys to making AFA work:
1. Define goals. Make sure to understand the client’s real need. For example, is it speed, precedent, stall, predictable costs?
2. Define scope. Doing a bid based on a complaint does not support defining scope.
3. Define the fee goal. Is it predictability or certainty, which are not the same: a client may want monthly predictability or certainty regarding total fee. Former may relate to cash flow, latter to budgets. Understand what drives the client and how GC is evaluated. It could be budget, outcomes, some type of audit for fair value.

===Discussion===

Q: How does above discussion relate to small firms?
A: Clients are figuring out that smaller firms in lower cost locations often offer more value. Damon says Seyfarth now collaborates more with smaller law firms. Sees “walls coming down” so that small firms work more with large ones. Brown says his firm competes with small firms and boutiques.
Damon says that all these movements also create alternative delivery mechanisms, including LPO and lawyers working virtually, which firms of all size can use.

Q: How does this apply to consumer law or small business lawyer?
A: Lippe says the same trends apply to all practices. Technology will be key everywhere. Clients will focus on value. 95% of the issues will be the same across practices and firm sizes.

Q: How should firms respond to value billing - where should we squeeze overhead / costs to make up for this?
A: Value billing does not mean less profit. Discounts are not value billing; if you use flat fees or capped fees, you can re-think how you do the work and maintain profits. It’s less “squeeze” than “re-shape how you do the work”

===Wrap Up===

Moderator: how do we keep this conversation going beyond the conference?

Toby: We need a Sedona Conference for value. [RF: Sedona is a leading non-profit that works on e-discovery issues]
Lisa: Lawyers and clients need to share success stories. That’s not happening now. A core change management principle is show success.
Paul: In so many words, “just act” - there are lots of management tools and measures in the market - try and adopt. One step: create inventory of law firm processes
Ellen: Work with other peers in other corporations so that when talking to law firms, the firms hear a more unified message about value. This will help change conversations in law firms.
Mark: Find ways to lower costs (e.g., put people in lower cost locations), use technology and use it well, adjust compensation to align incentives. Successful firms will figure out the right cost structures.

This is a live post from the College of Law Practice Management Futures Conference. This session is What is the Future of Price: Defining Value in Value Billing. 

[As with all my live posts I try to capture the highlights of what panelists discuss and report accurately. Any of my own editorial comments appear in square brackets preceded by my initials, RF.]

The Moderator: Ronald Staudt, IIT Chicago-Kent College of Law
The Panelists: Toby Brown, Vinson & Elkins; Lisa Damon, Seyfarth Shaw LLP; Paul Lippe, Legal OnRamp; Mark Ohringer, Jones Lang LaSalle Americas, Inc.; and Ellen Rosenthal, Pfizer

Ellen Rosenthal, Pfizer on An Overview of the Pfizer Legal Alliance

Gets a lot of questions from law firms about how to value work. She did not have a good answer for how to set the price for a large chunk of work on an annual basis. There are no good metrics. Law firms measure on an hourly basis; Pfizer measures based on value received. The two are not speaking the same language.

Pfizer forbids its lawyers from talking about hours with the engagement partners. Wants to move away from lawyers. But the 500 lawyers of Pfizer push back a lot. They need to think a new way about value, outcomes, and deliverables. Coming up with a language to discuss pricing or value is very challenging.

The premise is that the billable hour is dead. About 70% of its global legal work is non-hourly billing. Pushing to put all of the legal work in the Pfizer Legal Alliance (PLA). The PLA consists of 17 firms; there has not been any turnover. Pfizer views this as a real alliance and collaboration. Pfizer believes that long-term, committed relationships will produce better value. The PLA law firms are integrated with the businesses and each other. The firms really work with each other. They do not hoard work because with a fixed annual fee set at outset of year, there is no incentive to hoard.

Pfizer is heavily invested in training the lawyers in the Alliance. Within Pfizer, three senior lawyers are on a governance board ("Steering Committee") with the Alliance’s Roundtable governance group.

The core value of the PLA is mutual value. Cynically, one could say Pfizer is asking for a discount. But real view is for changed economics and search for non-economic benefits. Thinks mutuality is a key idea of value.

The PLA value proposition:

• Cross-firm collaboration and information sharing and predicable income flow
• Access to learning about Pfizer
• Regular meetings between Pfizer and each PLA firm
• Knowledge sharing platform
• Annual meetings and firm visits

Law firm lawyers enjoy practicing more because they work collaboratively internally, with other firms, and with Pfizer. Pfizer sets a fixed fee a the beginning of the calendar year, payable monthly, irrespective of the level of work. Firms have predictable cash flow; moreover, they have no incentive to say they can do something well just to get the business. Alliance firms get to hear from CEO and other very senior Pfizer managers. There is a secondment program for law firm associates; there is also an associate roundtable (cross firm).

Pfizer sets the price in December. Discussions start soon to discus scope of work in 2012. 70% of scope is known; 30% not known. Staudt asks “how do you discuss scope without raising hours?” Rosenthal: we just don’t talk about hours. Also, we do not discuss specific matters in detail - we address the entire portfolio. But this is the challenge: if we say we are paying a firm $20 million, how much work is this.

Lippe points out that part of value is that it’s better to prevent a problem than fix it. That should drive some of the discussion. Rosenthal sees this more as a tactic than a principle. Pfizer experiments each year with how to refine the value and fees. Trying to focus on risks, level of complexity. Risk has multiple aspects (e.g., reputation, financial). [RF: I wonder if Pfizer or law firms run Monte Carlo simulations to assess potential outcomes in a large portfolio of work.] Pfizer asks, retropsectively, where firms spent most of the resources and then compare that to the value provided. What is the value to effort ratio? Is this at right level and, if not, how should it be adjusted? These are open questions that Pfizer is working on.

There is no true-up at end of year. Bonuses are for collaborative behavior and extraordinary outcomes, NOT for doing more or less work than expected.

Mark Ohringer, Jones Lang LaSalle Americas, Inc.

Company is one of the two largest providers of commercial real estate services such as managing or investing property. CBRE is the main competitor. Jones Lang invented the idea of outsourcing real estate management.

Mark is very frustrated with law firms. Has not found any strategy that is effective to manage and work with law firms. His strategy is to try to minimize work sent outside because fees are “sky high”. It got better for “about five minutes” during the Great Recession. Law firms are like private schools and hospitals - always going up.

Whenever Mark has a lot of repetitive work, e.g., contracts, he will hire a lawyer. His cost of getting a happy, experienced lawyer is about $125/hour. So once he has a full load of work, he hires someone inside. No firm can compete with his inhouse price. Manages 2 billion square feet of space. That means a lot of slip and fall cases in offices and retail space. Has completely outsourced all of this work to insurance companies. So the insurers deal with law firms.

Mark calls his department competition to law firms. Has hired 60 lawyers to work on revenue generating contracts. He cannot pass this cost through to customers (unlike banks). Does as much as possible to keep litigation from going to court. Wants to keep contentious matters out of law firms hands. If it becomes clear that a dispute is well-grounded, company will investigate. If something really went wrong, write a check to fix is better than litigating. Same with HR / employee matters.

So what’s left for law firms is hard to predict work such as M&A. Acquisitions can be global and flow unpredictable plus require specialized expertise such as ERISA and antitrust. For this limited scope of work Mark sends outside, he is willing to pay hourly. But he has people on staff who watch law firms like a hawk. Restrict outside counsel to where expertise is really hard - then watch carefully.

Cannot find way to motivate law firms to get to quick resolution of matters. They have no financial incentive to do this.

Mark recognize he is just one voice. Not claiming this view is a universal gospel. About 3/4 of money on law is NOT for outside counsel. For work that does not yet justify hiring a full-time lawyer, Mark works with Axiom. Legal OnRamp is working with company to automate forms. All this to keep work away from law firms.

Now, so little goes to firms that Mark is reasonably satisfied - as long as he carefully manages and gets just the senior partner and not all the minions.

“Completely flummoxed” with how to deal with law firms.

So the principle here: inhouse law department is the competition for law firms.

Paul Lippe, Legal OnRamp

Key value principles:
1. Always listen to client
2. Consider cost of doing work internally as alternative
3. Always easier to improve value than talk about it
4. Need alignment: common platforms, common incentives

Does a 2x2 grid.
1. Lawyers are actually smarter and act like they think they are smarter: this is status quo
2. Lawyers are actually smarter but act like clients are smarter: out compete other firms
3. Lawyers are not as smart as clients but act like they are: smarter bankruptcy [cites Kodak]
3. Lawyers are not as smart as clients and act like clients are smarter: dramatic success with clients

Lisa Damon, Seyfarth Shaw LLP;

Key value principles:
1. What’s best for the client is best for the law firm. This may mean bills are lower. Just listen to clients and follow-up.
2. Focus on relationships. When you do value right, relationships are different. Go from vendor to business partner quickly. Lawyers are much more satisfied
3. Clear and flexible approach to measuring success. Lawyers resist establishing success criteria. Start with a clear definition with client of success. OK to change this as long as you discuss with client.

Toby Brown, Vinson & Elkins

Key value principles:
1. Reiterate relationship, do what’s best for client
2. Understand the client’s goal
3. Define scope: is it a single matter, a portfolio? What does client expect?
4. Understand the fee goal
5. Price with fees, not rates. Assess fair market value (FMV) of services, not number of hours. But recognizes FMV may be hard to establish. But FMV of rate has not bearing on FMV of fee.

Yet another large law firm has opened a low cost service center. Is this old news that firms can simply note - or a call to action? 

Last week Pillsbury announced that it will open a low cost service center in Nashville, TN. Let’s start with a review of which other firms have already opened such centers.

Several firms now operate centralized service centers in low cost locations. Among US-based firms, Orrick has a center Wheeling, WilmerHale in Dayton, Reed Smith in Pittsburgh, Baker McKenzie in Manila, and White & Case in Manila. Among UK-based firms, Clifford Chance has a center in India, Allen & Overy in Belfast, Herbert Smith in Belfast, and Linklaters in Colchester. Separately, many firms in both countries have outsourced one or more business functions to companies that operate low-cost, centralized facilities.

A service center outside a high-cost city offers two obvious benefits. First is lower cost. Moving jobs from DC to Dayton, London to Belfast, or LA to Nashville reduces compensation and rent. The second is improved efficiency and effectiveness. Consolidating and centralizing a function offers several benefits: more flexibility to adjust staffing to meet peaks and troughs in demand; staff can develop specialized skills; easier to offer 24x7 service; and better potential (relative to dispersed support) to streamline and automate processes.

Now that a half-dozen US firms have opened low cost centers, will the market tip? Do other large firms risk suffering a cost and operational disadvantage if they do not have one? Yes, but the message is less “open a low cost center” and more “figure out how best to centralize support and reduce cost”.

Firms with offices in lower cost cities can centralize support in one of those cities (as Reed Smith did.) Those that operate in high-cost cities may need to open low-cost owned and operated centers or outsource.

Firms that do so should take full advantage of the opportunity. The transition can be costly, financially and psychically. Management should therefor take the opportunity to take a deep look at how they provide support overall. As I suggested in 2009 in Law Firm Staffing Reference Model, the “theory of law firm support” is not well developed. Benchmarking goes only so far. It can instill false comfort since many firms, despite lay-offs, are over-staffed or “wrong-staffed”. Smart law firm managers thus need to ask what support areas are weak or strong, what lawyers really need (and not just want), what training / experience is required to provide the support, and where those staff should sit. Answering these questions thoughtfully will make any centralization that much more valuable.

Firms that do not assess support needs and reduce costs may eventually need to lay-off staff. If the lay-offs in 2008 are any guide, the best they do is cut costs. Without careful planning and analysis to re-tool support, lay-offs are just a short term fix. Whether motivated by fear of future lay-offs or needing to remain competitive, I expect to see more firms open low cost centers or outsource.

At the International Legal Technology Association annual conference last month in Nashville, I was a panelist for Future Proofing Your Law Firm. I share here an overview of the themes we prepared in advance (click here for the published slides (PDF). 

My co-panelists were Gerard Neiditsch, Executive Director Business Integration and Technology, Mallesons Stephen Jaques; Jeffrey Rovner, Managing Director for Information, O’Melveny & Myers LLP; Michael Mills, Kraft & Kennedy, Inc.; and Mary Abraham, Counsel, Debevoise & Plimpton LLP.

Last year this same panel (minus Michael) presented A New View of the Automated Law Firm, where we discussed the idea of Bet The Farm vs. Law Factory. The “law factory” idea has become a bit of a meme. We recognized, however, that few firms or even practices encompass just one business model. And some argue that there is a vast middle ground between the two (a pending blog post touches on that idea).

Whether that meme represents a dichotomy or a continuum, or is even right, we agreed that the legal market likely will not return to the halcyon days of pre-2008. So all firms need to ask how to survive and thrive for the next few years and beyond.

Planning, never easy, is even harder today because of several trends: loss of control, volatility within and across markets and economies, the proliferation of mobile devices, the ascent of social media, and the virtualization of everything (not just IT but also organizations).

Loss of control presents the most problems:

• Pricing as we knew it - up only - may go extinct with alternative fee arrangements.
• Lawyers have lost their monopoly on legal know-how. DC-based lawyers fretted when the Internet meant that everyone had equal access to agency publications. That was just the beginning. Today, lawyers’ roles as priests, exclusive “knowers” and interpreters of the secret sacraments, is long gone. Clients can learn deal terms and much other legal information as easily as lawyers. Buying access to West, Lexis, PLC, KIIAC and many other readily available third-party sources is equal opportunity.
• The IT gods have lost control of IT and of data. Consumer devices rule: Android and i-Device tablets and smartphones change how, when, and where users interact with computers, data, and applications. Consumer services also rule: prohibitions notwithstanding, many use personal e-mail accounts and other web services (e.g., YouSendIt) for business. And finally, data volume has exploded. It’s not clear which is easier: preventing leaks or making effective use of it.
• Offices belong on the endangered species list. Lawyers want to work from home, coffee shops, or clients. And with IT everywhere, why not?
• Hierarchy has flattened. Clients don’t defer to law firms, associates question partners, and partners are often free-agents who often would rather than peel away than share. Aside from changing mores, the free flow of information via social and other tech has further flattened the hierarchy and reduced the boundaries between organizations.
• Time is no longer our own. Fax and Fedex reduced multi-day turnaround times to hours or overnight. Digital communication now requires instant response and 24x7 availability.

Given the loss of control and an uncertain future, how can and should a firm plan for its future? We suggested five strategies a firm could follow: (1) Think about the business model; (2) Wait and see; (3) Hedge using a portfolio approach to try multiple strategies, weighing risk and potential reward; (4) Plunge into a single new strategy; and (5) Agility - adapt rapidly, by constantly trying new things, keeping those that work, tossing those that don’t.

We suggested that firms adopt elements of all five. We specifically disclaimed, however, the viability of asking “Who else is doing this” as a strategy driver. In my view, the first two are the riskiest because they mean do nothing. (Note that ‘do nothing’ is a decision that the status quo is acceptable.) The third, plunge, is a high-stakes game - a wrong guess means certain failure.

I personally favor a combination of hedging and agility. Both involve elements of biological evolution: vary — mutate or experiment; kill the failures; replicate the survivors; and repeat. Though millenia of evolution suggest this strategy works, lawyers typically avoid failure at all cost. Their personalities don’t align well with successful strategies in an uncertain time.

Yet we did note that unlike in most industries, law has been remarkably stable. Of the 51 highest-grossing law firms in 1985, 46 in AmLaw 200. Four have merged and two failed. If past is prologue, law firms have nothing to fear. Unless of course we believe the Great Recession has fundamentally changed the legal market. Firms that believe that need to find a way to overcome fear and entrenched attitudes.

What does all this mean for large law firm CIOs? We suggested that we have entered Legal Technology 3.0. LT 1.0 focused on infrastructure and applications - e-mail, document management/production and billing, all operating at 99.999% uptime. LT 2.0 embedded IT in the practice & strategy - services to win clients and talent, e.g., outsourcing and mobility. In my view, LT 3.0 means CIOs must drive strategic change, support multiple scenarios, encourage agility and adaptation, and set up mechanisms to deal with uncertainty. Easier to say than to do. (For more on LT 2.0, see my 2008 post, Legal Technology 2.0).

More specifically, Legal Tech 3.0 means CIOs must be prepared for several trends:

• Information is dynamic, not merely static
• Engagement - internally and externally - is networked, not hierarchical
• All data and applications must be delivered so that they are device-agnostic
• Working from anywhere is elegant, economic, and necessary, not merely tolerable
• Infrastructure is simplified, consolidated and eventually moved to the cloud
• Information access gracefully balances security and convenience
• New technology is adopted when it’s good enough, not when it’s perfect
• Agility is revered
• Resilience is expected

The first managing partner with whom I worked had it right in 1989: Technology is not a destination, it’s a ride, and often a wild one. Today, the same is true for law firm strategy and operating models.

[Thanks to all my co-panelists for coming up with this framework and especially to Michael Mills, who had the laboring oar in writing the slides.]

At the International Legal Technology Association (ILTA) annual conference last week, alternative fee arrangements (AFA) was a hot topic. One dinner discussion with a few forward-thinking friends got me thinking about how firms cost matters and how best to handle sales commissions. 

What, you ask, there is no such thing as sales commission at a law firm.

Let’s face it, beyond the few firms still on lock-step partner pay, partner compensation reflects “rain making.” In most businesses, the partners who brought in the business would be paid a commission on the value of the deal (um, I mean matter or client).

Would it matter in setting an AFA price if law firms, irrespective of what they called commissions, separated out the “legal labor value” of partner work from the “sales value"?

In most businesses, commission is a “below the line” cost, meaning it is not part of the “cost of goods solds”. If, for example, partner R(ainmaker) brings in a $1mil matter, suppose her commission is $100k and that amount is accounted for separately. If both R and partner G(rinder) can do equivalent quality legal work, then, for costing purposes, both R and G should figure in to the cost at the same hourly rate.

If, however, commission is bundled into R’s rate, then the matter may appear more expensive than it really is or the firm may mis-allocate work between Gs and Rs. Of course most firms don’t really have a great understanding of costs, so there is some circularity here. And my analysis assumes the net value to the firm of the $1mil value is actually $900k because of the commission paid.

Can anyone help with a theoretically sound approach for how best to think about this question?

Let’s face it, clients now exercise the buying power they’ve long held. So law firms must act. But how? 

A session at the upcoming ILTA Conference called Making an Impossible Engagement Possible tackles the “how question.” And panelists John Alber, Rudy DeFelice and Ayelette Robinson want your help. They are “crowd sourcing” answers.

That means they want your input. The topic is therefor not only timely, but for all of us legal technology, social media, and collaboration enthusiasts (geeks?), self-referential.

The action is over at the 3 Geeks blog in Don’t Be Shy! Help Make the Impossible Possible. I’ve reproduced the problem statement below and my answer. But go to 3 Geeks to put in your answer (I’ve disabled comments on this post).

PROBLEM STATEMENT

Your firm has had a long relationship with a major financial institution–Mega Mega Bank. As a consequence of the housing bubble bursting and the ensuing recession, the bank is dealing with a number of defaulted consumer and business loans. It’s facing hundreds or even thousands of lawsuits. Each suit is, on average, not a major matter, ranging from a few thousand to a few hundreds of thousands of dollars at risk. But collectively, they pose a significant expense to Mega Mega Bank. Rather than asking the law firms that serve it for price estimates to do the lawsuits, the bank has set a not-to-exceed price for each suit. That price is extraordinarily aggressive. It is a fraction of the average your firm has been charging for such suits to date, and you regard your teams working on the suits as already quite lean, leveraged and efficient. Your firm views the business with Mega Mega Bank as strategic and it has decided to do a portfolio of some hundreds of cases at the price proposed by the bank. The lawyers, project managers and technologists who will assist in handling these matters do not, at present, have any firm ideas how they will do the work to a high quality standard while, at the same time, controlling costs so as to make the engagements economically feasible. Your job is to work with others on the team to find a way, or many ways, to accomplish high quality work at a much lower cost than has previously been possible. The firm will invest as necessary to preserve the relationship–within reason. But time is of the essence. The longer the team does business the old way, the more money the firm will lose.

My Answer (written in about 15 minutes)

My “two cents", which actually means about 15 minutes:

TALK TO THE CLIENT: Make sure you understand the client’s business objectives and risk tolerance. Learn who at the client knows what about these matters. Figure out whom you can consult on an ongoing basis, sources of information, escalation, metrics, and governance for the project.

STREAMLINE: Interview your lawyers and staff who have worked the matter to map the typical flow of cases already handled. If client has done the work, include them in discussion. Create the “as is” map. Then, in a team setting, review as is map for where steps can A. be eliminated or made more efficient and/or B. be delegated to a lower cost resource (see below). Make sure you come away from exercise with good process flows and checklists. And identify tasks for automation.

ANALYZE and STREAMLINE AGAIN: Immediately require all timekeepers to use accurate task codes for all work on these matters. After one month or 20 cases, whichever comes first, apply business intelligence / analytics software (including visualization techniques) to identify patterns. Use results to refine processes.

CENTRALIZE: To the extent the work has been spread out across the firm / offices, consolidate it one place with people focused on it full-time. Consider moving some or all of it to a lower cost location.

IDENTIFY LOWEST COST RESOURCES: Once process is streamlined and documented, identify the lowest cost resources. This could include paralegals, college grads, contract lawyers, offshore LPO, or onshore LPO.

AUTOMATE: Be careful not to automate a broken process. Shoshana Zuboff in Age of the Smart Machine used the term “informate”. After two months or 50 matters, identify where document assembly, expert systems, or other COTS or custom software we save labor.

THINK CREATIVELY: Would a smartphone or table app in hands of the client accelerate? Should you do a decision tree for each matter and have client review it? Can you develop statistical profiles of matters that help identify likely course and therefore appropriate level of investment?

Doctors share many traits with lawyers. Yet health care, prompted by public policy and challenging economics, has changed much more than law practice. Lawyers and law firms can learn from doctors, as a Wall Street Journal article last week illustrates. 

ERs Move to Speed Care; Not Everyone Needs a Bed ("ERs Move to Speeed Care; Not Everyone Needs a Bed” in the print edition on 2 Aug 2011) reports that “emergency rooms are adopting so-called lean-management principles pioneered by such companies as Toyota Motor Corp. to increase efficiency, cut costs and provide better service.”

The key to reducing the rate of those who leave without being seen (LWBS), a key performance metric, is “abandoning the longstanding rule that every patient gets a bed.” Also, ERs employ more nurse practitioners and physician’s assistants, which frees doctors to focus on care instead of paperwork.

What are the similar opportunities in law practice? A good starting place would be to define key metrics, which is more than just outcome and cost. Then firms need to examine how they practice to improve those metrics: Which tasks are truly necessary, which are not? Can firms perform these tasks more efficiently? Who is the right person to do the work? What technology would speed the work or improve outcomes?

General counsels who want lower cost BigLaw would be wise to encourage their outside counsel to develop metrics, ask these questions, and apply Lean techniques. Come to think of it, GCs would be wise to do the same for their own law departments.

What will it take to get more lawyers to adopt real metrics and analyze the process of law practice?

Toby Brown of 3 Geeks and a Law Blog recently posted The Lawyers’ Fear of Accountability, which expands and comments on my recent post, Does Defining Good Service Scare Clients and Lawyers? A Thought Experiment. I’ll continue the discussion. 

Toby writes that lawyers fear accountability - for example, in delivering excellent client service - because they fear damage to their reputation:

“lawyers have held themselves above the masses. To maintain their reputation they feel the need to be perceived as “The Best” regardless of the subject. This arrogance may well become their Achilles’ heel. I do not see a clear path to solve this problem for firms, but they really need to find one.”

The solution likely will not stem from law firms as institutions nor lawyers as individuals. Rather, it will come from third party rating systems. It’s already happening:

• Chambers and Partners objective ratings (as opposed to a pay-to-list model) are gaining traction.
• The ACC offers a ranking system.
• International Law Office Client Choice Awards is currently running a survey to identify outstanding lawyer client care.
• Edge International, a legal strategy consulting firms, now offers the Edge Reputational Index, “a percentage ranking of law firms compared to the firm that ranked the highest in our study.” (According to its August 2011 e-mail Comminque.)
• In Australia Beaton Benchmarks measures"client perceptions of law firms in Australia. With over 6,000 independent ratings from members of the c-suite, the in-house legal department and line managers, this product changed the way in which Australia’s law firms view the importance of objective and comparative measurement of their performance and brand positions.”

The impact of third-party ratings may, however, take time to cause lawyers to change what they do. Why? Because clients value their cozy outside counsel relationships and so have little motivation to seek objective data. But the market eventually works. Just consider the impact of the first AmLaw 100 ratings in the mid 1980s. Many argue that profit league tables changed BigLaw irrevocably and, 30 year later, we still feel its effects. Could the same happen with reputations?

Third parties intend to be visible because ratings are a business or mission for them. Less visible is that at least some corporate law department clients already rate outside counsel. Whether they share these ratings - and the law firm selection decisions the ratings drive - is unclear. But clients do switch firms and the reasons are not always cost or conflicts.

I do think Toby is right. And I agree with him that law firms should find a way to address the problem. Whether firms try and succeed before a third party establishes itself as a go-to rating service is anyone’s call.

I recently asked here how large law firms should define “good client service”. Subsequently, I posed this question at a meeting of several experienced BigLaw professionals. 

All of us - lawyer, librarian, marketer, IT, KM professional, practice manager - struggled to define good client service. In a flat legal market, the large firm that successfully delivers “good service” can likely win share. So perhaps it’s time for BigLaw to ask what clients what they really want. (If I’ve missed an accepted, quantifiable definition of good service, let me know.)

In our meeting, all of us agreed that regular client communication is a key element of good service. I proposed a thought experiment. Use firm systems- e-mail, individual lawyer calendars, CRM, and the VOIP phone system - to measure the amount of communication between relationship partners and clients. I suggested that firms could set communication “service levels”. For example, million dollar a month clients might warrant two calls per month while 2 calls per year might suffice for the $20k/month client.

Whatever the number, the point is to define prospectively the right amount of communication, measure it objectively, and take corrective action if it falls short of the service level. Management would, at minimum, talk to partners who fell short. Everyone was visibly uncomfortable with that idea.

That reaction is understandable; BigLaw dislikes Big Brother. That mindset, however, stems from a fundamental problem: partnerships are closer to a collection of solos than to an integrated, single entity. In the latter, why would anyone flinch at the idea that management tracks performance and provides feedback when it falls short?

The more general point is that once we define elements of “good service", we can come up with metrics to track it. Legal technology will support some metrics, surveys others. This is not rocket science. Rather, it’s a matter of motivation and some thinking.

Maybe lawyers - inside and outside - avoid defining good service because “be careful what you ask for lest you get it”. Specifying good service means clients need to say in advance what they want and how they will measure it. Outside counsel then needs to deliver. Both seem uncomfortable about being pinned down. And that’s too bad - it may explain the disconnect many surveys show between corporate law departments and BigLaw.

Do large law firms provide quality service? 

The answer depends on what we mean by quality and the metrics we choose. A threshold question is whether to consider the quality of substantive legal advice. Even if that were the only metric, the question remains difficult: outcome relative to what? Clients may have a strong or a weak position, so outcomes have to be measured relative to some reasonable prospective standard.

Of course, service is more than just about outcomes. Some clients might even take outcome off the table, viewing legal advice quality as a given. Instead, they might focus on all other elements of their interaction with BigLaw. But which ones? And what metrics?

Two recent items got me thinking about this. Martin Collins, legal head of Bloom Energy, writes in Helping in-house and outside counsel work better together ("Avoiding Mistakes” in print edition) in Inside Counsel (July 2011), of his frustration asking outside counsel to answer five enumerated questions and not receiving five distinct answers or answer yes-no questions and not getting back a yes or no.

Separately, an AmLaw Daily blog post, Survey: Half of Law Firms Don’t Seek Client Feedback (28 June 2011) reports only 48% of firms “formally solicit client critiques and just one-third communicate the feedback to lawyers”. In most markets, customer opinion counts a lot in evaluating service quality. The fact that not even half of firms surveyed ask clients their opinion speaks volumes.

So how do we answer whether BigLaw provides quality service? My view is that we need an open source, group effort to answer it. To start the process, I have created a Google document with a short outline and a few instructions. Click here to access it. Anyone can edit it. With sufficient participation, this could become a wiki but I want to start with minimal overhead and see how many participate.

Lawyers were once technology laggards. Moi, type? They resisted e-mail. They ridiculed websites. Thankfully, that era ended. In spite of the 30-year history of what the PC has spawned, it’s not obvious lawyers get technology for more than personal productivity. Let’s look at some evidence.  

Document Management. I regularly hear BigLaw friends report that “half the lawyers in my firm do not use the firm’s central document management system”. Ring the alarm bells. Aside from back-up and security questions, what about collaboration? A half-and-half DMS approach yields the worst of all worlds. The lawyers who share via e-mail or shared directories wall themselves off from the rest of the firm.

Social media. If lawyers don’t know what it is, worry that they are living in a cave. And many may use it in their personal lives. But compared to corporations, the anecdotes and data I’ve seen suggest that lawyer use of enterprise social media - blogs, wikis, and micro-blogs in particular - is way lower than in many corporations. Oh, I forgot. Lawyers collaborate in person. That is why so few firm actively support lawyers working virtually, isn’t it?

Outside Counsel Management. Read Facing the Future in the 2011 In-House Tech Survey in Corporate Counsel (22 June 2011), which reports on the 2011 Survey of In-House Technology. Smartphone use is up. Sure, they are fun and a personal convenience. e-Billing was once hailed as the way to manage law firms. Only 35% of law departments responding require law firms to use it. And we know from other sources that law departments using it rarely perform serious data analysis (e.g., figure out which firms are most cost-effective).

—- —- —-

You can lead the horse to water…. modern technology enables professionals to collaborate more effectively. It is the glue that holds together global teams. Deploying it is easy. Adoption, however, depends on individuals who truly want to collaborate and do more than manage their own, personal workload. The challenge in technology for lawyers is not the technology, it’s the lawyers.

Since not everyone reads Twitter, I reproduce here a selection of my recent Tweets. 

Using Google doc for 1st time in a while (for a legal #KM group). Finding editing easier than in Word. Will report if KM profs share ! 01 May 11

@slaw_dot_ca post on Howrey demise, legal outsourcing, and innovation http://bit.ly/mbvGnE || Suggests firms partner with LPO. #LawFactory 02 May 11

Microsoft Deficit Watch - Excel 2010 - Pivot Tables ARE sensitive to trailing spaces in text but auto filter is NOT. Bug or feature? 02 May 11

law.com: Reed Smith Hires K&L Gates Partner to Create #eDiscovery Practice http://bit.ly/izCT7v || See my 2007 post http://bit.ly/lFWrRR 03 May 11

ABA Commission on Ethics 20/20 Recommends Amending Lawyer Ethics Rules to Address Legal Process Outsourcing http://bit.ly/mFuSSM 03 May 11

Too bad Twitter does not provide average Tweets/day - more useful in assessing whether to follow than total number 03 May 11

RT @jordan_law21: Seth Godin nails the legal profession in 200 words: long work vs. hard work: http://bit.ly/jZNB3X || AFA implications? 03 May 11

RT @legalit Recommind Forms Strategic Alliance w LexisNexis for Hosted #eDiscovery http://litn.eu/rec34 || Interesting wrt Applied Discovery 05 May 11

RT @jogdc: The Myth and the Madness of Cost Effective Lexis and Westlaw Research Training http://goo.gl/fb/lXgtW || Fabulous post 06 May 11

‘A less gilded future’ The Economist on the legal new, lesser normal http://econ.st/kuDjDu || Sums up trends. More GC to get the message. 06 May 11

Are cell phones the rabbit ear antennas of the 21st Century? You have to move them to get a better signal. #in 06 May 11

http://www.clearspire.com is new model DC-based law firm. Separates practice and biz services. Virtual. Like Axiom but a law firm? 9-May-11

How should we interpret Warhol’s “In the future everyone will be famous for 15 minutes” in the social media age? #in 9-May-11

Got PR e-mail on a book re ‘Break your Tech Addiction’ but I’m too busy Tweeting to read it 9-May-11

Given all the Microsoft software deficits I’ve logged here, hard for me to imagine Skype getting better under its ownership #in 10-May-11

via @Christianuncut Fenwick & West adopts Excalibur Sharepoint-based #DMS; replaces ‘usual’ large firm DMS 2 options http://bit.ly/mfE9Vn 11-May-11

Will Microsoft Skype cut off calls so it can update software, like it shuts down my Win 7 PC to update Windows w/o asking me? 11-May-11

As I read Legal IT survey by @LegalIT http://bit.ly/jbOEXn, only 50% of law firm BI usage goes to really understanding the business. Sad. 11-May-11

@legalfutures post: Profits soar at Australian law firm consolidator http://bit.ly/koQvN5 || Shared, central services a factor 16-May-11

When people write in a note “friendly reminder", does that mean they might write an unfriendly one? #in 17-May-11

Search on a top 20 global law firm’s website returns fewer hits than using Google for same search. Does BigLaw really get websites? 18-May-11

Legal Week: Eversheds Consulting plans growth after key client roles http://bit.ly/lulzdS || ‘deepen client relationships’ - good strategy 19-May-11

Bought new backup laptop. Perhaps the zillion choices + incoherent explanations drive some buyers to iPad. 23-May-11

Microsoft Deficit Watch - Excel 2010 - charts with ‘data range too complex to be displayed’. Two decades into a product - I don’t get it. 24-May-11

New @DannyErtel post: re legal outsourcing: How do you Build Your “Dream Team"? http://bit.ly/l5z50a || gd overview of options / issues 26-May-11

RT @KMHobbie #iltakm blog re recently released outstanding legal #km bibliography http://goo.gl/QT4QT || Good resource 27-May-11

Microsoft Deficit Watch - Win 7 - error: file name too long to copy. || How can exist on hard drive as legal name but be too long? 27-May-11

New Yorker Cartoon: We’re ready to begin the next phase of keeping things exactly the way they are http://bit.ly/iGedOe || Law firm motto? 31-May-11

Altman Weil has released the results of its 2011 survey of US law firms, Law Firms in Transition, by Thomas S. Clay and Eric A. Seeger . Anyone interested in the financial performance of US law firms, including BigLaw, should read this. My focus here, however is elsewhere: alternative fee arrangements (AFA) and practice efficiency / legal process outsourcing (LPO). 

AFA. Virtually all of the 805 firms surveyed, including 95 of the largest 250, report using AFA. Don’t jump to the conclusions that firms are embracing AFA. Only 12% report “that non-hourly projects are more profitable than hourly billing.” Two-thirds of firms offer AFA in response to clients; only one-third offer it as a competitive differentiator. The latter, however, reported higher profitability on non-hourly fees at a rate 2x the former. A reasonable inference (not logical necessity) is that firms can make more money embracing AFA rather than merely succumbing to client pressure to offer it.

Legal Process. The trend most cited, by 96% of firm, as a “permanent change in the profession” is the “focus on practice efficiency”. As the authors note, however, “Practice efficiency and process improvement are simple ideas – but are not easy to execute effectively.” One way to execute is with legal process outsourcing (LPO). On LPO, the survey finds that 8% of 250+ lawyer firms outsourced legal work in 2010 and 11% expect to do so this year. Perhaps more telling is that from 2010 to 2011, the number of firms who think LPO will become a “permanent trend” jumped from 28% to 41%.

Thinking about the practice efficiency imperative and LPO data, I have two questions. First, for the firms not planning to use LPO, what are they planning to do to achieve this goal? I am by no means suggesting LPO is the only option, just that other than LPO, I see more talk than action. Please, prove me wrong - with data or anecdotes (beyond one firm’s Six Sigma commitment and several’s legal project management efforts). Second, for the the 59% that don’t see LPO as a permanent trend, what do they mean by “permanent trend”. Let’s just say that in my view, Thomson Reuters’ purchase of LPO Pangea3 speaks clearly to “permanent trend”.

Here’s my overall take: the good news is that firms now at least talk about the need for changing how they work. So we have crossed one hurdle. The bad news is that specific plans to change (lay-offs don’t count) seem sparse. The secret sauce we need to make the twain meet is simple: aggressive clients who demand real change.

I had an “aha” moment on Monday when I read a Tweet by Susan Hackett of ACC: “At the ALA Annual Conf: so many firms talking about firms-no one talking about clients … yet! I’m up tomorrow.” Just where are law firms on client service and experience? 

If you follow my Tweets (ronfriedmann) you know that I read a lot legal publications and blogs. Client service is not that common a topic and client experience even less so. Perhaps that’s a distinction without a difference but I suspect that some firms confuse a “client service” initiative such as client interviews with how the client experiences the law firm overall.

On Monday, the Wall Street Journal’s Airlines Promise: It Will Get Better describe multiple airline and jet-maker initiatives to improve the customer experience. Yes, I know, roll your eyes; anyone who travel knows how awful flying has become. At least the industry players are trying to improve the experience. Law firms need to consider that their law department clients might not rate them all that much better than they do airlines.

Today, Jordan Furlong of Law21 wrote a great blog post, Explaining content and why lawyers struggle with it . He describes the challenge of writing legal content that actually appeals to readers - and how few firms do this well. Might this be a problem across a range of services firms provide?

And that brings us back to Susan Hackett’s Tweet. Maybe the real problem is that law firms hardly ever talk about clients.

How many legal technology initiatives improve the client experience? Some will say extranets do but I’m not sure that extranets change the law firm experience all that much. One initiative that comes to mind is Mallesons’ PeopleFinder; see my blog post The Shift from “Client Facing” to “Client Service” Systems.

Has the time come for a dialogue about the client experience that law firms provide? What steps might CIOs take to improve it? Let the discussion begin.

Some who now manage or have managed law firm technology believe that legal software has never reached its full potential. One impediment is now under attack. 

Ethics rules bar non-lawyer investment in law firms. As a result, law are thinly capitalized; partners want to get cash out annually, not invest in the business. Arguably, if firms had more capital, they would invest more in technology, both infrastructure and applications to support lawyers.

Moreover, rational investors in law firms likely would be more aggressive about alternative fees arrangements (AFA). They would see that AFA allow for greater profits if service delivery became more efficient. Owners so motivated to drive efficiency would likely invest more in legal tech.

So I was interested to see a challenge this week to ethics rules barring non-lawyer investment in law firms. Jacoby & Meyers’ Newest Fight: Helping Nonlawyers Own Law Firms in the Wall Street Journal reports on Tuesday that J&M is challenging rules that restrict non-lawyer investment in law firms. Read the article for quotes illustrating both sides of the debate. See also Suit Challenges N.Y. Prohibition of Non-Lawyer Firm Ownership (NYLJ, 20 May 2011)

I suspect greater investment in technology is not likely to sway the discussion about outside investment in law firm. The debate on this issue has long seemed poorly informed. Neither side cites data to support their views. Many seem to treat the issue as one of philosophy, logic, or even human nature. Why not test different answers, collect data, then assess and adjust policy.

Fortunately, an evidence-based approach will soon be possible. Australia has allowed publicly traded law firms for a couple of years. The UK is about to pull the trigger on alternative business structures (via the Legal Services Act), which will allow outside investment in firms.

If the bookies were taking bets, my money would be on a showing that clients are not harmed by outside investment. If so, woe to the advocates of the current rule who have staked their claims on philosophy and supposition rather than data.

I recently received an interesting e-mail from a friend who is a senior manager in a large law firm. He raised the idea of “dynamic pricing", which is how airlines price seats and a mechanism some thinkers suggest will become more common for other consumer goods. I share here our e-mail exchange. 

Friend: I want to share with you an article with a very interesting summary of consumer trends. Section 3 of 11 Crucial Consumer Trends for 2011 focuses on new ways of shopping for goods and services. Note especially the very last paragraph on dynamic pricing:

“Dynamic pricing. Traditionally practiced by the airline industry, improvements in real-time information are now allowing other sectors to experiment with innovative dynamic pricing models, such as the US-based Off and Away, which auctions hotel rooms, and Swoopo, a German ‘entertainment shopping’ site where every bid placed extends the auction’s time period.”

This idea will likely become relevant in the legal market, i.e., lawyers offering and clients asking for lower priced services for lower utilized staff for less time critical work, something called dynamic pricing. This will require very accurate and up-to-date information on what capacity is available, and real-time tools to find the correct pricing for this capacity. My guess is that there will be quasi law firms - probably spurred on by the changes in UK funding in this area - that will cotton on to this quite quickly and put further pressure on the legal market. I suspect law firms will be late to this potentially disruptive pricing scheme. They might be forced to ’sell capacity’ into third party networks - in other industries these are called ‘platforms’. You may think of Apple’s iTunes / App Store as a platform, and observe the damage this is doing to Microsoft, Nokia, Dell, RIM BlackBerry, etc, etc.

Ron: The dynamic pricing idea is interesting but, even for me, somewhat futuristic. Aside from the practical issues to implement it, there is market psychology. Consumers like a bargain and don’t want to feel they paid too much. To some extent, those two require a trade-off. I’m thinking of the souk or any other merchandise sales where price is subject to negotiation. There is a cost to the negotiation in both time and in the anxiety that you have left money on the table.

So dynamic pricing might induce some of the same anxiety in general counsels. Unless of course clients can be trained to deal with legal service as they do flights and just accept a highly variable and often incomprehensible pricing scheme.

Another reason I am skeptical is that I’m not sure there are enough similar transactions to support D/P in law the way airlines can. Airlines can predict future demand based on history - do you think that’s true, even in law factory work? If I want to maximize revenue, I’d rather figure out each customer’s price elasticity and extract the highest possible price per customer. If someone willing to pay a lot comes along when I have capacity, I’d rather charge the high price.

PS - not sure I completely get the platform analogy. Are you suggesting suppliers would sell into a distribution network with broader reach?

Friend: My thinking is that there will be platform providers (e.g., Thomson Reuters or perhaps a commercially set up virtual law firm) who will allow clients, lawyers, support service providers and other specialists to trade services. I think this will take quite a bit of time but may arrive in the medium term at the more commoditized end of the market. Platform players may ultimately become market makers and dominate this space - may take a while to arrive at BigLaw - but may come sooner if the pricing and the service experience are very compelling.

Ron: Irrespective of dynamic pricing, the idea of a platform provider in legal is interesting. Arguably, Lexis Nexis and Thomson Reuters West are best positioned, as you point out. Especially TRI, with its recent purchase of a legal process outsourcer (LPO), may be angling to become such a platform. Do you think, however, the platform might come from a start-up, say Legal Onramp, which is trying to be more of marketplace than a provider per se?

I still struggle with the underlying economics of dynamic pricing in the legal market. By available capacity I assume the focus should be on people (lawyers or related professionals), not machines. Aside from the fact that legal automated systems are not that advanced, adding capacity to them is very inexpensive. So staying with staff, I wonder if a profit maximizing supplier - whether a law firm or alternative supplier such as an Axiom or LPO - would not be better off limiting capacity to what it can reasonably expect to sell. Holding excess human capacity is very expensive, irrespective of who “owns” it. Unless the “spot price” of capacity were a lot higher than the long-term price, I suspect suppliers would be careful to limit capacity, preferring to fall short of meeting demand (foregoing revenue) than risk a significant over supply (incurring unnecessary cost).

============
So, is this too futuristic? Comments welcome.

The latest National Law Journal (NLJ) 250 report is out, the list of the nations top 250 firms. The results, while not surprising, serve as a good reminder that BigLaw’s heady days may well be past. 

The NLJ 250 (National Law Journal, 25 April 2011) reports that “Big Law continued to shed lawyers at a brisk clip in 2010.” In 2009 and 2010, the lawyer headcount at the top 250 firms shrank by almost 10,000 (roughly 3,000 in 2010).

The NLJ 250: Editor’s Note offers a glass half-full view, noting that “Grim as the numbers be… the number of lawyers working at the 250 largest firms in America is still higher than it was in 2006… And though the decreases are steep by big firm standards, the cuts still represent less than 10% of the attorney workforce among NLJ 250 firms. It’s not exactly happy news for the lawyers who’ve departed Big Law, but it’s worth remembering that firms reached record sizes in the two years prior to the recession.”

I think “glass half-full” reflects BigLaw management wishful thinking. Couple these data with the combination of price pressure and challenging realization rates and the glass may be worse than half-empty. It may also be cracked and moldy. That is, we have to decide whether we now have a better answer to the questions of the sustainability of BigLaw business model. In my view, the headcount reduction is merely a leading indicator of fundamental business model changes to come.

On a side note, The NLJ 250 links to “An interactive map of 21 U.S. cities with the highest number of lawyers.” Infographic: Big Law USA has a map of the US with dots for about 20 cities. The article says “Click on the map for attorney totals by city” but the action is simply to mouse-over, not click. Moreover, it’s sobering that this counts as “interactive” in the legal market. I fear that confusion between two common technical terms and the limited view of “interactive” says a lot about lawyers and technology.

What makes a law firm a firm, not a collection of solos? From both the client and firm perspective, technology plays a big role in the answer.  

Client Perspective. I am not sure how general counsels answer this today. Concrete, operational ways to answer this include:

• How long it takes the firm to find lawyers with experience.
• How quickly lawyers can find relevant work product, either on an open matter or when starting a new one.
• Consistency of lawyers’ time entries across offices and practices.
• Consistency of billing practices, formats, and detail across matters.
• Receiving appropriate substantive alerts and other marketing e-mail (and of course no duplicates).
• Ability of a lawyer, during a call, to conference in another lawyer not already on the matter.

This list gets at whether firms have both the culture and technology to share experience, work product, standards, and clients. All of those seem important indicators of whether a firm acts as one.

Firm Perspective. The ultimate answer turns on culture and compensation. Howrey’s demise illustrates that a focus on compensation and a weak culture may make the firm less than one, irrespective of anything else. Beyond these linchpins, operational ways of getting at this include:

• The percent of firm revenue from matters where at least 25% of the work is done from in an office that did not originate the matter.
• Whether geography is a barrier to assigning associates.
• Whether partners in one office can easily determine availability of associates in other offices.
• For a new matter, the time it takes experienced associates to identify relevant experience and similar matters.
• The ease with which a partner can get financial reports on all of a client’s billings across the firms.

Technology plays a central role in all these factors. I regularly hear about firms where use of the document management system is optional, where the CRM languishes, where there is no effective federated search tool, and where the firm does not have or use its business intelligence (BI) tools. So I wonder how such firms operate as one. Firms need both to have the right technologies and to use them the right way to act as one.

CIOs who want to have an impact should make sure they understand how their infrastructure and applications support - or not - the firm acting as one. Well, at least as long as the partners care about that goal.

I frequently discuss with law firms and law departments how best to provide lawyer support, including outsourcing as an option. Inevitably, the conversation turns to support quality. I am surprised how few have defined what “good support” means. 

Defining good lawyer support was a big part of my presentation last week at the Ark Group conference Best Practices & Management Strategies for Law Firm Library & Information Service Centers. Jean P. O’Grady, Director of Research Services & Libraries at DLA Piper LLP (US) and I presented the keynote panel, Outsourcing: Outrage or Opportunity. Marsha Pront, Senior Library Consultant, IMS Legal Research Services moderated. In the audience were 45 people from 35 mostly large US and Canadian law firms.

I said that defining good support requires metrics, service level agreements (SLA), and a governance structure. Without these, managers cannot assess if they provide good service, where improvement opportunities lie, or the viability of alternative support approaches. When I asked for a show of hands of who had instituted metrics or SLAs, few hands went up. This is pretty typical in law firm audiences.

We did not have a chance to discuss what metrics to track but “core” support functions cry out for metrics. Jean, citing Jim Collins in Good to Great, defined core as follows (1) “Good to great” companies focus on what to do and (2) they also put equal focus on what not to do and what to stop doing. She surveyed attendees in advance, asking which library functions respondents consider a core business activity of the firm. She reports the results at her Dewey B Strategic blog post, Outsourcing, Outrage or Opportunity? What is Core?

Once you know what to measure, you have to define the right service level to offer. For libraries that might mean, for example, categorizing research requests by complexity and, for each complexity level, specifying a turn-around time.

A governance structure is also key. One element of governance is a process to recover from errors. Another is articulating criteria for when the SLA applies. For example, appropriate governance might limit in-depth business development research to partners with a demonstrated track record of winning new business.

As for the question of “Outsourcing: Outrage or Opportunity,” many seemed skeptical that outsourced service could be as good as what they provide internally. To understand this view, I asked two questions. First, did the audience believe that every support function in their firm was “good”. The looks and comments confirm what everyone in a large law firm knows: some support functions just are not that “good”. But of course, not mine!

And second, I asked how many had work experience in an organization that provides outsourced services. Only a couple of hands went up. I then pointed out that every law firm employee, in fact, works for an outsourcing organization. In-house counsel can “make” legal services or “buy” them from law firms on an outsourced basis.

I hope the audience left with the message that metrics, SLAs, and governance are key both to judge quality and know where to draw the make / buy line. To optimize lawyer support, law firms must adopt the right evaluation framework. That is true whether they choose to work purely internally or to outsource.

This blog post appeared earlier this week at the Integreon blog. Right, I do work for Integreon, which provides legal outsourcing services, so you might think I’m biased. I frame my thinking a bit differently though.

In 1989 I was one of the first non-practicing lawyers in a large US law firm to focus full-time on legal IT and practice support. Then Wilmer Cutler was an early PC adopter so inside the firm, I had support. But when I talked to other firms, the hostility to technology was often palpable: “why would lawyers ever need to use e-mail"; “lawyers dictate, they don’t type"; “I went to law school so I would not have to learn spreadsheets"; “we could never do an e-mail client update, it might not be perfect"; “law firms will never have websites”. The list goes on. And the resistance lasted at least a full decade.

My view is that just as many of us look back 20 years and try to remember what all the fuss about legal IT and practice support was, in a few years time we will do the same for outsourcing. Things take time but the legal market does change and rationalize.

[Update 3 Mar 2011: Steve Levy of Lexician wrote Outsourcing: Bad Word or Wrong Word? today that comments on above. He suggests that managers focus on who is doing the work, not who employs the worker, and that the issue is more one of delegation. I agree. See also my post Is Offshoring the Same as Delegation? ]

Kudos to the new and improved Law Technology News (LTN). I just wish I could say that practice technology were also ‘new and improved.’ 

Monica Bay and her LTN and ALM colleagues (including Aric Press, David Snow, and Sean Doherty) deserve praise for the newly designed and re-launched magazine. With vendor squibs and short updates migrating to the web, the print magazine now has even more and better content, namely in-depth feature articles. And like many readers, I am pleased LTN has adopted the standard magazine physical format. The page size is smaller yet feels cleaner and much less cluttered, so it is also visually more appealing.

Most features in the re-launched LTN focus on e-discovery and law firm IT infrastructure. If this represents the state of legal technology, then the meta message is loud and clear - that’s where legal IT management is spending its time. Did I miss a new-and-improved practice technology?

The economic crisis has yielded a diminished new normal for BigLaw. I had hoped this would spur practice technology innovation. Yet I struggle to name more than a handful of recent innovations (e.g., KIIAC for contract analysis, Bloomberg Law as competition for Wexis, Reed Smith’s matter and budgeting SharePoint portal, and Wilson Sonsini’s online term generator and client CLE offering).

Maybe I’ve missed the boat. I fear, however, that one aspect of BigLaw has not changed: structural impediments to building or even buying innovative practice support technology. On the practice side, partners focus on making raining or serving clients. On the technology side, CIOs focus on the need to maintain and upgrade infrastructure. So neither key stakeholder has time or perhaps even motivation to push for practice technology innovation.

Yet much has changed. The market is abuzz with alternative fees, legal project management (LPM), and legal process outsourcing (LPO). Lawyers are abuzz about their iPhones and iPads. And some firms are making big moves, for example, Foley to Net Documents and Baker McKenzie to SAP.

Over at Twitter, I’ve speculated that we may have moved to an era where legal and practice technology is now ‘horizontal’, that is, firms deploy broad market platforms with a bit of legal overlay. Less important in this world is legal vertical market software (even platforms such as document management).

If my assessment here is right - limited new practice technologies and a new focus on horizontal platforms - then perhaps we need to look for innovation woven into other systems.

So I finish, not sure if I should end up gloomy or wildly optimistic.

Last week I wrote Should Law Firms Impose a Cover Charge? in response to Bruce Carton’s blog post, BigLaw May Roll Out ‘Minimum Annual Legal Spend’ Requirement for Clients, commenting on a Legal Week article. The topic struck a note among legal bloggers. Collected here is a chronology of comments on the topic, as collected by my Tweets. If I’ve missed commentary, let me know and I’ll update this post.  

Feb 2: Legal Week reports DLA Piper will require new clients spend annual minimum, $200k likely for US http://bit.ly/ffoJ9h || rationalizing intake

Feb 5: Legal Blog Watch post by Bruce Carton:  BigLaw May Roll Out ‘Minimum Annual Legal Spend’ Requirement for Clients

Feb 5: New post: Should Law Firms Impose a Cover Charge? http://bit.ly/g6Yw2v || Discusses DLA Piper min charge + @LegalBlogWatch questions on it

Feb 7: Comment to my original post by Toby Brown:

Ron - as usual, excellent insights. The conflicts issue and cost of intake are both serious issues, but usually only discussed after-the-fact, once they create problems. I think firms should take these into consideration even before they take on new clients. They should think about these issues when targeting new clients. A third un-stated cost here is the cost of acquisition of the client. Why spend all that money pursuing a client that can’t be profitable?

Lastly, I think a cover-charge is a non-starter. In this market asking a client to pay for the privilege of being a client shapes up as the classic lead balloon. “We already pay you too much,” are strong words to heed.

Feb 7: Comment to my original post by Doug Cornelius:

There are a very good reasons for a firm as big as DLA to set a minimum. But what about those hoping to make partner? DLA just raised the bar for new partner trying to bring in business. It sounds like you can no longer pick up a small piece of work to try to get your foot in the door.

You can also view this as partners pulling up the ladder to make harder for others to advance up.

Feb 8: RT @carolynelefant Solos can cover DLAPiper clients who can’t meet the 200k cover http://bit.ly/gYf8mW || More on BigLaw ‘cover charges’

Feb 9: RT @ReesMorrison World’s largest law firm institutes minimum fee for new clients http://bit.ly/falWsv || more criticism of cover charge

Feb 9: Client Minimums or Service Maximums? by @wiredgc http://bit.ly/hB3g4m || more on law firm cover charges

Feb 10: by @legalbrat - DLA and the minimum spend: an investigation (sort of) http://bit.ly/i1PP2q || more on BigLaw cover charge. this GC supports

Feb 11: @legalbrat blog on DLA and the minimum spend (http://bit.ly/i1PP2q) now @Legal_Week http://bit.ly/fqC3hw || cover charge has legs as news

Feb 11: RT @wiredgc: Will 6-figure client minimums help smaller law firms? Depends on how small is small. http://bit.ly/fsiEPO || more on covers

Feb 11:  The new price wars by @jordan_law21 http://bit.ly/hJjkKZ || more on DLA minimum client charge

Should law firms charge a minimum ("cover") to accept a client? I think that is perfectly reasonable. Indeed, it is more than reasonable, it is a good practice. 

On February 2nd, I tweeted “Legal Week reports DLA Piper will require new clients spend annual minimum, $200k likely for US http://bit.ly/ffoJ9h || rationalizing intake.” Today, Legal Blog Watch reports on this article and asks some questions:

• Is this a novel requirement or is this something that is quietly in place at other firms?
• If novel, will clients go for this?
• What is the consequence if a client who commits to spend $200,000 with a law firm fails to do so? Termination? Or termination, but only if there is a more lucrative client waiting in the wings? Or no termination but the client must write a check for the difference (seems unlikely!)?

Here are my answers and some comments. First, this is novel to me. Second, I don’t see why a rational client would find this offensive. And third, I would un-ask the last question because the easier path is for the firm to bill the full “cover charge” upfront. Remember the old-fashioned retainers? - like that.

Lately I am writing about “law factory” versus “bet the farm” firms. The idea of a cover charge relates indirectly - it’s about making a conscious decision about your business, your costs, and your market position.

One reason to seek a cover charge is that conflicts are a real problem and therefore any new client or matter creates the risk that a firm will be conflicted from a much bigger / better / more profitable one. This is not academic; I remember partners talking about this 20 years ago in a kinder environment than today.

Another reason for a cover charge is that matter intake is expensive. I doubt many firms have quantified the cost to open a new matter and then bill for it but I venture that it is rather more costly than most partners and managers think. If your cost of goods sold includes a “start up” and on-going administration (billing) that costs thousands, then don’t charge less than that. Covering your cost is s basic business sense.

I suspect there even more hidden costs of small matters in large law firms. Task switching taxes the human brain. If lawyers have a lot of little matters, there is ‘frictional loss’ as they switch among matters. That means lost billable hours (or lost productivity in an alternative fee arrangement world). Further, I suspect that the psychology of small matters in BigLaw means that either lawyers under-bill (don’t upset the client, they can’t afford much) or over-bill (compensate for the pain-in-a** factor but violate ethics).

Of course, all this is idle speculation. If firms were real businesses, they would have data to analyze these questions and they would be able to run models to estimate the impact on their business. Some day.

If I were a DLA Piper partner, I would be very happy with this decision. Any clients who find the policy offensive are probably not ones I would want. And the policy would help check the ‘hope springs eternal’ view of my partners who always think the new small matter they want to take on will be the next Microsoft antitrust or Enron litigation.

A front-page article in the Friday New York Times raises the issue of the divide between science and humanities. Lurking here a lesson for lawyers. 

In 500 Billion Words, New Window on Culture describes Google’s recently released Books Ngram Viewer, which analyzes how often phrases occur in the world’s books over the years. The article is less about N-Gram, however, than it is about the divide between disciplines:

“Despite the frequent resistance to quantitative analysis in some corners of the humanities, [one of the scientists involved] said he was confident that the use of this and similar tools would ‘become universal.’ Reactions from humanities scholars who quickly reviewed the article were more muted.”

The scientists seek to “demonstrate how vast digital databases can transform our understanding of language, culture and the flow of ideas.” They applied “high turbo data analytics” to humanities questions in what they coin “culturomics”. For example, “they found technological advances took, on average, 66 years to be adopted by the larger culture in the early 1800s and only 27 years between 1880 and 1920″. The article suggests humanists cannot cope with data.

The legal market faces a similar divide between disciplines. Law focuses on text, business on numbers. Lawyers look for small subsets of cases to find distinctions and similarities; business people look for large amounts data to find trends. Lawyers solve one narrow problem, business people broad problems.

The divide is not just academic, as both an anecdote and a recently published survey illustrate. First, my anecdote: The immediate reaction from a senior corporate associate when I suggested learning spreadsheets: “Ron, you don’t understand. The reason I went to law school is so that I would not have to deal with numbers.” (OK. Perhaps that explains investment bankers earnings relative to lawyers.)

Anecdotes add up to data: The Third Annual Law Department Operations Survey, a December 2010 joint publication of InsideCounsel and the Blickstein Group found that “[f]ewer than half of the respondents have a formalized metrics / reporting program.”

With the cost pressures GCs face, the lack of metrics is damning. Once I might have latched onto time or budget constraints to explain the lacuna. Now I think it is discipline divide. Lawyers just do not focus on numbers and management. Like the humanists the the Times article, lawyers sit on the side while the business managers crunch the data to see what’s really happening.

The difference, however, is that practicing lawyers hold power and make key decisions. A week of MBA-type classes some law firms provide for lawyers does not overcome a lifetime spent avoiding data. Professional managers in large law firms have become more business minded (and have several MBA programs they can attend) but ultimately they have much less power than partners.

We need to bridge the lawyer divide between text and number. Doing so might go further than many other current initiatives meant to reduce costs and improve legal performance.

[Two minor points on the above:
1. The law departments metrics lacuna is bleaker than it seems: I assume that the LDO survey goes to law departments with a Director of Legal Operations position, So it self-selects for those companies that are more advanced in managing the law department and therefore are more likely to have metrics. A reasonable inference is that the percent of all law departments using metrics is even lower.
2. The text v. numbers and cases v. data-crunching reasoning divides may well affect our view of the law itself. Will practicing lawyers rush to analyze what we might infer from changes in word and phrase occurrence over time? Not many but at least one so far. Trends in Law, as Seen By Google’s Ngram by Bob Ambrogi illustrates the power of Google’s new tool for legal analysis. See his graphs for phrase pairs such as “law firm partner, law firm associate” and “intellectual property law, securities law, corporate finance” trend over time. Very interesting.]

We are overwhelmed by information and data. What we lack is the wisdom and insight to take simple steps to improve what we do. So I am pleased to see a new service and website that focuses on the latter rather than the former. 

Attorney at Work is a new website that “promises you one really good idea every day.” These ideas are for practicing lawyers and for law practice managers. An all-star cast of legal market thought leaders offers concise, practical, and actionable tips in digestable form - just 300 to 500 words. Sign up here for daily e-mail. Or subscribe to the RSS feed.

The service just went live but I am already impressed with the daily tips and advice. Examples include not obsessing over new technology (what, moi?) and dealing with an angry client.

Speaking of technology, Attorney at Work raises an interesting question of choosing to get information by e-mail versus an RSS feed. Both are available but this service stresses e-mail. I think for busy lawyers and law practice managers, that is the right answer. My anecdotal survey suggests that RSS users are overwhelmed by information rivers and oceans (hat tip to Toby Brown at 3 Geeks). And I regularly fear the echo chamber effect, so I do not want to assume widespread RSS use; in fact, I suspect the percent is smaller than many think.

Delivery mechanisms is a topic for another day. Whatever way works for you, I suggest you subscribe.

A key ingredient needed to reduce legal cost and improve lawyer performance is missing: research and development.  

Let’s start with what we see in the legal market:

• A few general counsels are changing how they manage law practice, both internally and with outside counsel.
• A larger number of GC whine about costs but take little visible action to control them other than demand discounts.
• A bevy of commentators (including me) opine about how the legal market should operate and who should do what.
• A handful of outfits produce empirical data about and benchmark BigLaw but focus more on what is than what might or should be.

What we don’t see is observable, significant R&D to achieve efficiency and cost goals. To be sure, there is some trial and error testing. But that’s a far cry from systematic, controlled study. Let’s first consider the dollars and cents of R&D, and then what a R&D budget might fund.

On the money side, The National Science Foundation reports that non-Federal R&D funding has fluctuated between 0.6% and 1.2% of gross domestic product. Applying the low end of the range to the corporate law market of about $100 billion would mean $600 million on R&D. I’d be surprised if anyone could even identify $6 million of R&D.

Of course, some might argue that it’s appropriate to spend very little on R&D in legal. But consider how much companies spend on legal. Serengeti reports that $10+ bil companies spend about 0.3% on legal. That’s $30mil annually with a lifetime cost (NPV) of $600 million at a 5% cost of capital. That’s big. R&D to lower that legal cost might be a very good investment indeed.

The Chicago School ("whatever is, is right") might argue that the apparent lack of R&D suggests that the market thinks savings are not possible. I think the better conclusion is that market structural problems make investing in R&D nigh impossible.

If funding were available, promising R&D might include:

• Develop defensible automatic / predictive coding for litigation document review. . We all now that doc review costs are huge. Many e-discovery (EDD) experts believe that computer generated document designations for responsiveness and ultimately privilege are more accurate and reproducible than human review. The computer approach is certainly cheaper than humans. So if I were a GC facing on-going, sizable doc review bills, I would consider R&D to support creating a defensible automated approach. Doing so is not rocket science. More likely, it’s a brute force process, specifically, paying to review document collections twice - once the “traditional” way and once the “new” way - and then comparing. (Ok, perhaps over-simplified but you get the idea).
• Determine the right level of preventive law (including training).  The best way to reduce the cost of lawsuits and government investigations is to avoid them. Figure out how much preventive law is worth doing. This will mean data collection, probably some retrospectively but more likely most prospectively.
• Figure out how much contracting is really necessary. America spends a lot on drafting contracts. How much is all this ‘paper’ really worth? Might a term sheet with a simple cover contract suffice? Heresy? We obsess to paper everything because we fear something bad will happen. But where are the data showing that our current cumbersome approach to contracting really minimizes end-to-end cost? Perhaps data analysis would show we really do not need such complicated contracts.
• Go crazy with data that might contain hidden legal signals.  I was inspired by Insurers Test Data Profiles to Identify Risky Clients (WSJ, 19 Nov 2010), which describes how some life insurers are using a wide range of personal data to see if it’s possible to avoid medical exams in underwriting policies. They use huge amounts of inexpensive personal data (perhaps raising privacy concerns) as a proxy for what expensive blood tests and physical exams would otherwise show. Is there a moral equivalent in legal? What data would we have to analyze to find risk proxies? To be a little more specific, how many companies analyze the connection between their vast troves of operational data and their legal spending to see if they can find correlations that signal problems.
• Mine the data we already have. GC and law firms are sitting on huge volumes of fee-earner timekeeping data. Do something with it. To make it more useful, R&D may be required to extract automatically from text descriptions an appropriate task code. Once that’s done, pay statisticians, data modelers, and others to figure out what it’s telling us.

I’m not saying that budgeting for or doing research is easy. Only that there is a crying need to at least consider some fundamental research to reduce legal spending. If the GCs with budgets in excess of, say, $100 million are not willing to invest in R&D, who will be? Perhaps the answer is collective action (subject to antitrust considerations).

Readers, what do you think? Would RD pay off? What might it find? And who should do it?

I am attending the conference 2010 Futures Conference & Symposium Agenda hosted by the College of Law Practice Management and the American University Washington College of law. This is a live blog post of 60 Tips in 60 Minutes Panel Discussion, Tipsters: Mark Tamminga, Gowlings, management tips; Ann Lee Gibson, Ann Lee Gibson Consulting, marketing tips; Tom Grella, McGuire, Wood & Bissette, P.A., finance tips and Reid Trautz, American Immigration Lawyers Association, technology tips. 

MANAGEMENT
- Let managers do their jobs. Partners need to let business managers do their work. Get out of their way.
- Connect with staff. Meet regularly with staff to let them know how biz is doing.
- Deal with under-performers. Find a graceful exit. Not dealing with them is bad for culture and morale.
- Management is chaotic. It’s chaotic - get over it. Must pivot and snap attention back and forth.
- Don’t use e-mail to solve big or sensitive issues; do it in person
- Plan for succession. Younger partners need a path to management. Consider 2-week management training boot camp.

MARKETING
- Lawyer bios should be shorter. Say what you have done for whom. No adjectives and adverbs. Chunk info into natural groups.
- Keep practice descriptions simple. “No wall of text”. Marketing docs should not look like briefs.
- In pitches, discuss the client’s issues. Don’t tout yourself. Ask smart questions; don’t try to show how smart you are. Demo lawyer skills in real time.
- To get PR, leave reporters a night-time voice mail. Say you are sending info. Then send e-mail. Response rate is high.
- Call inactive clients for whom you’d like to work again. Call to say hello and share something interesting
- Fee Fie Foe Firm to research law firms
- Know who you really compete with and understand them
- Do RFP triage. Decide on opting out, all out effort, or pro forma effort. Volume of RFPs up 3x.

CLIENT TIPS
- Hire a full-time client interviewer. Do 100+ interviews per year.
- Billing is about communicating value. Train time-keepers on writing good bills.
- Improve likelihood of being paid - check on prospects before taking them on as clients
- Hold annual client planning meetings - with the client. Review company and industry changes. Discuss next year’s needs.
- Half-glass trick: when you need to work a room, only pour 1/2 glass so you can escape conversation go get re-fill
- Rainmaking requires consistency, repetitive tasks. Spend 250-500 hrs/yr. Schedule BD regularly. Write a personal BD plan.

PERSONAL and GROUP PRODUCTIVITY
- Get the right apps on your smart phone. Dragon Dictate allows free 30-sec dictation.
- Track time on a daily basis. Have timekeeping app open on start-up.
- Use free online scheduling tools such as Tungle, WhenIsGood, SAM: SetAMeeting
- Outlook Add-ins: Xobni, Simply File to store sent messages, Copy2Contact (formerly Anagram) [RF: I like Xiant Filer]
- Turn off new e-mail alerts. Look at e-mail occasionally, when it’s a good time for you.
- Dual monitors for all workers. Buy largest monitor you can afford.
- Buy a solid state drive in your next PC. It’s much faster
- Meet via the web with products such as gotomeeting or webex
- Organize your life with Evernote. Let’s you put all your info in one place. [RF: I use Microsoft OneNote, which competes with evernote]
- To keep up with tech: LifeHacker, Mashable, BGR, TechCrunch. Also SmartComputing magazine
- Build IT training into the budget
- Do regular back-ups

I am attending the conference 2010 Futures Conference & Symposium Agenda hosted by the College of Law Practice Management and the American University Washington College of law. This is a live blog post of the session Developing and Choosing Leaders for the New Generation and Beyond Panel Discussion. The moderator is Harry Trueheart, Chairman Nixon Peabody LLP. Panelists are Roland Smith, Center for Creative Leadership; Bill Migneron, COO of Lathrop & Gage LLP; Patrick McKenna, Law Firm Strategy and Practice Management Consultant. 

Truehart Provides Overview
The days of annual rate increases is over. So profession can no longer “wash over” its mistakes with increasing prices. Firms need to learn to cope with alternative fee arrangements, which likely means being more efficient. The model for how law firm hire and deploy legal talent is changing. Own view: many firms with a solid core of lawyers and ‘cloud of affiliated lawyers.’ Generational changes in large law firms will create need for succession planning.

McKenna on How Law Firms are Developing and Choosing New Leaders
- McKenna wrote “First 100 Days” for new managing partners a few years ago. That led to a program for new MP at Chicago. Reporting on a just-completed survey of 92 firms of over 100 lawyers. Sees a lot of ‘wishful thinking’ and ‘romantic folklore’ when it comes to law firm leadership. There is a myth of law firm leader as symphony conductor. The better analogy is that the leader is the main puppet in a show with 100s of partners tugging at the strings.
- New MP are surprised by the number of interruptions they have to deal with. Working with new MP, McKenna sees the challenges and cycles that MP experience. After 1 year, 40% question whether they want to stick with the role. 72% of MP today operate without a job description.
- Thinks job description is much more than HR issue. Did a description for one MP and came up with 72 bullet points.
- Only 25% of MP receive formal performance review - and that is way up from earlier.
- We imagine MP as a visionary leader ("Moses image").
- In practice, has never seen a law firm leader who has articulated a vision that the partners adopt and embrace.
- McKenna asks how much time they spend on problem solving versus exploring opportunities. Former is 80%, latter is 20%. Of the 20% on opportunities, the split between immediate opportunities versus long term, 2/3 is on the present. So only 6% of management time is spent on future. But only 9% of MP, even in firms of over 500 lawyers, are full-time managers. Many still bill time.
- We like to think of MP as grooming future leaders. But only 14% have worked on a formal succession plan. Where there is a succession plan, the successor is usually of the same generation as current leader.
- At a recent class of 31 new MP, only 3 have job descriptions, none have clear guidance on whether they should bill time, and does not have a clear sense of who is in core management.

Bill Migneron on changes in large law firm c-suite
- There is more hiring from outside the legal market.
- C-titles have proliferated (chief real estate, chief strategy, chief knowledge officer…. beginning to sound like bank vice presidents)
- The C-title helps attract people from outside the legal market.
- Outsiders believe the c-title will confer automatic authority and acceptance - which is a fallacy. This flows from relationship with lawyer leaders.
- Qualifications he seeks:
. technical competence,
. leadership ability (mold, mentor, lead both direct reports and lawyers),
. team building, agents of change (but you need your own style to do this),
. business savvy with ability to understand client base,
. ability to talk to clients
. trustworthiness (which takes time but ask about this in interview)
- A good match remains a challenge
- Has hired 3 c-level people in 3 years and so far is only 1 for 3 and jury is out on the remaining 1.

Roland Smith on Challenges of Developing Leadership
- Law firms always say they are different. Also hear this from doctors and from other sectors. But we usually don’t change our approach.
- Law firms do, however, have some unique attributes
- Anecdote from one large law firm meeting
. MP said I never heard of your center
. Another partner asked what are your credentials
. If we do what you say, will it increase partner income
- Has interviewed over 1000 managing partners
- Law firms have trouble making choices
- Lawyers provide counsel to clients on dealing with complexity and uncertainty but are bad at applying these skills to law firm management
- Lawyers are trained to be skeptical (not trusting) and look for problems. These are good attributes for law practice but bad ones for management.
- Cultural glue is important. But how viscous is the glue? How actively do leaders transmit the culture / glue to peers and successors? Even global law firms today operate in silos.

[For additional reporting on this session, see hashtag #colpm by Jordan Furlong (@jordan_law21)

After the last two years of severe recession and huge corporate legal spending cuts, I thought it was safe to assume that general counsel buying behavior had changed. It turns out, perhaps not. 

Reading What’s Really Going On in Today’s Legal Departments? a survey of GC in the August issue of Inside Counsel, the results sound very similar to what I read a few years ago: complaints about law firms but little evidence of buyers exercising their power. Cathleen Flahardy, editor-in-chief, notes in From the Editor “We were surprised that the economy didn’t have the impact we expected—GCs overall are still satisfied with their firms.”

Let’s see why the surprise: Over 90% of respondents report economics are increasing pressured to reduce outside counsel spend. So far, that seems to be the new program. Almost 70% are happy with their outside counsel relationships. Reading that, I would guess that firms are performing the way GC want. But keep reading.

Additional questions reveal that 50% of GC don’t think law firms recognize corporate budget constraints; 65% say law firms don’t actively seek ways to reduce cost; under 40% of firms are open to alternative fee arrangements; and 60% report their firms don’t understand their businesses. There’s more: only 65% of GC require firms to submit budgets; of these, 46% of firms adhere to budgets. That means that only 30% of law firms have matter budgets that they meet.

How should a CEO or CFO interpret these results? I’m not sure, but I can see that they would conclude, among other things, that GC are among the most easily pleased people. They might also conclude that it’s time to put purchasing professionals fully in charge of outside counsel relationships.

The College of Law Practice Management and The American University Washington College of Law are hosting “1, 2, 3, RESET! The 2010 Futures Conference and Symposium” on October 22-23 at AU in DC. I encourage anyone interested in the future of the legal market and law practice management to attend. (I am a COLPM Trustee.)  

This conference is for law firm leaders, managing partners, executive directors, c-suite law firm officers, consultants, law school deans and anyone else who plays a leading role in the business of practicing law. Click here to download the PDF program. Topics include The Impact on the Legal Business of Capital Markets’ Growing Interdependence, A Sea-Change in London (re equity investments and alternative business structures for law firms), and a wrap up session Now What? led by American Lawyer editor Aric Press. Other speakers include Peter Zeughauser, Simon Chester, Steve Matthews, Tim Corcoran, Marc Lauritsen, and Patrick Lamb.

I’ve attended many College meetings and they are outstanding. Unlike most conferences, vendor sponsorships play no role in the program or speaker selection. A committee of College Fellows works hard to identify topics and speakers based on the issues most likely to affect law practice management in the coming years. We are limiting the conference to 150 attendees so that we can ensure high quality discussion.

I hope to see you there.

The Recorder 19 July 2010 article Is Adding a Second Tier for Law Firm Associates a Good Thing? asks a great question. The answer is “yes, but….”. 

The author, Justin T. Miller, J.D., LL.M., CFP®, is a regional director of the Legal Specialty Group at Union Bank’s The Private Bank. He writes

“Firms are finding that a two-tiered associate structure can be an efficient profit model in that the second tier of ‘non-partnership track associates’ are paid sometimes as much as 50 percent less than the first tier of “traditional associates,” but may be billed to clients with rates that are only 25 to 30 percent less than those of the traditional associates.”

Miller notes that multi-tier partnerships are common now but that tiered non-partner lawyers is a “recent development.” I agree. Though several BigLaw firms have staff attorney programs, these lawyers typically work only document review. Miller seems to envision a broader remit.

Such a move is consistent with Richard Susskind’s “unbundling” or “dis-aggretating” legal services (see The End of Lawyers? and the view I expressed in my post The Right Resources to Solve Legal Problems that in-house counsel must consciously decide what mix of human resources is most appropriate to work on a matter.

In concept, I think tiering associates is a great. To do it effectively, however, BigLaw needs a major “operating system” (OS) upgrade. That is, large firms would have to improve their management capabilities and approach. Here are some specifics to address:

CASTE MENTALITY. As Miller notes, “If implemented correctly, a non-partnership track associate should be considered a full-time member of the legal team.” The caste system still thrives in BigLaw and works against integrating professionals who lack the same pedigree as partners.

TALENT MANAGEMENT. Lawyer recruiting, assessment, and career management are all geared toward elite law school graduates. Who will recruit the new type of lawyer? What are the appropriate criteria for hiring? What is the career path for this new tier of lawyers? Firms would need to answer these and other questions.

PROCESS FOR DELEGATING WORK. Once on board, who allocates work to lower level lawyers and how? Partners and senior associates may (emphasize may) be good at assigning work to associates, but do they have skill, training, and know-how to delegate work “down the chain.” Doing so requires a deep understanding of the deliverables and what resources can most effectively produce them. For example, consider the common task of contract drafting. As Kingsley Martin notes in Contract Checklists-does sequence matter?, few lawyers approach contract review systematically. Without a process in place now, effective delegation is that much harder.

MANAGEMENT SYSTEMS AND GOVERNANCE. Large firms may carefully review substantive legal work but few have formal systems for consistently measuring its quality.The concept of metrics is, at best, new to large firms. So one element of a management system is developing new metrics. Another element is a way to coordinate multiple work streams, also known as project management. BigLaw is just beginning to digest and embrace project management.

So I think a successful non-partner track lawyer program will require a major OS upgrade. Firms that can upgrade their OS to manage a new lawyer tier effectively - and that includes marketing it to clients - stand to win the favor of their clients. And that should translate to market and wallet share, which is critical in the current environment.

Large law firms will almost certainly not return pre-2008-crash economics. BigLaw will remain immensely profitable but firms will need to manage themselves more effectively. And this includes how they staff to support lawyers. 

The most recent evidence of the ‘new normal’ is the Altman Weil Law Firms in Transition study. This ‘Flash Survey’

“found a clear consensus emerging among US law firms regarding changes… Over 75% of firms… believe that more price competition, more non-hourly billing and the use of project management to improve efficiency of service delivery will be permanent changes in the legal landscape. The primary impact… will be a greater focus on efficiency and productivity driven by client demands for cost control.”

Nonetheless, the study found that firms expect to maintain profitability by controlling cost. Of course, lawyer compensation and partner profit are the biggest cost items. Though profit is not usually considered a cost, doing so is a useful construct. First, profit per equity partner is the economic cost required to attract and retain a key factor input (economist-speak for the services a partner provides). And second, by re-classifying partners from equity to non-equity status, firms control the cost of that key factor input. Altman Weil found that firms will make fewer partners and rely more on contract lawyers (presumably in lieu of hiring associates).

The legal press focuses on what happens with lawyers; I focus on staff. On the staff side, the study found that two-thirds of firms cut staff in 2009 and 20% expect to do so this year. Altman Weil also asked about outsourcing: “Did your firm do any of the following in 2009? Will you do so in 2010? Outsource non-lawyer functions. Offshore lawyer functions.”

For outsourcing staff, 15.7% of firms said yes for 2009 and 13.8% for 2010. These results seem low. Already in 2007, the International Legal Technology Association (ILTA) staff survey found “37% of Large firms and 19% of Very Large firms obtain [various IT] services outside of the firm”. Further, in my day job at Integreon, I see growing interest in staff outsourcing in 2010 among large US law firms. For offshoring staff functions, the survey found virtually no interest in 2009 or 2010.

Outsourcing is not just about lower cost labor. It’s also about improving process and more favorable economics. I explain this rationale in some detail in my paper Outsourcing as a Strategy to Manage Support Cost and Variable Demand. It was first published in fall 2009 as a chapter in Implementing a Successful Legal Outsourcing Engagement, an Ark Group study by Michael D. Bell of Fronterion, an LPO analyst firm.

For a specific example of how outsourcing can control cost and improve law firm profit, see my Integreon blog post today, Middle Office Outsourcing Improves Law Firm Profit, which discusses an article in The Lawyer last Friday. That article explains that staff outsourcing helped UK firm Osborne Clarke improve profit in the face of flat revenue.

In In Law Schools, Grades Go Up, Just Like That, the New York Times reports today that some law schools have artificially boosted grades. It’s hard to know where to begin assessing what this means - and why it is awful. 

The article reports that

“In the last two years, at least 10 law schools have deliberately changed their grading systems to make them more lenient…. Law schools seem to view higher grades as one way to rescue their students from the tough economic climate — and perhaps more to the point, to protect their own reputations and rankings.”

What disturbs me most is the perhaps not so subliminal message that lawyers can fix problems simply by changing appearances without changing substance.

The schools argue that the grade adjustment is a competitive responsive. Inflating grades changes nothing except appearance. How about competing by changing the curriculum so that graduates are more valuable to employers?

With law schools saying, in essence, it’s OK to fake grades, surely it’s OK for lawyers to take other short cuts and ignore inconvenient facts or whole areas of knowledge.

With law schools ‘adjusting’ grades to make them look better, no wonder clients fear that alternative fees are just papering over old fashioned bill by the hour.

If it’s OK to paper over grades, then it’s OK to paper over ignorance of key aspect so law practice. (See, for example, Craig Ball’s excellent commentary on lawyers failing to understand digital data in Show No Fear - Lawyers need to — and can — learn the language of e-discovery, Law Technology News, 1 June 2010).

It’s OK for law schools to adjust grades to look better. After all, there’s no law against it. So it’s OK to advise clients to take imprudent and immoral course of action; after all, there’s no law against it.

Or perhaps by “adjusting” slightly what words really mean, it’s OK for lawyers to advise that acts long-considered torture are really, after all, not torture.

The public view of lawyers is already bad. The practitioner’s view of the academy is already bad. Gimmicks like adjusting grades can only contribute to cynicism.

Last week I read with interest Jordan Furlong’s blog post The evolution of outsourcing. He notes that though LPO is “in its relative infancy, legal process outsourcing has already had a huge impact on the legal services marketplace”.  

Jordan focuses on two effects outsourcing has on the legal market:

“The first affects LPOs themselves: they now need to move their value proposition beyond cost savings in a market they helped to make more sophisticated. The second affects everyone: the legal profession’s response to LPO is having an unexpected effect on how legal work is distributed and how legal resources are allocated.”

Working for an LPO provider, I agree that that simply offering lower labor cost is not enough. I see my company and other established LPOs working hard to improve processes, introduce technology, increase efficiency, reduce cost, and achieve better outcomes for the lawyers whom they support. Personally, “I’ve put my money where my mouth is” twice. First, I joined an LPO three years ago. And second, I recently made a switch inside my company and now focus “legal operations consulting” to help do exactly that.

Jordan was perhaps even more prophetic than he realized when he wrote that “a surprising number of law firms are adopting — and adapting — the outsourcing model themselves.” Last Thursday, Legal Week published Taylor Wessing set to create arm in Cambridge for standardised work.

The article reports that the Anglo-German law firm will set up “an affiliated corporate services business to offer clients standardised work.” Their goal is to offer lower-cost options for routine work such as corporate due diligence. Eventually “it is likely that the firm will offer the service to third parties, including other law firms.” The firm may also partner with an IT outfit to streamline work.

“Adopting the outsourcing model” as Jordan suggests is exactly right. From the limited information I have, it sounds like the firm’s Cambridge unit will be a captive LPO.

I think this development is good news for the legal market. It further validates that law firms must respond to corporate pressure for (1) options, (2) lower cost, and (3) process improvements. Given that I’ve been writing about process improvement for a long time at this blog, I am glad to see more action toward that goal. Of course, I also see it as an explicit endorsement of the LPO approach.

Until recently, the corporate law market was served almost exclusively by in-house lawyers and large law firms. Today, however, clients can choose from among boutiques, regional law firms, LPOs, and now, law firms as LPOs. This choice and competition foster innovation and drive costs down - good news for clients. Firms like Taylor Wessing that innovate benefit. And LPOs benefit because in a diverse world of providers, I see LPOs as having the skills, experience, know-how, technology, and global platform to win a good share of the work to support lawyers.

I published a variant of this post last week at the Integreon blog, LPO Now Driving Law Firms?

What can lawyers learn by mapping the legal profession? 

A recent article and book got me thinking about maps, what they mean, and what they tell us about ourselves. That led to mulling what a ‘map of the legal profession’ would tell us.

More Manhattan in New Subway Map in the New York Times (29 May 2010) explains planned changes to the NYC subway map. You might think that mapping the subway is easy; after all, it’s not like the city’s landscape or subway routes have changed much recently.

But that’s not the point because map making reflects as much about what we think, which does change over time, as it does about the “underlying reality.” The 1970s subway map was graphically iconic but challenging to use for navigation. The current version is better at relating subway lines to streets. The big change in map style in 1979 was driven by a change in thinking, not by any actual changes in the subway system have been minor. (The planned changes will allow Manhattan to occupy more space on the map and reduce type size of bus information, all designed to make the map a better navigation aid.)

Earlier this year I read In Search of Jefferson’s Moose: Notes on the State of Cyberspace by David Post, a professor of law at Temple University. One of the themes he explores is how maps help us understand new frontiers, whether it is the New World or Cyberspace, and how they influence how we think about the place.

So I started thinking about what a map of the legal market would look like. Map making is not one of my skills so I did not even consider sketching something. I did think about tables we regularly see, from the AmLaw rankings to a variety of league tables. These text-based, tabular listings have their place but do not offer any of the richness of graphic maps. The discussion of looking at a range of metrics beyond profits per equity partner is encouraging but only a beginning.

How would a map maker deal with the many facets of the legal profession to reduce them to a 2-D representation? Maps are important both for what they include and exclude. Would the map show only law firms? Law firms and law departments? Consumers? Dollar flows? Volumes of cases? Legal risks? Government players? Legislation? Landmark court decisions? What are the key attributes that make the legal profession what it is?

We also need to consider how would lawyers react to a map. Consider the Steven Wright quote: “I have a map of the United States…actual size. It says, ‘Scale: 1 mile = 1 mile.’ I spent last summer folding it… ” Maybe Wright is a lawyer at heart - someone who loves precision so much that no detail dare be omitted. The beauty of mapping is that it does require trade-offs; it forces you to focus, to abstract, to consider what is most important, and to omit.

As the legal profession undergoes tremendous changes, it would be great to have a map that represents it. And to see how that map changes over time. What should be on that map? And for my legal IT friends, if there were a map of just your firm, what would it take to put legal tech on the proverbial map?

Legal project management (LPM) seems to be making major inroads into the profession. 

Back in April, the legal press carried two reports of interest. First, McCarthys’ project management plan in Financial Post (14 April 2010) reports that Canadian firm “McCarthy Tetrault is launching a technology solution it hopes will eventually help the firm better understand the costs of a merger or big piece of litigation. It’s a project-management system the firm spent more than 18 months developing in-house.” The firm describes its commitment and approach to project management at its website. And second, Tracking Numbers Key to Duane Morris’ Project Management in The Legal Intelligencer (21 April 2010) explains how project management supports the firm doing alternative fee arrangements.

This week I found that Altman Weil released a report on LPM, Legal Project Management: A Trend at the Tipping Point by Pamela H. Woldow and Douglas B. Richardson. The authors suggest that LPM a is trend, meaning here to stay, rather than just a fad. They relate the rise of LPM to other legal market trends, all of which stem from the shift in power from suppliers (law firms) to buyers (general counsel).

Today, via Twitter, I found that McDermott Will & Emery is using a Deal Dashboard to project manage transactions. The only information I could find about this at the firm’s website is a PDF at http://www.mwe.com/info/dealsdashboard.pdf. It is well worth reading. The screen shot make the system look quite easy and helpful (and leave me intrigued to know the platform on which it is built and the data sources that feed it). Further, the short text descriptions are, in my opinion, unusually well-written for a law firm, focusing on simple and understandable benefits.

Elsewhere, the references I found include a blog post by Jim Hasset, Legal Project Management ( Part 8 ) - McDermott’s Deal Dashboard, and one by Paul Easton, Law Firm PM Watch: McDermott Will & Emery’s Deal Dashboard.

Speaking of blogs, the two legal project management blogs I read are Easton’s Legal Project Management and Steven Levy’s Lexician.

Project management requires examining and managing processes, a task I have long argued is key. The legal profession has come a long way. Around 1993 another non-practicing lawyer and I tried to convince a litigator to use project management. Except we knew, at that time, we could not utter those words to a lawyer. So we explained in a somewhat round about but nonetheless clear way how we wanted him to consider using a very experienced legal assistant to help run a big matter. When he said “oh, you mean, it would be like having an extra very good secretary” my colleague and I exchanged a look that I still remember. We knew without saying anything that this was a lawyer who would never get it. Fortunately, at least some lawyers get it today.

More evidence has come in that the new normal for large law firms looks bad: the Hildebrandt Baker Robbins Peer Monitor Economic Index (PMI).  

This index is a function of demand (billable hours), productivity (hours per lawyer), rates, direct expenses, and overhead expenses. The 2010 Q1 PMI, released last week, is at the same level as 2009 Q4; three index components were down, two were up. But the up components are not good news. Rates were up but reflect only a change in mix, meaning lawyers with higher rates did a bigger percent of the work. Productivity was also up but reflects fewer lawyers doing what work is available; Hildebrandt reports that, on average, for each 10 departing lawyers firms are replacing, only 8. Hildebrandt concludes,

“It is increasingly apparent that the fundamental economics of legal practice are undergoing a significant and permanent shift…. With slow revenue growth, firms will continue to focus on cost‐cutting to bolster profitability, and consequently aggressive cost controls are now the norm, no longer simply a short‐term response to weak demand and pricing….. The strategic emphasis is shifting toward a different imperative: the need for greater efficiency in the delivery of legal services.”

The need for ‘aggressive cost control’ and ‘greater efficiency’ should drive more firms to study carefully WilmerHale’s recently announced cost-saving and efficiency initiative. WilmerHale announced at the end of April that it will soon move about 200 staff positions to a low cost operations center near Dayton.

In my Integreon blog post on this move, WilmerHale Reduces its Middle Office Costs, I argue that “centralizing support in a low cost location is a a key part of the answer” to how firms will control cost. The question seems less if large firms should centralize and more how to do so. And how to improve workflows and processes.

While the WilmerHale move is primarily about staff support, it also encompasses a more cost-effective approach to high volume, routine legal support. WilmerHale moving support staff to Ohio in the Washington Post (3 May 2010) reports that the “business center will develop the resources to provide on-site document review as well. ”

I am surprised that WilmerHale’s announcement has garnered seemingly little attention from legal media or bloggers. My Google search yesterday on “WilmerHale dayton ‘business services’ ” yielded only 37 hits, few of which comment on the firm’s move. That’s not much discussion about what strikes me as a momentous decision. If Hildebrandt is right about the new normal, it seems more firms should be considering this type of move.

How many more quarters of bad index readings will it take before we see more bold announcements?

This week I read an excellent analysis of BigLaw financial performance. I share it here and add a few comments.  

My friend Steve Nelson of The McCormick Group, an executive search firm with a big legal practice, is an astute observer of the legal market. He was previously a practicing lawyer and editor of the Legal Times. With his permission, I reproduce here an e-mail report that he sent on 22 April 2010 titled “TMG’s Take…on 2009’s Financial Results":

“Individual reports on law firm performance for 2009—which many observers regard as a watershed year for the legal industry—continue to trickle in. A perusal of those reports reveals some interesting trends:

1. It’s clear that law firms did a pretty good job of controlling costs during 2009. While total revenues declined for most firms (60 percent in our sample of 85 firms), the profit picture was decidedly different, as 58.5 percent of the firms reported an increase in profit per partner during 2009, and another 6.1 percent came out even. Those results contrast to 2008, where the sudden collapse of the economy caught many by surprise. That year, more than 70 percent of the firms reported increases in revenue, but just over 40 percent saw profits increase.

2. Law firms performed well in comparison to their largest clients in 2009. Overall, the law firms in our sample reported a 2.5 percent decrease in revenues, compared to a 7.3 percent decrease in revenues among the Fortune 100. The difference in profits was much more dramatic, with the law firms reporting a 2 percent increase, as opposed to a 56.2 decrease in profits among the Fortune 100 (This, of course, is a double-edged sword for law firms, as corporate clients may use these statistics to further hammer the firms on rates and value). [emphasis added]

3. Contrary to what was predicted by many observers a year ago, the elite Wall Street firms did pretty well in 2009. Cravath, Cahill Gordon, Sullivan & Cromwell and Simpson Thacher all reported increases in both revenue and profits in 2009, while Cleary Gottlieb came out even in both categories. Beyond that, there were few discernible trends based on size or geography, although firms with less than $300 million in revenues tended to do somewhat better than their larger counterparts.

4. Despite the two rough years, 14 firms were able to report increases in both 2008 and 2009. While some of those were among the larger firms in the country (such as Weil Gotshal, Bingham McCutchen and K&L Gates), there were many smaller firms included in the list, including two that are essentially one-city firms (Wiley Rein and Irell & Manella). So there was no pat formula for success over the past two years. On the other hand, only seven firms reported two consecutive down years in both revenues and profits.”

Steve has an Excel file with detailed results that he will share by request to snelson at tmg-dc dot com. Now my own comments….

I highlighted Steve’s point in #2 about the divergence between law firm and corporate profits. With purchasing professionals more and more involved in acquiring legal services, I agree with his observation that this could make future negotiations more difficult. In #4, Steve notes that there is no pat formula. I agree and venture a guess that these data show that law firms are differentiating. Using the detailed Excel file, I found the results intriguing:

Comparison of 2008 to 2009 Change in Revenue and Change in Profit (numbers of firms)

	Revenue Up	Revenue Down
Profits Up	30	21
Profits Down	3	26

I’m not sure what to make of this quadrant analysis without looking specifically at each firm. I suspect the different outcomes, especially for those firms that suffered a revenue decline, reflect differing appetites for cost cutting. If so, it would be interesting to see if the firms that (more) willingly accepted a drop in profits prosper more in the long term because they retained talent, preserved their culture, or both.

I wish I could believe that some firms decided to use the downturn to invest in legal tech - deciding to let profits drop - while their peers were down, hoping to gain a competitive advantage when the upturn comes. Hope springs eternal but that seems unlikely. I’d love to be corrected!

As law firms adjust their strategy to the new normal, they also need to adjust their operations. We may see more staff lay-offs but the time has come to re-think operations, not just cut. Historically, I’ve seen relatively few articles on law firm operations; so I was eager to read Hildebrandt’s recently published The Drive Toward Performance Measurement In Law Firm Administrative Functions. 

Author Kristin Stark notes “law firms have been slow to adopt performance measurement and improvement processes, viewing the nature of services provided by lawyers and the operations groups supporting lawyers as ‘unmeasureable’.” She proposes ways to measure and assess support functions such as tracking work activity (outputs and FTEs), benchmarking, and customer satisfaction surveys.

This is important reading for law firm managers and I hope Hildebrandt publishes more on this topic. One of her comments - that measures must be “Relevant to the goals that the department and firm aim to achieve” - conceals a difficult and little-discussed issue: the tension between the wants of the institution (the firm) versus the individual (a lawyer).

I have struggled to come up with a framework for thinking about the amount of support a firm should provide lawyers. Or, turning Stark’s comment to a question, just what is the aim firms seek to achieve? Lawyers might say “do everything for me” whereas firms might say “support is expensive, do more on your own.”

In the old days of the billable hour, it might have been possible, in theory, to maximize (Revenue - Cost = Profit). In practice though, it is not so easy. An example illustrates this. Suppose a partner who bills $1,000 / hour does an all-nighter. Let’s say he needs support that, if he did on his own, would take him 6 minutes. Assume further that he would not bill for this ’support’ time. Paying a secretary to be available all night just for this partner costs far more than the $100 he bills in 6 minutes.

And in that example you begin to see the institutional v individual tension. Lawyers frequently demand support, even when the economics don’t support it. As a lawyer, if support is “free” to me, why wouldn’t I demand it - after all, I’m not the one paying for it. Economics 101 tells us that free goods generate too much demand. In the example, the firm should make the partner do the work on his own (gasp!).

Of course, I have over-simplified to illustrate the challenge of determining the right level of support. And today, the move to alternative fee arrangements complicates the analysis. In this time of continuing economic hardship, law firm managers need to think about how much support is appropriate. And once they do, they need to measure how effectively they provide it, as the Hildebrandt article suggests.

I am attending Law Firm Evolution: Brave New World or Business As Usual? at the Georgetown Center for the Study of the Legal Profession. Here is my session report on the concluding remarks by David B. Wilkins, Lester Kissel Professor of Law and Director, Program on the Legal Profession, Harvard Law School.  

Big Structural Changes
1. Globalization - lawyers should look for where money changes hands and that is increasingly moving east
2. Rise of Information Technology - tech re-making every aspect of the world; the change is accelerating
3. Disintegration of 19th Idea of Distinct Fields such as law, accounting, business - knowledge is multi- and inter-discplinary

Impact of Structural Changes on Legal Profession
1. Legal services are being disaggregated and unbundled and being re-packaged and re-located
2. Basis of competition will shift from reputation + credentials to results + value - clients want value defined on their terms, which will be data-driven
3. Move from focus on firms to focus on networks - barriers between firms and clients going down, virtual teams, boundary-less work; clients will hire teams

The Challenges for Large Law Firms
1. Firms will have to embrace rather than shun commodification curve - even sophisticated know-how spreads and loses special know-how status); commodified work can be very profitable (e.g., Accenture)
2. Creating a common culture in global and networked economy - people move to best opportunities; firms need to develop ‘open architecture’
3. Manage “paradox of professional distinctiveness” - law firms face pressure to emulate practices of other successful global businesses but if they become too much like their clients, it will be hard to recruit and regulators will be less likely to give lawyers special rights (e.g., attorney-client privilege); need a new definition professionalism

I am attending Law Firm Evolution: Brave New World or Business As Usual? at the Georgetown Center for the Study of the Legal Profession. Here is my session report for “Business Models: Strategy and Governance.”  

Presentations:
Business Models in Legal Practice: Toward Definition and Assessment: Stephen Mayson, Director, Legal Services Policy Institute; Professor of Strategy, The College of Law, London

Evolution and Revolution in the Governance of Law Firms: Laura Empson, Director of the Centre for Professional Service Firms; Professor in the Management of Professional Service Firms, Cass Business School, City of London

Moderator:
Bruce MacEwen, President, Adam Smith, Esq.

Panelists:
Ralph Baxter, Chairman and CEO, Orrick, Herrington & Sutcliffe
Dan DiPietro, Advisory Head and Managing Director, The Law Firm Group, Citi Private Bank

First Questioner:
Peter Sherer, Associate Professor, Haskayne School of Business, University of Calgary

SESSION REPORT

Bruce sets stage for panel. What is strategy and governance really about? We are in an era where change is afoot. But we are not existentially challenged. We need to change but world as we know it will not end. AmLaw 20 firm chairman: “We are a very mature profession but a very immature market.” In recent survey of senior law firm leaders: 90% say challenges unprecedented but 57% say their firms’ changes are ‘mild.’ Eversheds report shows changes.
Strategy: what does your firm do, where do you do it, who do you do it for?
Governance: ranges from Athenian democracy to military-like command and control. Post-LSA (Legal Services Act) is big question mark. Don’t think LSA stops at UK border; “money finds its own level”
Issues: who should run law firms. Other industries don’t assume superb practitioners are c-level material. Does law firm train leaders - or potentially disable them? What would firms do with capital if they could raise money? Why don’t firms retain earnings when every corporation does?
The rewards to whoever answers questions right will be great - we are not the newspaper industry.

————

Stephen Mayson presents: Wants to answer the question “what is a business model?” Before specifying that the model is, what is meant by a business model? Indiscriminate use but no common meaning > formula for confusion. Sloppy language = confusion. In the literature, there is some agreement about a “business model”. It’s not the same as strategy. It’s not the same thing as a structure or organization. Legal structure (corporation v partnership) just a wrapper. Biz models are about how pieces of firm fit together and deliver on the strategy and create value.

Mayson tried applying “off the shelf biz models” to law firms and found them lacking. So, instead, focused on what are the robust characteristics of any business model. So defines business model as
- How a firm intends to create value
- What resources it needs
- What investment it needs to get the resources
- What are the returns on the investments

Thinks that whatever the business model of the old normal won’t work. Value creation requires understanding the market in which you operate. When he talks to lawyers about this, they have no idea of what the answers to these questions are. The question is under-analyzed. What does it take to be credible; it’s not just size. Law firms don’t have good articulation of value proposition (RF: “elevator pitch").

In UK, unauthorized practice of law (UPL) is very different than in US. Cannot hold oneself out as lawyer and there are only a few reserved activities. In US, ethics rules create barriers for non-lawyers. So in UK, firms have to think about what task they do in adding value.

How should firms resources value creation process? Historically, it’s been by hiring lawyers. There is little capital reliance. Types of resources include financial, physical, human, social (networks), and organizational (what is institutional asset). There is shift from human resources to others such as financial and technological. Thinks BigLaw is not good at managing a broader mix of resources. This is an attitudinal failure. For example, firms have BPO and LPO outsourcing options. They have 3rd party or captive options. Lawyers can work part-time. So there is less need for traditional lawyer FTEs.

What are the finances required to acquire the right resources? What is the magnitude, the time scale of investment? Historically, most firms are financed by internal equity and external debt. Under the UK LSA, firms will be able to take outside capital - of course, that means they have to offer attractive return, which seems unlikely. To discuss investment, you must have an entity that can be valued. How can you value a law firm - they are barely institutions.

Returns are key to attract finances. Value capture and creation are key. Value capture is harder in the new normal with so many parties offering services and serving as agents for various players. Amongst more claimants in value change, lawyers are losing their bargaining power. Clients are bidding prices down; suppliers are bidding costs down. Evolution is going from revenue generation and profit extraction to something far more complex.

A robust biz model will fulfill all of the above four elements. And he model has to survive in an ever-changing world. Are we talking about biz model or several models.

————

Peter Sherer presents: who will be the winners and losers as business model shifts? Likes to build models but we don’t have data for this current economic situation. So he went back to Great Depression for data. Length, duration, and effect of Great Depression is closest to what we see today.
Discusses in positional standing of law firms - typically. they have been evolutionary. But there are periods of revolutionary change among positional standing of firms. We are in a period where positional standing will be shaken up.

From 1920 to 1940, firms grew from about 6 to about 10 partners. Low growth rate, but not shrinkage in depression. Shows list of top NYC firms in 1920, 1930, and 1940. Most firms from not 1920 no recognizable today; by 1940, the list is very recognizable compared to today’s top firms. In 1930s, the NYC firms grew much faster than their competition. Explanation for this; momentum, critical mass of flexible young partners, re-making of firm competencies, flight to quality by clients. The successful firms move from boom advising to bust advising.

What are the lessons for today? Conditions today are favorable for innovation. A key indicator for Sherer is having a critical mass of young partners.

————
PANEL DISCUSSION

Bruce to Dan: do you see any commonalities among higher performing firms in how they create value? Dan: history will not predict future here. Innovation and execution will be key. Firms have, over last decade, been successful in managing top line revenue growth. Going forward, they have to focus on efficient delivery. Challenge: as a whole managing partners have very high IQ but very low CEO-Q (RF: meaning they are not good managers).

Dan: how doe firms choose MP: trust, good lawyer, client skills. But ability to make decisions and implement is not on the list in selecting managing partners. Ralph would say it’s on the job training.

Bruce to Ralph: I’ve heard a lot of flight to quality and flight to value - what do you think? Ralph: Everyone wants quality. The level of quality buyers want depends on circumstances though. Clients will continue to seek the best value for their money. Clients increasingly recognize that don’t need “Cadillac” quality for their every legal need. This creates enormous opportunity for new entrants into market. Clients may want “Chevrolet” quality instead - good enough for the need. Dan adds that he hears from potential laterally moving partners that they want to go to higher quality firms; but from others, he hears that laterals no longer fit with current firm’s value proposition. This creates opportunities for AmLaw 2nd 100 to grab partners from 1st hundred. Bruce: partners are re-sorting themselves in the market.

Bruce: what are the criteria for a good leader. In past, ‘do no harm’ was enough but no longer. So what should partners look for? Dan: consensus building is key because even in streamlined partnership, you need to bring key players along. Ability to take calculated risks. Ability to execute well. Ralph: we need leaders and managers. For a long time, he thought leaders more important than managers. But right now, we need good managers. It’s clear change is needed and what the change is - the execution is the hard part. But leadership still very important. Ralph says most AmLaw 100 partners don’t get what’s going on in the legal market. Typical partner needs help understanding market forces, especially those whose practices are still doing well. Managers and leaders need to educate them on why change is necessary. Leadership is combination of vision and persuading partners on the vision.

Ralph agrees with Bruce that law is still a good business. Ralph thinks PE investors would put money into US law firms if they could. But profession is less attractive than it was in past. But costs most come down and value go up. Lawyers have never had to manage costs - now they do. This will separate winners and losers. Firms must examine the metrics they use to assess their progress. Income and revenue per lawyer is no longer the right metric. Orrick’s model will diminish revenue per lawyer over time. Firm has changed talent model - changing mix of resources. Many fee-earners will be at lower comp level. Once firm reaches its desired resource and biz mix, its revenue per lawyer will, by design, go down. So for Orrick to focus on RPL would target the wrong goal.

Dan: market is becoming of two minds about hours per lawyer. With AFA, hours matter much less. But metrics have not caught up with new approach to busineess.

Bruce: The “evil twin” to key performance indicators (KPI) is “key risk indicator”. What are the “KRI"? Dan says Citi looks at partner departures as a leading indicator. Citi is looking at percentage of partner interest departing (which weights importance of partners who are departing). On leverage, does not think debt is a big deal in legal market. Debt levels in legal are lower than most other sectors. Debt is only a risk indicator in presence of other problems.

Ralph: BigLaw is not dead. Some firms may go away and pecking order may change. But it’s still a good business. Relationships with clients, practice specialties are huge advantages. But it is a big challenge and creates opportunities for others.

I am attending Law Firm Evolution: Brave New World or Business As Usual? at the Georgetown Center for the Study of the Legal Profession. Here is my session report for the session “Creative Destruction and Innovation.”  

First, however, the panelists:

Presentations:
Coase, Schumpeter, and the Future of the (Law) Firm: David McGowan, Lyle L. Jones Professor of Competition and Innovation Law, University of San Diego Law School, and Attorney, Durie Tangri LLP, San Francisco; Bernard A. Burk, Director (Partner), Litigation Department, Howard Rice Nemerovski Canady Falk & Rabkin, A Professional Corporation

The Death of BigLaw: Larry Ribstein, Mildred Van Voorhis Jones Chair in Law and Associate Dean for Research, University of Illinois Law School

Moderator:
James W. Jones, Co-Managing Director, Hildebrandt Baker Robbins; Chairman of the Hildebrandt Institute

Panelists:
William J. Perlstein, Co-Managing Partner, WilmerHale
Mark Chandler, Senior Vice President, General Counsel, and Secretary, Cisco
Jeffrey K. Haidet, Chairman, McKenna Long & Aldridge

First Questioner:
William Henderson, Professor of Law and Harry T. Ice Faculty Fellow, and Director, Center on the Global Legal Profession, Indiana University Maurer School of Law

SESSION REPORT

Jim Jones asks if we are witnessing the death of BigLaw or a radical transformation.

——————–

Larry Ribstein presents. Started in BigLaw 40 years ago at McDermott Will. He did not understand the function of a big firm and then went to academia. Returned to the question in the mid 1990s. He has developed a “reputational capital” theory of BigLaw. Returned to thinking about in 2008. Now thinks that minor tweaks to model are not enough to save BigLaw; we are likely to see a downhill slide. Likens BigLaw to horse carriages in the age of cars.

Reputational capital model: The firm’s reputation bonds firm to clients and produces profits, which binds partners to the firm. It’s created by monitoring, mentoring, and screening new lawyers. Lawyers need incentive to work for the firm > that is the role of profits. Supporting development of the reputation is equal or lockstep compensation, an “up or out” tournament, and vicarious liability. Causing lawyers to focus on institution and not just on their own book of biz is a big challenge - a ‘fragile equilibrium’.

Once you move away from lockstep and tournament, institutional effort declines. Partners no longer monitor, mentor associates. Partners become prey for lateral moves. Pressures on equilibrium include short term economic climate, rise of in-house counsel, technology and markets that reduce size advantage, increased leverage that reduce monitoring and bonds, changes in liability, global competition, de-professionalization, and decline of hourly billing.

With these forces at play, you would expect to see BigLaw unravel. Cites dissolution of several firms (Altheimer, Brobeck, Wolf Block, Thacher) and says these are not isolated cases. We will see ‘devolution’ to firms of all partners or solo practices (one partner).

How would we save BigLaw (RF: should we want to do this?). Involves outside capital, new rules to protect IP of law firms, modification of conflicts rules. In the future, we will see multidisciplinary practices, law practice at the retailing level. It’s only ethical rules that prevent Accenture or Wal-Mart from providing legal services. Thinks outside legal finance is thin edge to changing how legal advice is delivered.

Above is all a hypothesis. But thinks demise likely unless someone can point out flaws in theory.

——————–

Bernard A Burk presents. We should care about economic models of BigLaw to help understand evolution and change in law firm structure. A good model can help predict and inform. Observes that largest law firms have grown very large. As firms got large, they became not so much fragile as brittle. By this, he appears to mean that firms have become far more dependent on lateral partner moves. What holds together firms that are brittle?

Reviews prior models, that he says are not useful:

• 1985 article: portfolio of human capital. This provides benefit of diversification (manage variation by person, geography, practice). For this to work, you need to share revenue fairly equally. Otherwise diversification theory makes no sense. This article assumed continuation of lockstep compensation. But we see that lockstep is now exception not the rule. No one has ever shown financial benefit to portfolio strategy. For example, number of branch offices correlates negatively with profits. Size is not well correlated with profitability. The most profitable firms are concentrated in specific practices
• 1991 model: trust between partners and associates. Rank-order promotion ("up or out") demonstrates to associates the basis of trust. Associates see their chances of making partner. (RF: I believe this is the Tournament to Partner theory.) Basis of this requires constant percent growth (exponential). When you look at law firm growth though, it was driven by demand, not by need to re-assure associates. In practice, there is no more tournament to partner.
• Reputational Capital theory: it does not work either. As firms become large, too hard to monitor. Also, clients shop for lawyers, not firms. So reputation does not have much value.

So, this is conundrum - what explains large firm then? Why do firms keep growing. There are dis-economies of scale that create friction. In this environment, partners have personal brands that attract clients. To make most of personal capital, you surround yourself with peers to / from biz can be referred. This provides some explanation for why a firm might get large. But as firms get too big, referrals are harder because partners can’t really know which partners are reliable and which will refer back. This theory is not complete but helps understand some aspects of current situation.

Partners want to move upstream and work with those who have the most reputational capital. It explains why model is brittle. Personal and individual capital belongs to the individual, not the institution. So it is easy to transfer across frims, unlike firm brand or collectively owned IP.

——————–

Bill Henderson is first questioner. 1. What services and values are best provided by large, multi-office law firms? What is competitive advantage of such firms versus other law firms? 2. What strategy would optimize advantage and make it sustainable long-term.

Larry: firms are dead; they can’t do anything to survive. Reputational Capital theory does not work - but none do. So firms can’t survive. Only thing that sustains large law firms is regulation. Does not see a way to optimize model.

Bernard: Clients have been improvident in paying large firms so much money. They had alternatives they could have used but did not. This is a multi-billion dollar mistake running for decades.

——————–

Mark Chandler: Looking at firms that fail does not tell us that much. Silicon Valley is sustained by CA law that makes non-competes void. Applying that to law firms would be good. Firms invest a lot in nurturing relationships. Says cross-selling is about revenue enhancement, not capitalizing on reputation. Mark uses 2x2 matrix: context and core on x-axis; mission critical and non-mission critical on y-axis. Upper right - mission critical and core tasks - are where in-house staff focus (In Task). This includes design, build, and sell activities; business development including acquisition; and IP rights. Little of this is outsourced because of relationships with business people. (Mission Critical are activities that, if performed poorly, pose an immediate risk.)

Out-task contextual and mission critical: high-stakes litigation, reputation, compliance, HR policy. Outsource non-mission critical / context tasks: HR cases, smaller litigation, real estate. Self serve for core and non-mission critical: routine transaction processing. Cisco is investing in tech in each quadrant to reduce labor requirements. Tools implemented to date: enterprise contract life cycle management; corporate secretarial, NDAs, contract builder, click accept, open source central, Cisco Patent Onl-line (CPOL), virtual approval process, E-board, SOX compliance. Cisco paid Orrick to manage entire corporate secretarial portfolio. Using Legal OnRamp for KM - best tool he has used ever for KM.

——————–

Bill Perlstein: Law firm managers and GC here are the ones who believe change is imminent. Most in the market believe we will go back to old normal. Says aughts is a period in time that will never repeat. Unique factors of first decade of century: Dot-com crash, major scandals (e.g., Enron), rise of e-discovery in huge volume (driving associates to review docs, which they hated and now this is no longer profit center), money was almost free with all the PE and other deals. Growth came from all these factors; we won’t have these drivers in the future.

Mistake to view AmLaw 200 as a monolith. Some of the top NYC firms such as Cravath and Wachtell are in a different business; they are doing the highest-stake cases. At other end, firms like Quinn Emmanuel have narrow focus. In the middle, you have many large, multi-office firms. These firms have trouble differentiating. Need to consider role of government regulation, impact of Internet on practice, challenge GCs face of managing multiple outside counsel, fact that most partners don’t want to manage the business.

——————–

Jeff Haidet presents. Evolution vs. Revolution. Recession is not the cause. The forces have been at work a long time. ACC value challenge had roots in 2007 before crash. Laura Empson, Managing the Modern Law Firms, raised many issues we see today. Agrees with Perlstein that flush times of first decade this century was a big distraction.

——————–

Q&A -
Perlstein says brand matters, that press overstates lack of glue in large firms, that most large law firms are not pure “eat what you kill”.

Chandler: we ask firms to bid using contract lawyers for doc review; if firm does not want to do so, then Cisco will retain the contract lawyers. Cisco dis-aggregates work and uses its telepresence product to foster collaboration.

Perlstein - firms have to get better at knowledge management (KM). One big client brings all its firms together annually to foster (force?) firms to collaborate.

On Sunday evening, 21 March 2010, I attended the first panel of Law Firm Evolution: Brave New World or Business As Usual? at the Georgetown Center for the Study of the Legal Profession. Reproduced here are my live Tweets from “Emerging Relationships Between Law Firms and Clients.”  

First, however, the panelists:
Presentation:
The Smarter Legal Model: More from Less: Trevor Faure, Global General Counsel and Partner, Ernst & Young Global

Moderator:
Lisa Rohrer, Director of Research, Hildebrandt Baker Robbins

Panelists:
Susan Hackett, Senior Vice President and General Counsel, Association of Corporate Counsel
Thomas D. Yannucci, Partner, Litigation, Kirkland & Ellis
Reena SenGupta, Managing Director, RSG Consulting

TWEET STREAM

At the Georgetown law conf on future of law firms
Trevor Faure, GC of Ernst and Young is first up
Lawyers have long history of bespoke work beyond realm of ordinary people
Compares bespoke lawyer work to custom cars like Bentley - many such car co’s now owned by other countries
The value of the bespoke name like Bentley is in its name
ROI has caused brands and companies to change hands
Same forces of increasing return on capital is playing out in legal market
ROI maximization requires measuring, managing, and improving (commoditizing)
Biz lawyer imperative - 1 Coverage, compliance, and client satisfaction
Biz lawyer imperative - 2 Net Cost incl fees, fines, and biz losses
Biz lawyer imperative - 3 Head Count
At heart, relationship btwn firms and client is a zero sum game
Only monopoly or ever changing list of clients avoids the zero sum game
Zero sum game means conflict btwn firm and client
Inertia may mean relationship continues but these clients never recommend the firm
EY has 4 lawyers in N America who focus on reviewing firm bills. It pays for itself
One GC says a magic circle firm is great but I avoid at all cost reflects a zero sum
Overcome zero sum with technology and communication
Interests of firm and client be rationalized
Agree on high stakes matters and what is commodity work
Sets forth ways to align interests. Fixed fees, risk or suits avoided, segment high end work
Trevor Faure finishes Lisa Rohre of Hildebrandt does panel QA
Thomas d Yannucci suggests that trust and good service fixes the mis-alignment. (???)
Yannucci: clients are buying risk reduction avoiding big losses more important than fees.
Faure: law firm relations change when company ownership changes. This is not just boom bust issue
And ownership is regularly changing
Faure: cost only a non issue in high stakes cases. But most work is not high stakes
Susan Hackett of ACC call on Jeff Carr of FMC about disconnect btwn firm and client perceptions
Hackett: firms do too much work that can be done by non lawyers moving that work can help improve trust
Hackett: quality is based in value, not hours billed
Reena SenGupta of RSG: her company does research on legal market with FT
Reena SenGupta: research shows clients and firms have big discrepancy in value perception
SenGupta: clients focus on output / results. Firms focus on inputs
SenGupta: GC role changing. Status and power increasing. Will affect panels and firm selection
Hackett: firms confuse important and strategic work
Strategic work is only small percent. Six sigma / lean applies to most work. Need predictability
Yannucci: if we have to, my firm will get smaller to keep its focus on strategic work
Yannucci: regional firms getting bigger b/c of focus on operational law support
Yannucci implies that multi office global firms are stuck in middle
Yannucci: cost to change firms b/c of institutional knowledge
Faure: MP of top firm told me our lawyers feel no compulsion to change
Hackett: the real challenge is not the firm, it is the client. GC fear change
Hackett: Too many GCs still more comfortable with discounts. But that will change.
Yannucci: young lawyers are doing things differently like managing contract lawyers or lawyers in India
Leah Cooper from audience: even in strategic work, there is low level work that should not be staffed w associates
Faure calls Yannucci on implying that contract lawyers less effective than alternatives
@CyberPlato what guarantee is there ever for meeting ethical requirements?
@cyberplato how many firms actually carefully supervise staff rigorously. Firms are bad at process, documentation, metrics
Yannucci: for big transactions, clients want many specialties under one roof
Jeff Carr - firms should be able to budget
Carr -firms should bear risk of outliers re budgeting. Faure says share risk
Faure on learning from Big 4 - measuring value. But does not see mega consolidation in law
Hackett: big change is not so much in fees but in how firms resource matters
Hackett: lawyers work too solo. They need to learn to team, work with KM to share know how
Yannucci: firms constantly share knowledge. NOT silos
SenGupta talked to top 25 firms. All expect to reduce space and size. Outsourcing middle office
SenGupta talked to UK top 25
SenGupta research shows many changes coming amongst big UK firms. Just at beginning
Audience member: ABS (alt biz structure) allowed staring in Oct 2010. That will spur change globally

[Note: I did not have my PC so I live-Tweeted from my smart phone. I used a spell checker to correct typos but otherwise did not edit the above. This was my first ‘live conference Tweeting.’ While I like it better than taking notes by hand (since I can’t read my own handwriting), I would still prefer to live blog a session because I think it is easier to read a conference report all at once. I did receive some Twitter replies during the session; I found it hard to respond to those and still Tweet what I was hearing.]

Last week the Times Online published Eversheds report looks at how ‘perfect storm’ will affect the legal profession (18 Mar 2010), which provided an advance look at “Law firm of the 21st century - The clients: revolution - An Eversheds report on the post-recession legal sector in 2010″. The report, due for general release on March 22, is a fascinating read – bad news for Big Law but good news for legal tech managers and outsourcers. 

Eversheds bases its report on a survey of 130 general counsel and 80 law firm partners about the state and future of the legal market. The firm concludes that “the revolution has now arrived”. And it is not a good one for Big Law. Interestingly, Evershed’s research finds that the recession was not so much the driver of change as the catalyst for it. Driving the change are four secular trends:
• globalisation – the move to the East
• increasing professionalism and status of the General Counsel
• technology
• the Legal Services Act in the UK.

The report is definitely worth reading; request Law firm of the 21st century at the Eversheds website.

It has so much interesting data and so many jarring conclusions that summarizing it is hard. Many conclusions will provoke discussion, for example, that the biggest firms need to reduce headcount and leverage, the hourly rate is “almost dead” in the UK, and that the balance of power has shifted to clients.

Given my interests, I will focus on the conclusion that “strategic resourcing through outsourcing and technology dramatically increased”. I have previously argued that a new focus on efficiency will be good for legal technology. The report concludes:

“On the technology side, a significant proportion of law firm clients and managing partners reported greater use and investment in technology. Over half of law firm clients interviewed (58%) had used technology to deliver legal services more efficiently as a result of the recession. A third of managing partners were actively investing in technology to either standardise legal processes or communicate more effectively within the firm and with their clients.”

Personally, I am skeptical that so many firms have done so much with technology during the recession but, at minimum, this reflects a change in attitude.

It has also become apparent that the recession will further drive legal process outsourcing penetration. (My day job is with LPO Integreon so you know my potential biases.) A 2008 survey found that 49% of GC would outsource (see my Integreon blog post, Survey Suggests US LPO Spending of $2 Billion by 2013). Less than two years later, Eversheds found that

“Just over a third (38%) of General Counsel were actively implementing or considering outsourcing low-level work to low cost jurisdictions and a further 29% were receptive to the idea of outsourcing provided they had suitable work.”

That is 66% of clients outsourcing or open to outsourcing, a substantial increase since the last survey. On the law firm side, the report finds that outsourcing will contribute to large firms having excess real estate for years because both legal and administrative work will be outsourced (and leases are long term so adjusting short term is very hard).

Spring has sprung in my home town of Washington, DC. And change is in the air. The Eversheds report is just one sign, albeit a well-researched and compelling one. I expect to hear more about change starting tonight as I attend Georgetown Law’s Law Firm Evolution: Brave New World or Business as Usual?. I hope to live blog the panels on Monday and Tuesday.

Just clip this coupon to save big dollars. Has the corporate legal market come to offering clients coupons? 

Not quite but read on. That Eversheds mulls shares for fees as firms step up alternative billing (Legal Week, 18 March 2010) is not such big news. As the article notes, we saw quite a bit of this in the dot-com era.

I was quite surprised, however, to read

“Slaughter and May has entered into rebate arrangements with clients, paying back a percentage of fees at the end of the year depending on how much has been spent. The arrangement has been in place with one client for several years and it expects to use it more frequently.” (emphasis added)

Rebates are common for consumer goods and some B2B transactions. But Slaughter and May? I think it speaks volumes about the legal market that a firm with a unique, high end position (think Wachtell Lipton in the US) is offering rebates.

“Other firms predicting an increase in rebates include Lovells, CMS Cameron McKenna, Norton Rose and Allen & Overy (A&O).” Hmmm. While rebates may shock, they are, after all, simply volume discounts after the fact. Volume discounts are common but it’s not clear whether firms have any recourse if the volume does not materialize. Rebates take care of the volume uncertainty (though it’s not clear how it affects the client’s cash flow).

I wonder if the energy spent on working out details of rebates would not be better focused on alternative fee arrangements. And if we have rebates, how far away can coupons be? Check your Sunday circular.

Some recent commentary suggests that the economic crisis has caused a lasting change in the legal market. 

For a time, I feared the crisis had been wasted, that BigLaw would not change. I see and hear comments from more and more directions that the new normal not only will be but already is very different.

The Hildebrandt blog, in Report from Law Firm Leaders Forum - Change is the Name of the Game reports that at a recent conference

“discussion among law firm leaders has evolved over the course of the last two years. Certainly two years ago there was quite a bit of skepticism about possible changes in the industry. A few firms were trying some creative approaches in select areas but most were not. A year ago there was much more talk about changes but still skepticism about whether things would return to normal when the economy strengthened. This year the discussion focused not on skepticism but on the specific actions firms have taken and how much farther they need to go.”

My take-away from this is that we should expect to see BigLaw continue to change in ways unimaginable two years ago. One factor driving this change is a shift in power. As Toby Brown of 3 Geeks and a Law Blog notes in Convergence in a Buyers’ Market? Whadya Stupid or Somethin? , the legal has become a buyers’ market. With so much buying power, he argues that convergence (law departments reducing the number of law firms) makes no sense because this reduces bargaining power.

I agree that buyers (general counsels) now have the power. And I also think it’s good to keep several outside firms to maintain competitive pressure. Having too many firms, however, may drive up transaction and management costs. I suspect any difference I have with Brown is more where to draw the line than in concept.

So, with the shoe on the other foot now, what are law firms to do? The Wired GC (aka John Wallbillich) argues in Why Value is not a Virus that the billable hour will survive only for top-end legal work, which is no more than 10% to 20% of the total. I agree with this; in fact, I wonder if the amount of true “brain surgery” legal work is even less.

No matter - firms must still adjust. Wallbillich suggests that the cost structure to provide very high end advice differs significantly from that needed to deliver the run-of-the-mill (gasp! - commodity) advice. He suggests therefore that to handle both, “a firm would need two of everything: pricing structures, staffing models, talent pools, comp plans. It’s like merging Wal-Mart with Tiffany: I’d really like to see that ad copy.”

I see his point but think some global firms will manage to do this well. Some UK firms already manage to straddle the seeming divide, from Lovells with its Mexican Wave, to Lawyers on Demand by Berwin Leighton Paisner. Yet I suspect that many firms will struggle to do both high-end and commodity work well and profitably.

All firms should therefore listen to what Adam Smith, Esq. (aka Bruce MacEwen) has to say about branding. He suggests in A Brand Is a Promise that firms will have to focus on selling their brand rather than their lawyers. While he does not tie this imperative to the “new normal", it strikes me that in the new buyers’ market, brand will become more important, not less. While buyers may have power, they will need to simplify their decision making and brand will help.

So, in one week, you have several smart commentators coming from different perspectives all talking about big change for BigLaw. Of course, I realize I might live in the echo chamber of the blogosphere. That thought was amplified after having drafted most of this post and then reading a post by Steven Levy at Lexician, Over the Cliff: Hourly Billing to Commodity Law?. He cites most the same blog posts as I do.

17 Mar 2010 Update: Jordan Furlong of Law21.ca in The platform is changing writes that the legal market delivery platform is changing from big firms to internet based. He compares it to how Word took over the market from WordPerfect.
Separately, Eversheds report looks at how ‘perfect storm’ will affect the legal profession (Times Online, 18 March 2010) summarizes an Eversheds research report on changes in the legal market. It assesses how “four drivers of systemic change: the Legal Services Act, globalisation, technology and the increasing power of in-house general counsel (GC), which will affect the profession whether working in the high street or on Cheapside.”

The 2010 Hildebrandt Client Advisory paints a grim picture for Big Law. 

The report, prepared jointly by Hildebrandt and Citi Private Bank, notes that “While the year ended with some hopeful signs, we enter 2010 with little prospect of a robust recovery and with mounting evidence that the profession is entering an era in which the fundamental economics of legal practice are likely to be significantly different.” Some key findings:

• Among almost 200 firms Citi surveyed, 2009 demand fell 4.1% from 2008 (for prior 6 years, it increased 4% per year).
• The NLJ 250 laid off more than 5,000 lawyers in 2009, over 4%.
• 2009 expenses dropped over 5% in 2009 in contrast to almost 10% annual increases for the prior 8 years
• The 21st century legal market boom rested on price (rate) increases. Other factors - productivity, leverage, realization, and expense control - did not contribute to profit growth
• “It is highly doubtful that [resistance to rate increases] will abate as the economy begins to improve.”

What’s a law firm to do? Firms “that choose to ignore this fundamental shift in the market and go back to ‘business as usual’ as the economy begins to recover are likely to find themselves increasingly out of step with their clients’ expectations and at a growing competitive disadvantage.” A sizable portion of the report addresses the challenge with a discussion of new metrics that firms should track.

Only hinted at, however, are some ways firms might move the new metrics. Clients want to unbundle services and use lower cost providers. So “firms will need to recalibrate their leverage models, perhaps incorporating greater numbers of non-partner track associates or other categories of staff attorneys, contract lawyers, or even outsourced resources.”

I can’t tell from the report if firms as they operate today can do well on the new metrics. Even before I read this report, it’s not been clear how much further firms can go with minor adjustments. I don’t mean to downplay the very painful steps firms have taken. As I’ve said previously though, cuts in 2008 and 2009 were emergency measures, not considered changes to the business model. How much more juice can firms get from, for example, cutting more equity partners or substituting more contract lawyers for associates.

At some point, the existing business model may snap. Firms may fail to attract and retain new talent. Or the weight of $200k overhead per lawyer may pull a firm down. But Big Law can’t easily transform to some other model such as a virtual law firm, a boutique, a firm based on alternative fees (e.g., Bartlitt Beck or Valorem Law), or a staffing agency type operation such as Axiom.

For BigLaw to prosper, it will need to adopt ideas that have been out in the market for quite some time. These include client-facing technology to increase value for clients, internal systems to improve efficiency, serious knowledge management to support alternative fee arrangements, project and process management to improve practice efficiency and effectiveness, working virtually to reduce occupancy costs and free lawyers to bill more time, business intelligence to analyze profits and make smart resource allocations, outsourcing support functions to reduce overhead, and outsourcing high-volume, low-end legal work to improve client value. In a few years, we will know if this is enough.

Risk analysis with decision trees is a rigorous way to analyze disputes and decide how much to invest in the litigation. An important threshold question is when does it pay to do risk analysis, which is not that easy and can take a fair bit of time. More generally, when does any legal question warrant an investment to answer? And how much work is “good enough"? 

A government lawyer who read my material on risk analysis asked these good questions. It’s the same questions in-house counsel should ask. For both corporations and the government, the surest way to reduce legal cost is to do less legal work. Improving efficiency or reducing rates is beside the point if skipping or reducing the work altogether is an option. And part of reducing work is to accept a “good enough” answer rather than a 100% answer.

So, is there a structured way to decide how much to invest in legal questions? That is, when a legal question arises, how can a lawyer assess its magnitude and rationally decide how much to invest to address it? Some lawyers believe every question merits thorough analysis. From an economic perspective, however, the client should first know the order of magnitude of the problem. Problems come in different sizes - a pebble, rock, boulder, hill, mountain, or asteroid - and the effort should depend on the size?
Because formal risk analysis incurs a cost, one might reasonably apply it only to problems that are say, at least boulder-size.

A reasonable economic / business decision might be to ignore pebbles and rocks. Certainly treating every problem as if it were an asteroid or boulder is uneconomic. I am not aware of any systematic and documented in-take process designed to assess a legal question and how much to invest in it.

Of course this assessment, intake process, or “gate keeping” happens; I just don’t see evidence that it is systematic and documented. No matter how experienced the gate keeper lawyer, questions will arise outside the scope of experience. What then?

If business and government are to reduce legal expense, then we need a systematic gate keeping approach. A knowledge management professional might suggest that every incoming query be captured in a database, along with its disposition. Then, once there is enough data, the gate keeper can search for similar past questions. The problem with this approach is that the range of legal issues is enormous, as is the language describing them. So I’m not convinced this would get us very far (aside from the challenge involved to collect and maintain the database).

Some of my peers likely would suggest a “crowd sourcing” approach. If the gatekeeper cannot answer with confidence, he or she could use a variety of technologies (inside or outside the firewall) to seek the opinion of other lawyers and experts. Those opinions could help gauge the severity of the problem and how much to invest.

Perhaps my suggestions take us in the wrong direction. Does anyone have examples of a systematic gate keeping / intake approach, one specifically designed to assess the level of investment appropriate to answer a legal question? And does anyone have views how government lawyers should deal with this given that many legal issues they face may have as much to do with policy as with dollars? I welcome your comments here or on Twitter (flag @ronfriedmann).

Update (26 Jan 2010): Steven Levy of Lexician references the above post in his very helpful Simple Risk Analysis blog post. He presents a simple but systematic way to assess risk. I agree with his view that just the act of getting a group to write down, working collectively, what the risk are is very valuable.

Just when lawyers thought it was safe, the Economist comes along to pronounce it’s not. 

Laid-off lawyers, cast-off consultants (21 Jan 2010) reports on the impact of the economic crisis on lawyers and management consultants. The Economist writes that

“the legal profession seems likely to undergo the most profound structural changes. For the first time—long after IT and finance departments went through the same experience—the corporate legal departments that hire law firms are under great budgetary pressure, and are thus demanding much better value from them.”

One consequence of the shift according to the article is “a growing gap between the best firms and the rest.” Another is that “legal-process outsourcing is booming, as law firms parcel out some of their more basic work to reduce costs.”

On legal matters, lawyers argue a point until the Supreme Court rules on it. For economic matters, the market is the final arbiter. It does not debate whether to to grant a writ of certiorari; it simply does its job of selecting winners and losers. If I were a managing partner, I would listen to the Economist and assume the worst. If you wait until we know for sure, it likely will be too late.

Bad news for law firms could be good news for legal technology managers. The reality of the new market will require delivering more value. This could usher in a new chapter - maybe even a new volume - in legal technology. As firms get serious about process improvement, project management, and alternative fees, they will need to be creative in deploying new technology and using old technology more effectively.

Consumers routinely seek estimates for many services, for example, buying a new roof, replacing an HVAC system, repairing a car repair, and even obtaining some medical services. The logic behind this should also drive general counsels to seek estimates for the cost of legal work. 

Lawyers have long viewed law practice in mythical and mystical ways, which supports the belief that predicting cost is impossible. Myths die hard but desperate economics have a way of changing minds. Several trends - alternative fees arrangements (AFA), project management, and process standardization - work to de-mystify law practice.

So I disagree with Brad Smith, GC of Microsoft, who writes in his January 1, 2010 column in Inside Counsel, Alternative Arrangement, that “Some legal assignments are too unique to estimate in advance. Paying by the hour for such services can make good economic sense.” I agree with everything else he writes and was impressed to see he expects 45% of MS legal spend to be AFA.

Perhaps what he really means is that some matters are so complex that estimates are not reliable enough for either side to feel comfortable using AFA. If so, that does not warrant skipping estimates. Rather, it means variances between estimates and actual spend will be bigger than for more routine matters.

The right approach for one-off matters is to refresh estimates as the work progresses and to estimate by stage, taking into account the many discrete activities of each phase. Sophisticated clients and law firms should be able to combine personal experience with analysis of prior billing data to produce reasonable estimates at any given point in a matter.

We may need lawyers who specialize in estimating. And to avoid potential economic and other conflicts, it likely makes sense to have an estimate prepared by someone who will not work on the matter. This would be true even for work done purely internal to a law department. “Legal estimators” might add to cost short-term but over time, the discipline of making estimates and then comparing them to actual costs would add to lawyers’ understanding of complex matters and how best to manage them.

Lawyers like precision. As a result, they often let the perfect be the enemy of the good. The new economic reality may force them to live with approximation and ‘good enough.’ 

First, a story. After graduating NYU Law I worked for Bain & Company as a strategy consultant. Consultants, like lawyers, consume much information. Unlike lawyers, however, they accept ballpark estimates. So I was in for a surprise when I subsequently switched to practice support for a law firm.

I needed to know the average rate for documents reviewed per review. The firm had no data so I asked several lawyers. All said “I don’t know” and said they could not estimate the rate. OK, I thought, time for new tactics. I asked some other lawyers, this time saying “I’ll assume the review rate is 100 docs/hour” to which they replied “no, that’s way to high”. OK, I said, then I’ll assume it’s 5. No, that’s way to low. Back and forth we went - all the conversations converged to a rate between 10 and 15 docs/hour. (This was 1989, paper docs, with issue coding.)

This was a valuable early lesson for me, one not taught in law school: for lawyers, silence is better than a chance of being wrong. Silence is better than approximation. The thinking and fear that underlies this mindset - I’ll call it ‘perfection thinking’ - has consequences.

And I’m not sure we can still afford it. Clients often want to know if there are any major risks: “let me know if there are any boulders in this playing field.” Lawyers often hear that and think they need to find not just the boulders, but also the pebbles. The fear of being wrong - and of malpractice - runs deep. ‘Perfection thinking’ makes it hard to approximate, to apply to 80-20 rule, to guide in the right direction but with some imprecision.

And this, I think, is a big reason corporate legal costs are so. And why consumers can’t get affordable legal service. A Nation of Do-It-Yourself Lawyers, a New York Times op-ed piece by two state court chief justices, on 2 Jan 2009, argues that the profession should support “unbundled legal services and other innovative solutions — like self-help Web sites”. Unbundled here means limited-scope representation. “Perfection thinkers"want absolutely correct answers, always; most people, however, would settle for just a bit of guidance.

My hypothesis is that firms that overcome ubiquitous ‘perfection thinking’ will do better. They will be the ones to communicate clearly with clients to learn the client’s risk parameters (not their own). Of course we need general counsels who think this way too. They must understand the risk their companies are willing to take. How else can they limit the demand for lawyering? Of course, all this means living in the universe most of the rest of us inhabit - one full of approximations and imperfections. Welcome to the real world.

Two recent published comments about BigLaw associates illustrate what I view as the risk of thinking about the legal market as it has been instead of what it likely will be. 

One comment comes from the GC perspective. A leading general counsel, commenting on lawyers learning concrete skills, was quoted: “I’m indifferent about whether they learn that at a law firm or in school, as long as I don’t have to pay for it.” It seems to me that GCs pay to train young lawyers one way or another. They can hire a law grad and directly incur the training cost. Or they can retain outside counsel and indirectly incur it.

Delivering legal advice over over the long term creates an economic cost to train lawyers. That is, there is a real cost and someone has to pay for it. So in my view, refusing to pay for junior associates is just a way to seek a discount or reduce partner profits - it does not make the cost go away.

The comment seems to suggest a “minor repair” to the old regime rather than to seek to usher in a new one. If I were a GC, I would seek regime change. For example, I would demand almost all work be priced on alternative fees, especially fixed fees. Then, as the buyer, I would not care about my law firm suppliers’ factor inputs (the mix of timekeepers). Instead, I would focus on cost and results. In how many other markets do buyers worry about supplier factor inputs?

A second comment comes from the law firm / recruiting perspective. The article Will Law Firm Changes Affect Hiring and Retention of Associates? (The Recorder, 21 Dec 09) expresses concern that law firms put their long-term health at risk by moving away from associate lock-step pay. The author argues that differentiating associate compensation is too hard and concludes that “Law firms that adopt dramatic changes in how they value and treat their associates in a time of economic stress may find themselves at a dramatic disadvantage in retaining and recruiting people as the economy recovers.”

This thinking is anchored in the past and apparently ignores many a change a foot. The evidence is that firms are differentiating now, that clients want alternative fees, that a wider range of suppliers (e.g., virtual firms, boutiques, and outsourcers) will prosper. Moreover, in the new regime, we will need to think about both demand and supply differently.

On the demand side, I suggested in Does the Legal Market Suffer the Same Over-Consumption as Health Care? that smart clients will find ways to make better risk-adjusted decisions, which will limit the need for legal advice. So I don’t assume a return of high demand any time soon.

On the supply side, my prior post argues that smart firms must adopt project management and business analysis. This discipline will help deliver advice without necessarily increasing the need for lawyers commensurate with whatever increase in demand may occur.

Also on the supply side, I don’t assume that in a new regime the labor factor input, aka new associates, will be the same. Who’s to say new lawyers will flock to the standard bundle of old rather than consider a range of “bundles” (mix of compensation, training, collegiality, etc) with different characteristics.

Of course I may be wrong. But in considering the future of the legal market, it seems more helpful to contemplate a new and better regime than to adjust the old one or assume that the old one will return unchanged. In my experience, tinkering with or trying to preserve a broken system typically fails. We need more legal market players envisioning how a new model will better meet everyone’s needs.

Law firm staffing is more an artifact of history than design. Forward thinking law firms need to re-architect themselves. 

Most large law firms added staff over time without a master plan. Hiring lawyers meant employing more secretaries. Introducing PCs meant building an IT department. Doing marketing meant creating a new department. If firms’ decisions about how much staff were driven by data, it was benchmarks of other law firms. Benchmark data merely report other random decisions, not what’s optimal.

The massive BigLaw lay-offs over the last year reflect emergency cost cutting, not a conscious organizational re-design. Even after big cuts, firms have room to reduce still massive overhead (see my post Overhead Cost at Large Law Firms Matters After All.

Cuts alone, however, are not enough. Firms must also add to deal with the new normal. Now is the time for large law firms to consciously re-design their organization. It’s not easy; I don’t have answers but I do have questions.

I start with a comment I made a year ago in Law Firm Staffing Reference Model: “To determine what support lawyers need, firms must know what lawyers should do on their own and what they should delegate.”

It seems clear lawyers must delegate analysis and management to other professionals. So firms need more business analysts and project managers generally for effective service delivery and specifically to support and alternative fee arrangements. What is the right ratio of each to the number of lawyers? Does that ratio vary by practice? What other types of professional support personnel are needed? How should firms analyze and answer these questions? I don’t have answers but I think these are important - and the right - questions. Firms that answer them well can gain clients and prosper.

Since not everyone reads Twitter, I reproduce here a selection of my recent Tweets. 

RT @robertsawhney Above the Law blog on the ACC value index for law firms http://bit.ly/2UMp0H || Any rankings better than none?

‘Glut of Law Firm Office Space Hits 6 Mil Sq Ft’ NLJ http://bit.ly/4eLW9a || When firms finally encourage working virtually, glut will grow

Hildebrandt blog post on new law firm metrics http://bit.ly/4FDByK || imo, best wld be: client success relative to reasonable expectation

LPO market update by Valuenotes http://bit.ly/2O5au9 || Growth slowed; 12.5k employees in India; $440mil in 2010; scale matters

Just met with 5 large law firms: all talked project management for lawyers + AFA; some best practices. New normal looks different so far.

For firms serious abt project management for lawyers: have person in charge of office moves involved in training

Lawyers who dismiss office move planning as just ‘logistics” are not ready for project management - stick to substance only!

LexisNexis sells HotDocs to Capsoft http://bit.ly/220zBO || LN ‘retired’ CompareRite, now sells HD… what’s next to drop?

Eight more UK top 30 firms size up legal outsourcing moves LegalWeek http://bit.ly/wUgwR || LPO tipped?

Lyceum Capital injects £25m into LPO start-up. The Lawyer http://bit.ly/1mEF1v || LRA move but w/ 140 LPOs, innovative?

@DougCornelius Billable hour _is_ doc assembly barrier…. that’s why PE investment in UK could change market

Thinking about implications of seminal move from a ‘read only analog’ world to a ‘read-write digital’ world. #in

Found today http://www.reason-ed.com by Greg Buckles. Matrix of EDD software. Looks useful.

Anyone try Xiant filer yet featured in LTN Daily Alert on Wed? Looks good but would love to hear reviews before dealing with Outlook add-in

RT @IntegreonEDD An Overview of the Latest ValueNotes Legal Process #Outsourcing Report http://bit.ly/8R2eLx | Mark Ross’ Integreon Blog

With exact written record of e-mail supplanting imprecise recall of phone conversations, is truth any easier to ascertain at trial? #in

If clients don’t want to pay higher lawyer rates, don’t. Debate unnecessary, switch firms. Action will affect rates, not talk. #in

Do lawyers want the benefit of change without the pain? #in

Citi GC thinks he should not have to pay for lawyer training http://bit.ly/7r0cQr || GCs pay in the end, it’s just where the charge shows up

First legal conferences monetized speaking, now magazines. Just got offer to pay for editorial space in reputable legal mag

Orange Rag reports on Fronterion Top 10 outsourcing predictions for 2010 http://bit.ly/4TCKaN

True/False: In Florida, judges socializing in person with lawyers to face ethics charges? FL - “The Forward Looking State” ?

Thinking abt communication: bright line used to separate synchronous + a-sync modes; social media blurs that. Implications? #in

Last week I spoke at the Ark Group Conference on Alternative Fee Arrangements (AFA). I gave a short presentation called Unbundling Repetitive Aspects of Large Matters, my effort at de-mystifying and simplifying alternative fees. 

Inside and outside counsel would find AFA easier if, instead of thinking about entire matters, they thought about the components of big matters. By big matters I mean single large matters such as major litigation or an M&A deal or “portfolio” matters such as real estate transactions, sales contracts, or managing NDAs.

These big matters typically include high volume, repetitive elements that can be treated as fairly discrete activities and therefore costed and priced separately. Here are some examples of common “discrete activites:”

Matter Type	High Volume Elements
Litigation	•Document review •Motions
Deal	•Due diligence •Employment contracts
Real Estate	•Environmental review •Lease agreements
Sales contract	•Drafting and execution •Manage rights and obligations
NDA	•Standard language •Managing

The key to achieve reasonable alternate fees for both clients and firms is to unbundle these and other high volume tasks and treat them as discrete activities. Doing so can lower the cost and improve the predictability. All that’s needed is to apply the appropriate selection of process, technology and human resources:

• Process
• Workflow analysis
• Metrics and QC
• Data analytics (EDD)
• Knowledge management
• Business intelligence
• Project management
• Technology
• Document assembly
• Conceptual review tools
• Repositories
• Contract management
• Human Resources
• Paralegals
• Contract lawyers
• Outsourced lawyers (onsite, onshore, offshore, multi-shore)

By unbundling - that is, separating matters into discrete “chunks of work” - and then applying the tools above, tracking costs and effort, and monitoring and repeating the process to refine estimates, clients and lawyers likely will find that they reduce cost and, as important, make cost more predictable. That in turn should make AFA much easier.

Am I missing something, or is AFA easier than meets the eye?

A.B. Culvahouse, Jr., the chair of O’Melveny & Myers, has piece in Corporate Counsel today called A Shift That Can Benefit All of Us. He writes “reports of the demise of “BigLaw” have, in the immortal words of Mark Twain, been greatly exaggerated.” Yet reading the rest of his commentary, I wonder… 

I think BigLaw has a future, but one very different from the past. And I think his commentary supports that view. So let’s consider the rest of Mr. Culvahouse’s remarks in detail.

Mr. Culvahouse acknowledges that “many aspects of the law firm business model that created tension between law firm interests and those of their clients are rightly being reinvented” and observes that both the market and his firm are moving toward alternative fee arrangements. I interpret his comments about OMM billing, in my words, ‘we were offering risk-sharing arrangements but now the market is forcing us to offer fixed fees.’

Mr. Culvahouse then addresses the recruiting and staffing model. Training costs are shifting from clients to law firms. These changes create value for both parties but only with trust. I interpret his comments, my words, ‘this is a drastic change and the system will break if clients don’t step up to plate and help resolve the market issue of training new lawyers.’

He also points out the important role that law firms play first as trusted business advisers, confidants to executives, and sounding boards to manage corporate change and second as “guardians of the ‘rule of law’ both at home and abroad” through pro bono work. I interpret this, my words, ‘for all the complaints about BigLaw, remember we serve a critical role in commerce and society that is not easily replaced.’

In sum, I read his commentary more as a plea to preserve BigLaw than as support for the idea that BigLaw demise is greatly exaggerated. That said, I do believe BigLaw will survive, in part for the reasons Mr. Culvahouse explains. But I think it will be a very different BigLaw. Whether it becomes a cylinder instead of a pyramid is too early to say, but the shape and operation we have known in the past likely cannot continue into the future.

BigLaw economics likely have changed permanently. Is the same true for the consulting companies that advise large law firms? 

Consider that virtual law firms and boutiques now compete effectively with large law firms for a wide range of matters. This is true because

• Cost pressures force general counsels to consider lower cost alternatives to BigLaw
• Smaller firms offer world-class capabilities through technology and informal or formal alliances (e.g., Meritas)
• GCs demand alternative fee arrangements (AFA) and smaller firms, with their much lower overhead and more flexible thinking, are more willing to offer them
• BigLaw benefits have likely been over-rated all along. Need a global footprint? Just how effective are multi-office firms in utilizing their global offices? And, if as GC argue, they hire lawyers and not firms, why does a global network or having multiple practice areas matter?

In my anecdotal observation, similar forces operate among law firm consultants. My sense is that 2 or 3 consultancies dominated legal consulting circa 1990 but that they have since lost significant relative market share. Perhaps it’s just because I’ve been around a while and know more firms, but I do think there are many more solos and small consulting firms today than even 5 years ago.

BigLaw and the consultants who serve both are in the business-to-business market. B2B marketing has shifted and continues to shift to the web and social media where scale matters much less. For example, consultants such as Rees Morrison, Bruce MacEwen (aka Adam Smith, Esq, Jordan Furlong (new to the consulting this month), Patrick McKenna, or Bruce Heintz illustrate how blogging can either establish or maintain thought leadership, a key consulting selling point.

Of course, the solos and small shops have no monopoly on using social media to build their brand. At Altman Weil, consultant Tim Corcoran blogs extensively and Pam Woldow writes an outstanding Twitter feed @pamwoldow.

With the rise of web-based marketing and low cost technology, brochures, tech infrastructure, office space, acquiring support…. all the requirements to operate a business have become easier to acquire. And branding is now a whole new game open to anyone with a PC and net connection.

I am not suggesting that BigLaw or big consulting firms will go away. Rather, the ecosystem is becoming more diverse, meaning players of all sizes can thrive and the environment keeps changing. The “new normal” is likely to be much less stable than the old one, so get ready for an interesting ride.

Large law firms historically have not spent much energy managing overhead cost. To be sure, BigLaw lay-offs are rampant but these have been aimed mainly at lawyers; staff have been cut in rough proportion to typical support ratios. News last week, however, suggests that firms may now target overhead per se. 

The Recorder reported on Friday (2 Oct 09) that Cooley Lays Off 58 Staffers. These “cuts represent about 5 percent or 6 percent of the firm’s staff… and the majority were secretaries. The information services and marketing departments also took a hit.”

In general, several reasons explain why a big law firm might lay-off staff and not lawyers:

• To correct prior over-staffing.
• Support needs have declined; for example, technology substitutes for humans or a new practice mix reduces support needs.
• The firm outsourced support.
• Lawyers become more self-supporting. Self-support might not require extra time because of process improvements. If self-support does require lawyer time, however, query whether this implies working longer hours, billing less time, or working more and billing for work previously performed by staff.

In this instance, Cooley explains. Cooley Chief Operating Officer Mark Pitchford said “This is recognition that we were overstaffed in certain areas.” A confidential firm memo posted at Above The Law explains “we have streamlined, and in some cases reorganized, several firm functions, invested in new technologies and endeavored to implement attorney staffing ratios commensurate with our attorneys’ changing support needs.”

Will other firms take a similar step? In January 2009 I suggested in Law Firm Staffing Reference Model that few firms consciously decide on appropriate staffing and that support ratios seem random. Then in May, in Cost Control as Part of AmLaw 200 Turnaround Strategies I analyzed BigLaw support cost per lawyer. Making some assumptions, I found that the median AmLaw 200 support cost per lawyer in 2008 was around $170,000.

In this analysis, Cooley’s overhead per lawyer was about $210,000, well above the median. So these cuts may reflect a “move to the median”. Draconian and painful as the cuts are, however, they don’t move the economic needle much. Assuming average compensation of those cut is $60,000/year, then in my analysis, Cooley overhead per lawyer drops by about $4,000. (We cannot simply apply the 5% staff cut directly to the $210k overhead number because it includes fixed costs such as leases, IT, and malpractice premiums.)

To reduce Cooley overhead per lawyer to the median of $40,000 would require much larger cuts, perhaps close to an order of magnitude larger. My analysis likely does not hold up for such dramatic changes; nonetheless, we know overhead is enormous and hard to cut. A major overhead reduction likely requires a re-think rather than incremental cuts.

Do other firms now have “permission” to make similar cuts. Remember, by definition, half the firms spend more than the median. So that leaves 99 others who could cut to get closer to the median. And I’m not even suggesting the median is a good target. In fact, I suspect it reflects more than a modicum of bloat.

BigLaw and the market it serves is hurting. Some believe the new normal will be the same as the old normal; I don’t. I am now convinced that project management - applied to law practice - will be part of whatever happens. 

Recently, I’ve seen a surge of interest in project management (PM):

• At 3 Geeks and a Law Blog, Toby Brown wrote last Friday The Evolution of AFAs: Law Firm Side, in which he suggests project management needs to be part of the answer to Alternative Fee Arrangements.
• Steven Levy, who headed the legal technology team at Microsoft for many years, wrote last week at his Lexician blog, Rethinking Legal Project Management Tools and Low-Tech “Tools” for Legal Project Management, which together serve as a good short intro to legal project management.
• Today, Levy posted Professional Project Management in a Legal Environment, which recaps a discussion with Paul Easton of the Legal Project Management blog, adding some nuance to the PM intro.
• In the last few weeks, friends at two large law firms have asked me about legal PM and suggested that it could become a big initiative at their firms.

A frequent theme for me is that lawyers must focus not just on substance, but also on how they practice law. Project management is a great way to do so. I think an illustration helps.

Two lawyers may each offer good advice and solutions. Mr. Red, as part of his process, takes a stack of papers, throws it in the air, and let’s the paper land where it will. Then he has associates gather up the paper randomly, organize their portions, and work on the stack they have collected, occasionally communicating with each. With much scurrying and constant swapping of paper among the team, an answer emerges.

In contrast, Ms. Green carefully reviews and sorts the same stack of paper. She divvies it up logically among associates, regularly tracks their progress against set goals, and makes sure each is sticking to scheduling and communicating clearly. The answer emerges quickly and on schedule.

Red or Green answers might be the same but the cost is not. Under hourly billing, general counsels have been oddly hands-off in monitoring processes, even though some are, like Red and Green, demonstrably better than others. Under AFA, then clients won’t care if the paper is “tossed” or “neatly stacked” but the law firm will. In essence, project management distinguishes Green from Red. Beyond obvious cost implications, under which approach do you think lawyers are happier and progress more systematically in their careers?

When architect Philip Johnson put a neo-Georgian Chippendale pediment atop the then-new AT&T (now Sony) building in 1984, he ushered in post-modernism. When an architect of the way BigLaw firm works says there’s a new style in town, take note. 

Hildebrandt launches the week of September 21 its LawVision™ service (PDF brochure) to help law firms adapt to a market “likely positioned for revolutionary change as market forces exert pressure on the traditional law firm model.” (emphasis added)

On the substance, Hildebrandt finesses just how much revolution to expect but notes that even limited structural changes will “ripple” throughout the firm. So, whether revolution or ripple, firms must assess how they operate. Hildebrandt’s solutions include many themes I’ve long advocated: performance metrics, analyzing the process of how lawyers work, rationalizing work allocation, outsourcing, alternative fees, and legal technology to support process change. Law firms are, in my view, long overdue in working smarter; guillotines do focus the mind.

On the spin, Hildebrandt wisely also appeals revolution deniers. The opening quote in big type by Brad Hildebrandt notes that the profession “may be transformed or it may evolve in more moderate steps, but regardless it is changing.” Further, LawVision™ is designed “to insure that there are no unexpected or unintended consequences of actions that a law firm takes to respond to new market or economic realities.” This positioning likely assuages denier fears but as I read history, real revolutions necessarily result in ‘unexpected or unintended consequences.’

This service offer is timely and well crafted. By holding out the potential both for controlled and incremental change and for truly structural change, Hildebrandt likely can gain mind share of multiple management factions.

As to the future, I think BigLaw is on a new path, like it or not. Enough firms are talking about big change - see, e.g., Above the Law re The New Biglaw Business Model, According to O’Melveny & Myers and Legal Week re Mayer Brown and Reed Smith set to champion fixed fees - that revolution may become a self-fulfilling prophecy. Those that don’t change likely will lose market share.

Just as the era of modernist glass box buildings holding a monopoly came to an end, so to may the era of pyramid-shaped BigLaw firms with their ever increasing rates and leverage. The shape of things to come is not yet clear, but it will differ. And, with apologies to The Who, the new boss likely will not be the same as the old boss.

Last month, in As World Embraces Statistics, Lawyers Sit on Sideline, I lamented the lack of statistical mindset in the legal market. Why should we care? 

One reason: statistics can be very important at trial. Bob Ambrogi, in Statistics Surge as Evidence in Trials (IMS Expert Services August 2009 Newsletter, explains the growing importance of statistical evidence.

Another reason: to spot potentially unreliable statistics or analysis, whether for law practice or firm management. To illustrate, I deconstruct the Incisive Legal Intelligence law firm Economic Confidence Index (PDF) released in August (referenced at (an August 4th Incisive blog post).

Not Describing the Sample. To interpret a survey, you must understand who responded: how many and what demographic. Small, skewed, or unknown samples may yield unreliable results. I did not find a description of who - position/title, location, or firm size - responded to the Confidence Index. Who knows if the sample reflects large or small law firms or a mix.

Comparing Surveys from Different Points in Time. Comparing responses at two points in time requires like populations or samples. Incisive writes “[c]ompared to the beginning of 2009, the majority of firms report that business conditions have either improved or stayed the same rather than worsened.” To start, I was perplexed because the text says this is the first month of the Confidence Index. If so, it is not clear how any comparison whatsoever is possible. To boot, if Incisive conducted an earlier survey, there is no information on whether the sample was comparable.

Ask Unambiguous Questions and Help Readers Interpret Surprising Results. The Confidence Index survey asked respondents “In which of the following ways has your firm taken steps toward cost cutting/maintaining profitability as a response to the current economy?” This question does not specify a time period so answers presumably could refer to last month, 2009 year to date, since the crisis began (exactly when was that?), or some other time period. Does this matter? I think so. In this survey, 33% of firms report lay-offs in answer to the question. Compare that to data at at LawShucks, which show about 250 reported AmLaw 200 lay-offs. Surveys should not leave readers wondering about basic interpretation. If results are surprising in comparison to other widely reported data, then offer an explanation.

Report Data Accurately and Consistently. All the Incisive graphics and tables report on questions referring to 2009, the past six or twelve months, or in the next three or six months. Yet the text states “looking forward to 2010…[60% anticipate improving conditions]” What is the basis for Incisive comments about 2010? Three explanations come to mind: the survey asked questions about 2010 not reported in the write-up, the authors confuse 2009 and 2010, or the authors assume 2009 second-half data predict 2010. Write-ups should accurately reflect the data collected and the analysis.

Imagine presenting the Confidence Index to a judge who happens to understand stats and data. If you were the lead litigator, would you want to put this Incisive survey into evidence?

It’s a new era for BigLaw. For both the management of large law firms and the proper handling of litigation, law firm managers and litigators will increasingly need to collect and analyze and present data. Let’s hope, as Bob Ambrogi suggests, some lawyers and staff really can deal with data properly.

For those who do see a need to learn more about stats, law department management consultant and blogger Rees Morrison suggests 10 free courses to learn more about statistics in his September 13th post.

The legal market is remarkable for its lack of solid market research. There is much discussion about alternate fee arrangements (AFA), for example, but little data about how extensive the market is. I’m going to take a flyer and estimate total AFA from one data point. 

I learned to generate estimates from virtually no data as a management consultant. I frown on this practice but my goal here is more to provoke others to come forward with data than to call the market size.

The Alternative Pricing page at Hildebrandt.com reports that “Hildebrandt consultants have assisted law firms in the development and implementation of pricing strategies that have resulted in over $1.8 billion worth of non-hourly engagements in just the last year alone.”

I don’t know Hildebrandt’s share of legal market consulting. It’s big, long-established, and widely cited. I’ll assume it’s share is 30% and that its competitors provide comparable (to their size) levels of AFA advice. With these admittedly SWAG assumptions, then the AFA market is worth $6.0 billion (= 1.8 / 0.30). That’s less than 10% of the AmLaw 200 revenue (which was $80 billion in 2008).

Can anyone step forward to refine this estimate? If it’s right, does anyone else think the number is really low given all the general counsel bluster about fees?

Lawyers have discussed alternative fee arrangements (AFA) since at least 1989, when I first became a law firm manager. The economic crisis adds fuel to the supposed AFA fire. Now, a new article by two prominent lawyers argues the merits of fixed fees, pointing out what it will take to get there. 

Two Veteran Lawyers Say Now Is the Time for Fixed Fees (Corporate Counsel, 24 Aug 2009), by Ben W. Heineman Jr. and William F. Lee (respectively, former General Electric Co. SVP & general counsel, now distinguished senior fellow at Harvard Law School’s Program on the Legal Profession and co-managing partner of Wilmer Cutler Pickering Hale and Dorr), sets forth in detail the benefits of fixed fee billing to BigLaw and clients.

If nothing else, the article is interesting because of the prominence of its authors. Beyond that, it lays out different matter types and suggests fixed fee approaches for each. Further, it suggests specifics such as “data-mining techniques to determine reasonable ranges of cost for a wide variety of legal services” and project management. The authors’ comments on PM are especially interesting, not just because they say the words ‘project management’ but also for what they lump in with it:

“Law firms must develop project management capacity that combines sensitivity to quality with sensitivity to productivity. The time invested in a project will be managed as the project proceeds, rather than discussed after the fact… [client and firm must] learn to do more with less: the real definition of productivity. By the same token, in-house law departments must also develop project management capacity (and productivity measures for in-house lawyers).. For both in-house and outside lawyers, connective technology (e.g., general and specific deal documents, databases, or general and specific litigation documents) and selective outsourcing to third parties can help drive real productivity.” (emphasis added)

If the quoted text became reality, that would indeed be big. Almost every time I talk to partners about project management (or budgets for that matter), their eyes glaze over. Likewise, partner attention span for technology rarely exceeds a few seconds. And many BigLaw partners have gone on record about the putative horrors of outsourcing.

So, from my perspective, it’s great to see two prominent lawyers argue implicitly or explicitly for what I’ve advocated at this blog since 2003: technology for law practice productivity, business intelligence for both law firms and law departments, knowledge management (KM), a focus on the process of how to practice law, use of decision trees for risk analysis, risk-based decisions about how much to invest, and legal and middle office outsourcing.

I hope the authors will back their views with action, putting their considerable personal influence and their organizations’ resources behind their views. Many a legal market foot soldier or low-ranking officer have tried to go down the road they suggest, only to end up lying wounded on the side of the road. We now need the generals to lead. And the battle metaphor is intentional: changing how lawyers think and act will be hard indeed.

Update (24 Aug 2009): The Wall Street Journal today published ‘Billable Hour’ Under Attack, about fixed fees and AFA.

I have previously compared the health and legal professions, focusing on the evidenced-based approach in medicine and the appalling lack of anything like it in legal. Informed by the current national health care debate, I see another lesson for lawyers and law firm managers: find ways to limit over-consumption. 

Though over-consumption of health care is virtually off the table, it’s a huge problem. Why not have that extra test to eliminate a 1 in 10,000 risk - after all, someone else is paying? Why not consume a lot if no one even bothers to tell you the price in advance? I suspect over consumption by both clients and lawyers is a big problem.

Clients probably spend way too much on legal services though general counsels likely would disagree. I’ve discussed this in posts about whether cost control is really a GC priority. I suspect legal is like health care - the US spends much more than other countries for the same results.

Similarly, law firms likely over-consume support services. Law firms are to lawyers as insurers are to patients: a third party payer. Firms pay to support lawyers but lawyers determine how much service they consume - without knowing the price. Lawyers don’t even get the moral equivalent of an insurer’s “Explanation of Medical Benefits”. How many lawyers secretly or sub-consciously think “Why not have someone available to help me, I might need support between 10pm and 4am.” Or “Why not demand that a secretary sit outside my office 10 hours a day - my phone might ring and I can’t afford to have my calls answered by a central system.” Lawyers don’t pay the cost, so why not be safe rather than sorry?

Try this thought experiment: Give each lawyer a budget equivalent to the current support cost. Let the lawyer go up to 20% over but, at least for partners, make them pay 25% of any additional cost beyond that. Conversely, if at the end of the year, money is left from that pot, let the lawyer keep 50%. Would service consumption go up or down and is that good or bad? You tell me.

Update 22 Aug 2009 After writing above, I found similar idea by law department management consultant Rees Morrison in his post What if a law department gave each attorney an allowance to pay for support?, which suggests the possibility of creating a market for secretarial support services, where what an inhouse lawyer doesn’t spend stays with the lawyer.

Dan Regard’s post The Fragmentation of the Communication Container at EDD Update blog raises important practical EDD considerations. Plus it suggests what metaphysical question about meaning. 

Dan writes that “methods of communication have changed over the last few years”. At one time he expected that the web would lead to big, complex documents where all the connections were clear. Instead, our communications “have become shorter, and more frequent, rather than larger and more complex. What was once sent in one letter, is now sent in 3 emails, or 5 texts, or 10 tweets. The size is smaller, the frequency is greater.”

Dan, an EDD authority, concludes that EDD will be more about “archeology", that is “re-assembling fragments of what once was… we will have more challenges (on the e-discovery side) to show complete conversations… Those conversations we do have will span days, not minutes. Sound bites will lend themselves to greater degrees of interpretation.” (emphasis added)

The EDD implications are clear. I want to pick up on Dan’s last comment about interpretation. I agree that as ‘the container fragments’, so too does meaning and intent. It can be hard enough to interpret old-fashioned back-and-forth dialogue after the fact. Scattering thread reduces clarity even more.

In real-time, the participants may remember where all the strands are or be inclined to interpret gaps in a positive light. But what happens after the fact, months or years later? As Dan suggests, just re-constructing the pieces is hard. It may be impossible. For example, 2 or more people may have a “conversation” simultaneously on Facebook, Twitter, e-mail, and Linkedin. The connection among and across media and time is in wetware (participants’ brains); explicit links may well be absent.

Historians or litigators may find it impossible to find all the pieces. Even if the participants are available and willing, they may be no more able to re-construct the full picture than a 3rd party. And even if you find all the pieces, do you face the moral equivalent of literary deconstructionism? Scattered text seems far more subject to interpretation than traditional media.

Litigators need to tell stories to win, historians to interpret. In the future, I suspect that far more stories and interpretations from scattered communications will be credible than what we have seen so far. Meaning and intent have always been hard to fathom. It looks like it will just get worse.

The world is rushing to embrace statistics. Not so lawyers. 

For Today’s Graduate, Just One Word: Statistics (New York Times, 6 August 2009) explains the rise of statisticians. “In field after field, computing and the Web are creating new realms of data to explore — sensor signals, surveillance tapes, social network chatter, public records and more… Though at the fore, statisticians are only a small part of an army of experts using modern statistical techniques for data analysis.”

It’s not that lawyer and law firm managers have no data to analyze. I’ve frequently lamented the lack of statistics in e-discovery, a very good example of ‘new realms of data to explore’ . And whatever happened to business intelligence (BI) in law firm management. The last entry in my BI blog category was three years ago. Maybe firms and vendors stopped talking about BI, but I suspect it just never got the traction I expected.

I’d be curious to know the average number of semesters of college-level math studied by lawyers versus other professionals. I suspect therein lies the explanation.

Is the legal profession unusual in its reliance on untested assumptions? 

I frequently point out that lawyers implicitly assume the human document review in e-discovery is reliable so I won’t beat that already dead horse. Corporate Counsel Are Reducing Ranks of Secondary Outside Firms, Survey Reports (NLJ, 20 July 2009) reports on a survey finding that general counsels “are using fewer law firms because short-staffed corporate legal departments have little time to manage outside firms, not just because consolidating work is cheaper.”

Why do we assume that law departments manage outside counsel? Do we have evidence this is true, other than claims that it happens? At the risk of playing semantics, I suggest that inhouse counsel don’t have time to administer so many outside firms. My impression is that inhouse lawyers rarely manage outside counsel. They focus instead on the substance and strategy of a matter, not its management. Further, they are often reluctant to “micro manage” their outside counsel.

Fine, prove me wrong. All the anecdotal evidence I’ve seen supports my view. I’ve talked to inhouse counsel about requiring, for example, their outside counsel to provide budgets, prepare decision trees, or require offshore document review. Typically, their answer is “I have limited bandwidth to deal with these issues and I have to pick my battles with outside counsel carefully.”

In my post Reducing Legal Costs Beyond Tinkering with Price (14 July 2009) I wrote “law departments must actually manage inside and outside counsel, looking at how lawyers perform their work and actively seeking more efficient and effective ways to practice.”

I don’t think the current structure of law departments supports real management. GCs who actually want to manage outside counsel likely need to create a new position, someone whose job is to manage. This would acknowledge that the status quo (pre- and post-crash) has inhouse lawyers focused on case strategy and tactics, which is fine. It would add a new layer responsible for real management.

Of course, this would be a new cost. But how could it not pay for itself? For any law department spending more than a few million dollars annually on outside counsel, it’s hard to believe that active management of firms wouldn’t more than pay for the additional salary.

In my Fall 2003 article, A Marketplace Trial, published in the litigation supplement to the American Lawyer, I argued that one could apply financial techniques to value and hedge lawsuits. The market may have taken a big step in that direction. 

Investing in Lawsuits, for a Share of the Awards (New York Times, 3 June 2009) is a front page business section article about investment companies such as Juridica Investments, which invest in lawsuits.

According to Juridica’s website, it is

“a limited liability, closed-ended investment company registered in Guernsey*, that has raised £80 million and commenced trading on AIM, a market operated by the London Stock Exchange, on 21 December 2007…. The investment objective of the Company is to build a diversified portfolio of investments in claims and to provide Shareholders with an attractive level of dividends and capital growth through investing directly and indirectly in litigation and arbitration cases, claims and disputes.”

The NYT article notes that

“Companies often jump at the chance to have an investor help pay for litigation, and lawyers usually appreciate having money set aside to pay them…. The investing companies say that because they do not take control of the lawsuit from the company and lawyers waging it, their most important task is identifying cases likely to produce a substantial return.”

An investor in a lawsuit necessarily must have a way to value the underlying claim. According to its annual report, Juridica “made substantial progress in developing scalable underwriting systems and processes for the evaluation of claims and continue to refine these.” This is tantalizingly vague - it would be very interesting to know more about the techniques (litigation risk analysis with decision trees perhaps?)

Assuming this investment model continues to work, how far can we be from the idea I proposed of rating lawsuits? It seems a small leap from an assessment for purposes of investing to an assessment for a fee.

I wonder whether these investors look at law firm efficiency and the use of legal technology in its assessment.

Whether Juridica and other investors represent a niche or the beginning of structural change in the litigation market is hard to say. Certainly the introduction of third-party forces in health care caused huge shifts. Might litigation face the same fate with the involvement of smart investors?

My prior post asked Is Cost Control Really a General Counsel Priority? My answer was “no", based generally on what I read and specifically an analysis of the Best Legal Department articles in the current issue of Corporate Counsel magazine. Since not all readers click through to comments, I am sharing here comments by Pamela Woldow of Altman Weil and Steven Levy of Lexician and formerly of Microsoft. 

Pam Woldow wrote:

Ron: As a consultant who spends her time in small, medium and large corporate legal departments, I must say that I am inclined to agree that the cost savings tend to be the imperatives of the CEO and the CFO. In general GCs, with some notable exceptions, are still stuck in the 1992 mode of seeking discounted hourly rates and asking for budgets for litigation, which did not work then and still do not – if cost control is the goal. While GCs are talking about needing better cost control, many seem not to know how best to really accomplish the goal. Instead, there is a perception that beating up firms for greater discounts will deliver the goods or, in contrast, they are living on the hope and prayer that because “law is different” they can justify the legal spend at the end of the budget year. From my perspective, they really have been placed in an awkward position. If they take serious steps to achieve cost control, executive management could second guess them.

It is a tough issue that requires GCs to lay out new and different steps to control costs and build consensus with executive management to accomplish the goals and have the requisite support. Without that support, not many GCs are going to seek innovative ways to cut costs as it will be safer to stick to the tried and true.

Steven Levy wrote:

Ron, I echo what Pamela says. I’d add one thing – it’s unclear, at least to me, how much of the lack of cost-control focus stems from the way the articles are written. If the law departments haven’t figured out how to make fiscal issues “sexy” to the reporters and editors, then the story won’t be printed, whether or not it’s there in fact.

To some extent, there is also the Geoff Moore core-and-context argument made so effectively in the Legal space by Cisco GC Mark Chandler. Is cost control “core” to the law deptarment?

Both commentators have extensive experience working in or with corporate law departments. So, are there any voices who disagree? Who will stand up and not only say but present the evidence that cost control is really a top GC priority?

The gap between what general counsels say and do about controlling outside counsel cost continues. At least that’s my take reading the Corporate Counsel magazine’s Best Legal Department 2009 issue. 

Best Legal Department – 2009 has three feature-length stories about the 2009 winner (The Hartford) and two runners-up (Exelon and IBM).

In the Editor’s Note, Anthony Paonita writes

“All of our winning legal departments are under even more pressure than usual to cut costs, both internally and in their outside spending. Our finalists all said that they’re doing more in-house, and that they’re starting to make firms think differently when it comes to fees and staffing. We may be at just the start of a fundamental transformation in legal services.”

I don’t see how the articles support that conclusion. In fact, cost control discussion seems buried. Allow me to quantify: of approximately 7,200 words in the three feature articles, only 409 relate to cost control - less than 6%. (To count, I copied text to a word processor and used a permissive standard for text about cost control.)

If cost control were really tops on the agenda, I would think it would warrant a larger share of the discussion. Moreover, the cost measures described by and large are not inspiring.

The Hartford gets discounts “on all the work one law firm does for it by agreeing to allow star associates to handle some appeals.” Other measures: “In-house lawyers actively direct all facets of cases… and are responsible for ensuring that the company receives ‘the best possible representation for the least possible cost.” The Hartford also insists “that a firm use contract lawyers on document reviews.” Useful? Yes. Transformational? No.

The most intriguing cost control measure gets one sentence in the article on IBM, which “is in the process of creating a ‘back-office hub’ of recent law graduates who do lower-level work.”

I am in no way commenting on the winning departments. Rather, my comments illustrate only another example of a public proclamation of the importance of cost control that is not backed up by clearly demonstrated and quantified action.

Are large law firms reeling with the rest of the economy? Reading legal headlines since January 1, you would think so. But maybe not. 

In Survey: Law Firms Don’t Expect to Make Radical Changes the AmLaw Daily reports on a new Altman Weil law firm survey (conducted March and April). [The preceding link is to a fee-based webinar about the survey.] The surprise finding, quoting AmLaw Daily:

“Law firms are not doing anything dramatic and are not planning to do anything dramatic [in response to the economic downturn],” says Eric Seeger, an Altman Weil consultant and co-author of the survey, Law Firms in Transition.

First a quibble, in law firm land, I would say the dissolutions of 2008 and lay-offs of 2009 are not just dramatic but earth-shattering. OK, so much for semantics. Is it possible nothing will change, that the economy is not so bad, that BigLaw can continue its bad ways? A recently released BTI survey finds that legal spend in 2009 will drop only 1.4% for all of 2009. Hmmm.

Here’s one take: BigLaw is playing musical chairs. Cut costs short term but hope for the best long term. “My firm will be ok, others will hurt.” If, in fact, BTI is right and legal spending is only down modestly, then it seems likely with a bit of market- and wallet-share shifts, many firms will do just fine. The question is, however, which firms will be left without a chair when the music stops.

Here’s another take: Law firm management is in total denial. A year from now, we’ll know.

Many legal publications and consultants offer advice for large law firms on how to stabilize and recover. Their suggestions focus on lawyer compensation, practice group strategy, alternative billing, and business development. I remain surprised at how little they focus on reducing law firm overhead. 

Last week, the Zeughauser Group (ZG), a leading law firm management consultancy, offered its take. Ashby Jones, in the Wall Street Journal Law Blog, summarizes a recent ZG alert (5 May 09). The ZG alert, Forward-Looking Strategies: Tough Medicine and Elixirs for Success (link to WSJ - I could not find the PDF at ZG site), has excellent advice for law firms. It suggests:
- Cut lawyer costs
- Own particular niche practices
- Take advantage of the upcoming re-structuring of financial institutions
- Expand in selected rapidly developing countries
- Offer alternative fees
- Enhance profits through matter management (law firm business intelligence in my words)

Like many similar pieces, the ZG discussion does not shine a light on BigLaw overhead. Am I mis-guided to focus on overhead? Is it big enough that management should worry? To answer that, we have to quantify overhead. Here’s a simple way to determine it using AmLaw 200 data:

• Start with gross revenue.
• Subtract partner profits (all partners, not just equity).
• Subtract associate compensation (I assume a blended $225,000/year and multiplied by associate headcount).
• The remainder is all other overhead - everything from IT and marketing to occupancy and secretaries.
• Lawyers require far more support than staff; I assume twice as much. So I multiplied the total overhead by 66.6% to determine overhead supporting lawyers.
• To compare across firms, I divided this overhead by total lawyers.

In 2007, 0verhead per lawyer ranged from over $500,000 per lawyer to just over $50,000 per lawyer. The median is about $170,000 per lawyer and the average is $185,000. Even before the crash, I would have said that’s real money.

I can explain only some of the variance. For example, NYC bulge bracket firms by and large top the list. But many variances are hard to explain. If firms with overhead per lawyer above the median reduced their overhead to the median, profits per equity partner could, in some firms, increase by more than 30%.

While the math is simple, cutting overhead is not. Adopting a rational and analytic approach to supporting lawyers could, however, for many firms, reduce overhead. Perhaps quite significantly. Ideas I’ve offered include doing more with technology, forming secretarial teams, and outsourcing middle office functions.

As firms implement the excellent strategy suggestions of ZG and others, they must not forget to shrink their often bloated overhead. The old adage that it’s easier to grow revenue than shrink costs is still true. So too is the one about not leaving money on the table.

[Side-note: I was pleased to see ZG reference outsourcing: “Non-equity partnership … are less flexible than outsourcing."]

Through the 1980s, marketing was a four-letter word in most large law firms. By the 1990s, BigLaw had build marketing teams. One survey a couple of years indicated firms were spending 2% of revenue on marketing. Where is marketing today and how has it fared in the downturn? 

I found a great answer to these questions in an e-mail I received from my friend Steve Nelson of The McCormick Group, an executive search firm with a big legal practice. Steve is an astute observer of the legal market. He was previously a practicing lawyer and editor of the Legal Times. With his permission, I reproduce here an e-mail report that he sent in April titled “TMG’s Take…On CMO Vacancies”.

“Large law firms don’t appear to be in a hurry to fill vacant Chief Marketing Officer positions. Our unofficial scorecard has 17 CMO positions at AmLaw 200 firms that have remain unfilled since the first of the year or even longer. Some searches have been put on hold, while other firms have made the ultimate decision (at least for now) to go without a CMO at all.

Given that it’s a truism that business development should be the last area for budget-slashing in bad times, this says a lot about the state of marketing and business development in law firms today. About five years ago, some firms began to hire honest-to-goodness “sales” people to spearhead their business development efforts. But that trend never really took flight. Sure, law firms hired scores of so-called business development professionals, but in reality, they turned into business development support professionals, behind-the-scenes operatives who increasingly ended up handling RFPs, developing seminar ideas, and the like. At the same time, firms began to focus their CMO searches towards those candidates who had a proven record of building a marketing infrastructure.

As a result, in today’s economic climate, it’s quite easy for firms to see a quick and easy way to cut a half million dollars or so in personnel costs by either firing their CMOs, or failing to replace those who had left for greener pastures. In many cases, those professionals accomplished the goal of building the team and the process, but never got to use any of their strategic or visionary skills. Moreover, given the fact that law firms rarely want to have “nonlawyers” or even “non-practicing lawyers” on the front lines of client team and new business development initiatives, the nexus between these C-level executives and revenue generation became tenuous at best.

At this point, most law firms’ reaction to the economic crisis has been to focus on cutting costs, rather than building revenues. Normally, such a cataclysmic change might lead some to take bold steps to increase market share, but we’re not seeing it yet.”

Comments form any law firm marketing professionals?

I had hoped that BigLaw would make fundamental changes, prompted by the crisis. Um, what crisis is that exactly? 

Dan DiPietro, client head of the Law Firm Group of the Citi Private Bank and noted BigLaw commentator, in Recession and Repair (American Lawyer, 1 May 2009) offers a grim prognosis for BigLaw finances and partner profits. Citi’s data are more current than the just-released 2009 AmLaw 100 report for FY 2008 offer.

Grimmer still is his assessment that partners have yet to recognize the magnitude of the crisis. An anecdote suggests that partners still don’t think the situation is bad enough to have to change anything. His article concludes: “So the need for bold action and innovative thinking is upon us. Firm leaders have the chance to fix a broken business model… These are times that cry out for boldness and innovation. But the window will not stay open for long. Who among you will be the first to act?”

Many commentators have spoken about not letting this crisis go to waste. That sentiment assumes recognizing a crisis. As I read DiPietro’s essay, BigLaw partners have yet to recognize the gravity of the situation. Perhaps they know something the rest of us don’t. Or perhaps they feel a 10 or 15% drop in income is not such a big deal when you’re still earning more than $1 million.

The new Am Law 100 results are in and they are not pretty. 

Lessons of The Am Law 100: Nothing Grows Forever by Aric Press and John O’Connor (The American Lawyer, April 29, 2009). As I commented last year, BigLaw CIOs who want a seat at the management table need to follow the money (and data). Read the article and accompanying tables but here are highlights:

• 2008 results do not show the full impact of the downturn, which started mid-year
• Gross revenue was up 4.1% to $67 billion, lawyer headcount grew faster at 5.4% to 82,000, and profits per partner fell by 4.3%
• A falling tide affected firms fairly uniformly; AmLaw reports little change in relative firm rankings
• The authors outline several interesting “performance points” to ponder, including controlling headcount, the future profitability of bulge bracket NYC firms, the likely vulnerability of non-equity partners.

[Side note: I Tweeted the preview Webinar yesterday, key word #amlaw100, at http://twitter.com/ronfriedmann.]

Update - Sponsored Link (5 May 08): Click here to buy the 2009 AmLaw 100 downloadable file, which provides a full set of data for analysis in Excel..

Inhouse counsel fail to control outside counsel for many reasons. One is to maintain cordial relationships with future prospective employers. This may change and, if so, could make developing lawyer ratings easier. 

In the era of the incredible shrinking law firm, can inhouse counsel reasonably expect to land jobs in BigLaw? I suspect that BigLaw is no longer the parachute or escape hatch it once was. Cynthia Cotts’ Wall Street Lawyers Dumped for Lower-Priced Boutiques (Bloomberg.com, 6 April 2009) suggests that economics at last trump cordiality and long-standing relationships.

If this is really a sea change, then perhaps we will finally see good law firm ratings by inhouse counsel. Ratings of both individual lawyers and firms would help clients select the most appropriate and cost-effective counsel. Aside from the usual “quality” ratings, there are objective ratings that would help:
- Propose a budget and deliver regular variance reports
- Respond quickly to questions
- Takes time to understand the company and industry
- Offers to use low cost resources such as managed reviewed services.
- Good knowledge management system that saves time

If clients are less concerned about landing jobs at law firms, perhaps they will be more willing to participate in or even initiate ratings. A lawyer rating service may be a good counter cyclical business.

My prior two posts suggest that BigLaw may be going the direction of Detroit: slow motion train wreck explained as perpetual re-structuring. Consider that a few large firms have already had 2 or 3 rounds of lay-offs. If BigLaw re-thinks its business, what might it look like? Try a cylinder replacing a pyramid. 

Large law firms in the UK, US, Canada, and Australia are “pyramids.” A few equity partners sit at the top, supported by non-equity partners, counsel, associates, and a huge staff. Over the last decade, many large firms have increased their leverage - the number of fee-earners and staff who support the top. The economics of firms has depended on maintaining this pyramid with its high leverage.

What if the legal market transforms and the pyramid no longer works? What if the new shape of law firms is a cylinder instead? In a cylinder, equity partners remain at the top but the number of fee-earners and staff supporting them is much less.

Two recent UK articles suggest a possible move to cylinders. Focus, Law firm management: A year of living dangerously by Matt Byrne in The Lawyer (30 March 2009) is an excellent, in-depth analysis of the future of large law firms. “The current financial crisis has been widely characterised as the most severe downturn since the Great Depression… Is it a cyclical downturn or does it represent a paradigm shift?… ” The article presents the varying views of managing partners of large US and UK firms on this question.

The Lawyer article reaches no definite conclusion. In contrast, Redundancy in the City: painful lessons for the big beasts in Times Online (2 April 2009) interviews Linklaters managing partner Simon Davies and suggests we may see a paradigm shift:

“Simon Davies, the managing partner of Linklaters, spoke exclusively to The Times… Davies sees a very different model emerging for the future… ‘Partners are spending much more time executing transactions or giving advice and, in each case, working with smaller number of lawyers to ensure that quality is maintained.’ … In this context it is inevitable that the firm should prioritise the very high-value work that needs the most experienced and creative skills while starting to slew off the lower value work that could be undertaken by more junior staff… ‘We are now moving to the right size for the new realities in the legal marketplace.’ ”

It’s not clear what the “right size” is. Suppose, however, large law firms must adopt more cylindrical structures to succeed. This would require major changes in how they operate. The huge and costly infrastructure supporting partners and other lawyers would need to shrink. For individual lawyers and staff, that surely would mean more pain than we have already seen. For institutions, it would require a careful reconsideration of how they support high-end fee earners.

In such a transition, the question would be how much support partners need and how best to provide it. We’re not unbiased of course, but we think that outsourcing is a natural answer for this potential new regime. Large firms can do away with much of the expensive and hard-to-manage middle office services required to support armies of lawyers. Instead, they can outsource support on a more flexible basis. Even some of the support junior lawyers currently provide can likely be outsourced to legal support staff onshore or off.

One way to think about the potential de-leveraging is a big squeeze: the traditional BigLaw pyramid must squish down to a cylinder. No longer will there be armies to support a few generals. In a cylinder, the size of support layers differ little from top to bottom. If slabs of the pyramid must become smaller disks of a cylinder, firms need to consider whether the economics of operating all those layers on their own will still make sense. As functions shrink in scale, the economics change - usually for the worse. So moving services such as document product, finance and accounting, and business research to an outsourced, shared services model may become much more attractive in this new world.

[I originally posted this as How Law Firms Can Survive Transforming from a Pyramid to a Cylinder at the Integreon blog.]

In my prior post, I asked if Is BigLaw Going the Direction of Detroit?. Fred Bartlit, founder of Bartlit Beck, wrote a great comment on the post, reproduced here with permission (plus more of my own commentary). 

Bartlit commented at Legal OnRamp, a collaboration system for in-house counsel and invited outside lawyers and third party service providers. LOR has great forums and many other resources; in my view it is the best and most promising “social media” and “web space” for lawyers.

Bartlit left Kirkland & Ellis to start a new kind of litigation firm, one based on going to trial, alternative fees, and a diamond rather than pyramid structure. He’s been thinking differently about the legal market for decades. His response to my blog post:

“‘Ron says: “The real problem is the product. The cars are not good enough. The management is insular.”

It is always very interesting to go to conference of “managing partners”. For many years the discussion has centered on doing the same old wrong things better: “get the hours up” “have quotas of hours” “recover all costs” ‘cross market” “hire more people” “our business model is based on most people leaving before end of 8 years”

I rarely, if ever, hear the word “quality”. Little or no discussion on how to improve the quality of our product. Just discussion of how to get more $$$ from the existing product. Likewise, I hear the BS “lean and mean", but never a real discussion of “efficiency” - of working to improve project/business methods to do the important work faster, better

Maybe the auto industry analogy is a good one?”

So there you have it, an inside view of how managing partners think and behave.

Extending the Detroit analogy, perhaps the drivers (clients) are happy with the equivalent of my family’s 1972 three-on-the-tree Ford Torino station wagon, which handled horribly, was uncomfortable, and rusted out in five years. Maybe the drivers have never experienced a true luxury car; a compact, efficient but comfortable car; a sporty car with some zing. Detroit did fine until Japanese car makers introduced affordable, well-designed, efficient, comfortable, low maintenance, and long-lasting autos, from econo-boxes to luxury-mobiles.

So, does BigLaw face the equivalent of a “Japanese invasion?” As long as drivers keep buying clunkers, it may not matter. At least that’s what Detroit thought. And who are the invaders of BigLaw?

Lots of news about the legal market this week. It feels like we could be at a tipping point. Wait, I hope we are. The alternative may be worse. 

On the editorial page of the New York Times today, Adam Cohen penned With the Downturn, It’s Time to Rethink the Legal Profession. “The silver lining [of recent bad news], if there is one, is that the legal world may be inspired to draw blueprints for the 21st century. ” Cohen goes on to explain potential changes - a very good read.

Let’s hope he’s right about those blueprints. For a great visual view of what’s happening in BigLaw, take a look at the rolling 12 month large law firm lay-off chart at Law Shucks. The surging layoffs of lawyers and staff is personally disastrous for many. What does it portend for the legal market?

To help answer that question, read the Tuesday David Brooks op-ed piece Car Dealer in Chief (31 Mar 09). He observes that the real problem at GM is that it has implicitly viewed itself as in the restructuring business for 30 years. “There are many experts who think that the whole restructuring strategy is misbegotten… The real problem is the product. The cars are not good enough. The management is insular.”

Hmmm, with a word substitution or two, might he say that a few years from now about BigLaw? When I look at the lay-off chart, it looks like BigLaw is, so far, following the GM plan. Let’s hope not.

My friend and former colleague Shy Alter of ii3 wrote an interesting blog post suggesting that, with some adjustments, the billable hour may have a long life ahead. 

In Billable hour - exagerated rumors about its death, Shy looks at his own knowledge management and consulting firm to assess different billing models, ones that limit risk and provide more predictability. And he reports on one of his law firm clients that has come up with a sophisticated cost estimating model.

Reading his post makes me wonder what the real problem is when clients say they want alternate fees. I suspect the talk about alternative fee arrangements is driven by a series of inter-related concerns:

• Legal services are just too expensive, irrespective of how charged for and costs have to drop
• Predictability is important and current BigLaw approach is too unpredictable
• Law firms have no incentive to work efficiently and work is currently highly inefficient
• Firms don’t ask about risk tolerance so invest too much in rendering services ("leave no stone unturned")
• Cost really does not matter but appearances do. GCs must create the the appearance of taking action on fees. (Remember “voo-doo economics"?)
• Hourly rates are just too high (the moral outrage factor)
• In an age shrinking compensation, clients no longer want to support partner profits approaching $2 million

The legal market is not well and I am not necessarily saying preserve the billable hour, rather, let’s as a profession discuss what the real problems are.

If you listen to law school deans, you would think training as a lawyer is the greatest thing since sliced bread. 

At least that’s my take away from the Nathan Koppel Wall Street Journal article Best Defense? Seeking a Haven in Law School (19 Mar 09). Koppel quotes law school deans who extol the virtues of legal education and writes:

“School administrators seize on the versatility of a law degree in asserting that [a JD] is still a sound investment. Lawyers, they say, will play a central role in navigating a variety of issues, such as the use of natural resources, cross-border trade and government stimulus spending, which likely will play a central role in the economy for years to come.”

That may be true for some but see Is the Versatility of a Law Degree Just a Myth? (NLJ, Dec 2008) and The Value of a JD and Musings on the Structure of the Legal Market, an e-mail exchange between Doug Cornelius and me.

As I often say in these posts, prove it with data. The NLJ article says “But even in good economic times, the advantage of a juris doctor degree in landing a job in another field may well be overblown.” And as the WSJ article points out, getting a high paying job if you graduate from a lesser law school is no sure thing. Do law school deans have the data to show otherwise, especially in what may be a new, bad economy?

In the current economic crisis, law firm management must re-think how lawyers practice and how to run the firm. 

The legal market changes slowly. Many say the slow pace stems from lawyers’ training to focus on precedent. That’s true but I think the bigger reason is that the market has rarely punished late adopters. Law firms could afford not to change because they consistently earned high profits.

Late adopters in other industries, in contrast, are regularly punished. For example, Sony’s focus on cathode ray tube televisions while competitors developed flat screen technology cost it dearly. Or look at the US auto industry. Law firms, however, rarely suffer by being late to the game. The ones that waited to adopt e-mail, waited to create marketing departments, skipped knowledge management, or waited to take business intelligence / analysis seriously have not visibly suffered.

That may change in the current economic crisis. Three AmLaw 100 firms have dissolved and many have laid off lawyers and staff. Articles today report on pressure to drop rates and BigLaw partners decamping to smaller firms where they can charge less.

Is the market just in a downturn or has it fundamentally changed? Blogger and editor Jordan Furlong argues in This is not a drill that

“Many underlying beliefs about how economic value is generated are simply falling away, and we don’t yet know what will replace them — all we know is that it’ll be different from what we had before. That’s why many of the legal job losses we’re seeing, in firms of all sizes, aren’t temporary layoffs that will return when the recession ends. They’re eliminations — positions that won’t come back, because the underlying mechanics of value in legal services are changing and the new environment that emerges from this crisis won’t require them.”

His blog post cites many recent articles and blog posts supporting this proposition (including Recession Sends Lawyers Home from the Washington Post, in which I am quoted).

The question for large law firms is how to react to this downturn beyond immediate lay-offs and cost cutting. Should they deploy more technology? Work virtually? Move to fixed fee billing? Put project managers in charge of big matters? Centralize management? Get serious about practice group profitability and management? Outsource more?

I would argue for all these changes and more. Yet some of my BigLaw friends think that all will return to normal in a couple of years. What if they are not right? What if the market really has changed? What if firms late to adopt new ways of working and doing business are punished?

Smart managing partners should explore options to reduce the risk of being left behind (and perhaps going out of business). Also, exploring options with clients builds their trust and can gain share. Just offering clients a new approach - even if declined - tells clients that the firm is looking out for their interests.

[I originally posted this at Integreon’s blog.]

If you innovate, earn recognition. 

The College of Law Practice Management (I am a trustee) sponsors the InnovAction Award. InnovAction honors innovation in law practice management. Law firms, law departments, and other legal service providers (but not vendors) can apply. Innovation can range from creative office design, to technology, to a marketing campaign. New this year, applicants can win Honorable Mention.

Take a moment to review the InnovAction web site and consider submitting an application. For more information:

• Prior InnovAction winners.
• About the College.
• How to Enter for 2009 and download InnovAction Entry form.

From the College of Law Practice Management, here is more information:

From Procter & Gamble to IBM to Federal Express, from nylon to photocopiers to the electron microscope – some of the world’s most well-known companies and products were born in past recessions and depressions. The current economic crisis will be no exception – when times are tough, forward-thinking people will find ways to do things better. That applies especially to the practice of law.

In the grip of an historic recession, the legal profession is finally taking innovation seriously. Innovations in the business and practice of law, once rare, are starting to emerge all over the world. From new billing and compensation models to original talent retention strategies to high-efficiency client services fuelled by information technology, law firms are finally getting it: innovation is the key to triumphing over both the downturn and the competition.

Is your law practice one of the profession’s leading lights of innovation? Have you or someone within your firm with vision and courage led a groundbreaking effort to practice law differently? Have you developed a new and better way of serving clients, a breakthrough way to find new business, a truly innovative way to value and sell your services? If so, then you deserve the recognition of lawyers and clients in your region and worldwide. And if so, the College of Law Practice Management (www.colpm.org) wants to hear from you.

The College of Law Practice Management is now accepting entries for the 2009 InnovAction Awards at www.innovactionaward.com. Awards are presented for law practice innovations within law firms and legal departments that have never been done previously, or that take an existing innovation to the next level of originality and performance. Complete contest rules and application forms can be found at http://www.innovationaward.com; the Hall of Fame display of previous winners is at http://www.innovactionaward.com/halloffame.php.

There’s still time to be a market leader in innovation. Enter the InnovAction Awards today and show the world what your firm or department can do.

Last November I wrote JD as Job Credential for non-Law Jobs: Mistaking Cause and Effect?. That post led to an interesting e-mail exchange with Doug Cornelius, a lawyer and blogger (KMSpace and, as of 2009, at Compliance Building). 

With Doug’s permission, I posted our exchange as an article at this site, The Value of a JD and Musings on the Structure of the Legal Market. In it, we bemoan how little practical law students learn and conclude that law schools may be even less prone to change than relations between general counsels and law firms.

Let’s think about the impact of the current economic crisis on law schools: Enrollment - bets on up or down? Endowments - way down. Prospects for grads to get jobs - way down. Approach to education - unchanged? How many law faculties have met to ask “what can we do in this tough economy to make our education more valuable and useful?” I suspect not many.

I am taking a holiday weekend liberty to diverge a bit from my usual topics. As a non-practicing lawyer, reading Is the Versatility of a Law Degree Just a Myth? (The National Law Journal, 1 Dec 2008), I answer yes." 

The money quote:

“Law schools and placement professionals frequently tout the versatility of a law degree as a path to alternative careers. But even in good economic times, the advantage of a juris doctor degree in landing a job in another field may well be overblown.”

I think a JD is not a useful credential for non-law jobs. When I graduated NYU Law in 1986, I worked as a strategy consultant for Bain & Co. My pre-law school job experience got me the job, the JD got me the “consultant” title, the same as MBAs (in contrast to “associate consultant” for BAs and, in my class, one MD).

I started law school uncertain if I would practice. I heard many lawyers and law placement professionals say how flexible a JD and law practice experience is. I found that with my prior business experience, a few employers (e.g., investment banks) would consider my JD as the equivalent of an MBA. I’ve seen little evidence that the market has changed since then.

Back then, I found many former practicing lawyers with fantastic, interesting jobs. I asked how they ended up not practicing. All had practiced - many for years - and for most, moving to a different career was largely a matter of chance.

That many lawyers end up with interesting non-law jobs does not mean a JD is a path to those jobs or a “flexible” degree. It only means that some lawyers, after they practice some years, can change careers.

“You can’t save your way to growth” is a common refrain. In the current economic turmoil, however, growing revenue is hard so the focus must be on cost control. A recent report, article, and conference session drive home this point. 

Hildebrandt is a leading legal market consultancy. The Hildebrandt Special Client Advisory: Fall 2008 notes that

“the current downturn has not yet been significantly offset by increases in other traditionally “counter-cyclical” practices…. the current year will represent a significant downturn for the legal industry… we are unlikely to see any significant turnaround until late 2009, at the earliest… firms [will be] forced to lay off legal and non-legal staff, slow down the hiring of new attorneys, restructure operations, and weed out unprofitable practices.”

The Advisory suggests steps to deal with the downturn, including focus on collections, negotiate credit agreements, examine expenses closely, consider layoffs, deal with performance issues, and adjust practice areas. Longer term, Hildebrandt says we may see more fundamental changes such as new lawyer compensation systems, alternative billing, and more legal process outsourcing.

Driving home many of these points is the new article Partners at UK’s ten biggest law firms take home £1.1m in profits (TimesOnline, 19 Nov 2008). It reports on profits at top UK law firms, citing an annual law firm survey published by PriceWaterhouse Coopers:

“[T]he gap between the top ten and the rest of the market is set to widen as lawyers begin to feel the impact of the financial crisis… the biggest firms had tightened their hold on the market through an increased focus on efficient management. ‘Larger firms have been looking long and hard at their cost base and how much can be outsourced,’ Mr Rose said [head of the Professional Partnerships Advisory Group at PWC ]…. managing partners [are] switching focus from revenue growth to reducing staff costs.”

The topic of growing revenue versus controlling cost was central in an October panel discussion at the Law Firm Leaders Forum. In a session called “Running Your Firm as a Business - A Closer Look at the Middle Office", my co-panelists Ed Poll of LawBiz and Ron Yano, CFO, Loeb & Loeb and I debated that question. Mr. Yano and I shared the view that cost control could increase profits by 1.5 to 2.0 profit points, which is significant in tough times.

Ed focused more on growing revenue but in his follow-up blog post, Law firm overhead - Can we cut?, he writes ”focusing your energy on producing revenue will produce greater benefits than focusing your energy on reducing overhead”. He points out, however, that that increases in the right costs can increase revenues, citing the example of Mallesons creating a system to answer more incoming client phone calls. In my view, another example is smart investment in business research for selling more matters.

[This is based on my post at Integreon.com blog.]

Could BigLaw follow Wall Street in unraveling? 

Few saw that Wall Street Masters of the Universe were really Naked Emperors? Michael Lewis, of Liar’s Poker, writes in The End (Portfolio.com, 11 Nov 2008) about a few who did see the emperor had no clothing.

Could large law firms meet the same fate? Nonsense! That’s what most said about the now defunct or bailed out financial titans.

Here’s a scenario: Fortune 500 general counsels decide suddenly that AmLaw 100 brand names are not worth the premium so shift huge chunks of work to “lesser” firms. Impossible? Before dismissing this, read Rees Morrison’s Why Law Departments Should Beware Super-Sized Firms or Ben Heineman’s Big Isn’t Always Better (Corporate Counsel, Nov 2008) .

If you are friends with any associates laid off from large law firms, point them to Legal OnRamp for networking and resources. 

Legal OnRamp (LOR) is a social networking site exclusively for legal professionals. LOR is primarily for inhouse lawyers but is currently inviting laid-off associates to join. Once online, they will find a career center with a resources, job listings, and networking. Applicants should indicate the firm from which they were laid off.

Getting the word out about this offer is a good occasion to comment on social networks. I’ve been on Linkedin from very early (among the first 50k to join) and joined Facebook and Twitter this year. So far, I see a lot more value in LOR - which is vertically focused - than these other networks. That said, I continue to spend some time on all the networks to see how they evolve.

I feel a post about Twitter coming on in the near future. By the way, you can see my Tweets, which are mainly professional rather than personal, at http://twitter.com/ronfriedmann. Coming up with a 140-character personal profile is both fun and a challenge.

I am at the ALM / Incisive Law Firm Leaders Conference. This session is the Growth Strategies for Success. Here are real-time notes. 

Panelists:
- Aric Press, Editor in Chief, The American Lawyer [moderator]
- Francis Burch, Jr., Joint Chief Executive Officer, DLA Piper, LLP
- Steven Nataupsky, Managing Partner, Knobbe Martens
- Greg Nitzkowski, Managing Partner, Paul, Hastings, Janofsky & Walker LLP

Francis Burch remarks

• Easier to grow by mergers than by acquisitions of groups, and less expensive
• DLA has been “following the money”
• DLA pay attention to what clients do and what they are likely to do and position the firm to the evolving client. This is different than listening to what they do because what they say and what they do is different.
• Lawyers don’t want to take risk until they have to; once they get to this point, the risk - return trade-off is not good. We are therefore very direct about risks and rewards. “The time to trade is when the currency is high.” Heller Ehrman is the example - it could have been part of a very powerful law firm. Not clear why they did not move when the value of their currency was high.
• We have 120 lawyers in Mideast today; zero two years ago. This is most dynamic market in world right now. If we were still just Piper Marbury, we would be reading about Mideast, not operating there right now.
• Pre-merger, Piper assessed itself. Had an uncharacteristically good corporate practice for a firm of its size and had anchor client in Alex Brown & Co. Being at bottom of AmLaw 100 was good for a Baltimore firm. But we did not think we could continue to play the same game successfully. Maryland companies were being acquired and we could not compete up for the work with the new parents. Being a regional firm would not allow success in future. Technology was driving much growth. Looking at these trends, we decided we had to change dramatically and that we had to move before everyone else figured it out. We understood that incremental change was not enough. Is skeptical of idea of “vision” but firm articulated the position the firm would like to occupy. Wanted a credible but aspirational plan. Firm outlined a 2-page plan that the firm still follows today. In this process, we are very explicit with partners about risk.
• We think that with global scale and scope of many transaction, only large firms will get the representation. We have achieved the scale we need to serve global clients. Our goal was not size for its own sake but because it’s required to serve global clients and remain competitive. AmLaw 100 data show that the biggest firms have done best. Plus, our diversification mitigates the risks of changing market conditions and provides better stability in revenue base.
• Thinks that having multiple related legal entities under one brand is necessary and inevitable in global law firms, so long as they are operationally integrated.

Steven Nataupsky

• We have prospered and grown by keeping our focus on IP only. Within this sphere, there is a lot of diversification across industries. Plus prosecution and litigation do not move together.
• We offer a structure dramatically different than other partnerships: we are lock-step for partners. We don’t track originations, we don’t track office profitability. We track only that lawyers bill at least 1640 hours. That’s the only metric. So how do we keep our stars? We need to keep people who believe in our systems. So we hire only a lateral every couple of years. We lose less than one partner per year. So we mainly grow organically.
• Our new lawyers are older on average because they have advanced degrees beyond JD. We can select out those that do not fit with our culture. For example, we have a large group of lawyers who meet 530am every morning to surf. So lifestyle helps sell our brand.
• At five years, lawyers became equity partners. All partners meet monthly and vote on a range of issues regularly. This instills a sense of ownership, engagement, and pride. This helps retain people. Our attrition is typically 4%.
• We intentionally keep our starting salary at $10k below market. This helps us make sure lawyers who join us buy into our vision. This helps self-select for the balance we want.

Audience Q&A

• How should firms match structure to their vision? Burch of DLA thinks law firm structure needs to change materially in near future. “Look out the window” and it’s clear. We need to borrow less, have more paid-in capital, retain more earnings, have a more equity focused partnership, have a smaller base of pyramid, use more contract lawyers [he may mean staff lawyers?]. Clients will demand that we disaggregate services. All the basic work needs to be done by people other than our core lawyers. We will see a radically different business model. This means big change.
• Given size of US law firms, why are US law firms smaller than their peers in UK. Why aren’t US law firms bigger? Ansers: consolidations is occurring now.

I am at the ALM / Incisive Law Firm Leaders Conference. This session is the Passion, People and Principles: Building Success from the Bottom, a presentation by well-known consultant David Maister. Here are real-time notes. 

It’s one thing to set a strategy, it’s another thing to execute. We can know what’s good for us, we can know how to do it, but yet we still don’t do those things. So most law firm strategic planning is a waste of time. Law firms can do the analysis, but will they take the action it implies? If it’s hard for individuals to do hard work today for benefits tomorrow, can institutions do so? The problem is that benefits don’t correlate linearly with the effort expanded. You have to take all the actions to get results but most people become discouraged along the way.

So what distinguishes winning law firms from the others? The competitive drivers are: drive, determination, discipline, energy, excitement, enthusiasm, engagement, passion, and ambition. Can better hiring provide these attributes? Not really, leading people is very hard.

Consistent excellence in serving clients is the key to profitability. The only way to achieve this is to generate enthusiasm, energy, and excitement in the troops. And the only way to do this is to manage the troops so that they are doing excites them.

If you divide partners into dynamos, cruisers, and losers. Dynamos are those who know what they want to next and who work to long-term goals. They actively build their own future. Cruisers are the ones who do the work and do it well, but they don’t have a personal plan for their own career. Losers are doing neither; they are not meeting the basics. Audience agrees that the dynamos are at most 20%. David says strategic plan is meaningless if only 1 in 5 partners know where they want to go. Management’s challenge is to help make more partners cruisers.

How many firms choose practice group leaders (PGL) based on their interest and passion on helping others and leading. He finds that 90% are chosen because they are stars in doing work, not for any people skill. Moreover, most firms don’t evaluate PGL on basis of group performance, so most focus on their individual performance. So firms don’t choose the right PGL and then evaluate them on the wrong basis.

If you want an effective practice group, you have to evaluate the leader based on group performance. It’s easy to do this: evaluate leader based on total hours and profits of the group. If the leader does not like this, he or she should not be the manager or leaders.

An effective leader does not expect perfection. She seeks year over year performance improvement. If the only attribute that a firm cares about in leaders is billing hours, then “I quit” - don’t bother trying to improve the firm. Real management means helping people do their work and fostering collaboration. This helps ensure quality work and service. In turn, that means happy clients and repeat business. And that in turn results in higher profits. But all of this is already in every law firm strategic plan. Law firms, however, don’t have the guts to enforce what they say. Management goes for volume (hours), not standards. Managing people for performance require selecting managers who want that job, who will help everyone perform, and who will encourage others’ performance. If law firms focus on management, standards, and fostering enthusiasm, the profits will follow.

I am at the ALM / Incisive Law Firm Leaders Conference. This session is the The Current State of the Legal Profession. Here are real-time notes. 

Panelists:
- Richard Rosenbaum, Greenberg Traurig, LLP
- Dan DiPietro, Client Head Law Firm Group, Citi Private Bank
- Aric Press, Editor in Chief, The American Lawyer

Opening Remarks by Richard Rosenbaum:

• Sloppiness in management works during the good times. Now in the bad times, the problem shows.
• Too many firms follow the pack in opening new practices instead of anticipating future client needs.
• Is money the only organizational glue that holds together some firms today? Recruiters will tell you that many groups have been at the firms only a short time. What will happen when the money is not as good?
• The idea of merger as the savior of firms is not the answer for most firms, especially in this cycle. Too many firms have protracted discussions, which then break down, and then partner groups splinter off. Expensive leaseholds will be a problem in mergers because firms will want to avoid that overhead commitment.
• Management always need to focus on minding the business. That just becomes very apparent in tough times.

Conversation between Dan DiPietro and Aric Press (and potentially audience): Dan and Aric have identified several questions to discuss.

What lessons do we learn from 2000 to 2007 that will help law firms cope with 2009?

• This period characterized by aggressive growth and rate increases, with control on expenses
• Partners see an 11th commandment that equity partners per profit should grow by 10% + per year.
• The good news, however, masked the gathering storm clouds. First, growth in per equity partner profit was dramatically slowing growth in the number of equity partners. You can only do that once. Second, expense began to grow, mainly in rising associate salaries. Third, leverage changed: post-2000, leverage increased. This works when demand is strong but is bad when demand shrinks. So firms go into current downturn with higher leverage. Leverage also became more “top heavy,” meaning that the numbers of income partners and counsel increase disproportionately. This groups has not been as productive (that is, they have billed on average 200 hours per year less than other lawyers). Fourth, profit gap across firms grew noticeably. That was not a huge problem with profits going up all around. Now, this disparity will be a problem
• Aric: from my conversations with law firm leaders, I see that many firms are preparing for very tough times, eg, not making any new partners

How different will 2008 be from 2007?

• Rates did not to go up as fast.
• Some practices disappear.
• Partners will still make healthy profits.
• First six months of 2008 has weakest revenue growth in this decade. Expense growth is significantly higher than revenue growth. So margin compression is significant. This is all demand driven - demand is falling, gross hours are falling. The old cliche that law firms are recession-proof has been de-bunked.

Which firms will get hit the hardest?

• The most profitable firms will be hit the hardest. Top tier was driven by Wall Street practices, so not surprising, with economic disruption, that these firms would be hardest hit
• But Main Street firms will be hit too in near future
• The increase in associate salaries has not bought large firms much. Loyalty and retention are not up. Firms need to consider how they manage their labor costs.
• Firms have a chance now to align associate compensation with performance instead of following the traditional lock-step model. This would help with margin compression

Is a global footprint making a difference in 2008?

• It looks like yes, especially for the leading UK global firms. It has taken a long time for UK firms’ investment to pay-off. These are firms with roughly 2/3 of their lawyers outside of London. Last year, for first time, more than 1/2 their revenue is non-UK.
• But London firms face big challenges because of financial market turmoil. The global platform may not suffice to hedge against the local problems. But the UK firms are better hedged than US firms. Us firms have a much smaller “hedge” outside US.
• Citi tracks global, international, national, and regional firms. Global firms have outperformed the others. Some of this driven by exchange rates but much by demand outside of US. This year, however, the picture is more nuanced. Firms doing business mainly in US, UK, and Europer ("international” firms) have not done as well as those truly global (with offices in Asia). But now, the slowdown appears to be truly global, so a global footprint could end up hurting firms near term. But the solution to the problem - a coordinated global regulatory response and changes in how M&A will work - will make the global footprint much more valuable going forward.

Q&A

• How should firms view alternative staffing models?…. Some firms have used contract lawyers to grow their businesses. This trend will increase in importance. Reliance on temp lawyers eliminates need to invest in space, technology, and headcount. It provides more flexibility. Properly done, not only will law firms but also clients, will want to rely more on flexible resources.
• Contract attorneys and others “off track” will grow beyond litigation. Some firms will use non-traditional staffing models for lower margin practices. There are several “off track models” (ways to employ lawyers other than supposedly partner-track associates)
• Firms that can go to GCs and say, “we can disaggregate our services to apply different cost resources to different parts of your problem” will be the ones that win. this includes offering up services in India. Applying the right resources at the right cost to different elements of the work will be the most valuable offering.
• If there are some permanent trends to emerge from this crisis… One big one will be clients taking greater control of their matters… If you accept that you need to be more responsive to clients…. If you believe that top quality means the ultimate competitive factor is controlling delivery costs… How do you think most firms are set up to delivery high value service and to respond to these trends? Also, would you undo some recent trends if that were possible? In a lot of matters and for a lot of clients, controlling cost is paramount but there is still an elite group of matters (e.g., investigations), where litigation budgets still will not matter very much. But many firms have grown so much that they really cannot focus on this sweet spot. So some larger firms find that they have to compete on cost. But surveys show that while GC complaining is universal, their will to act, to change, to exercise control is far from universal. Many clients are not willing to act on costs if they get decent service and results. If you look at the current crisis, clients have had a flight to quality (that is, high price firms). So cost-sensitivity may not be as acute as some think or say.
• If firms do anything different this year, they should go talk to clients. It’s surprising how few firms - in spite of all the talk - actually talk to clients.

Should serious professionals be present on the web? 

This morning I talked to a friend about Linkedin. Neither of us have found it incredibly useful yet but we both view it as (1) an option for future value and (2) an easy and professional way to let the world know about you.

Discussing this, I realized that I still regularly come across people about whom it is very hard to find any information on the web. This is not true for lawyers, almost all of whom have firm website bios. For law firm management and legal vendor professionals, however, I often have a hard time finding any information about them.

Granted, with my 5+ years web presence, I have views. But have we reached a tipping point where we should be suspicious if a 35+ year-old professional is hard to find on the web? No web hits suggests a certain lack of involvement - no participation in professional, community, or political events and a conscious choice not to share credentials with the world.

One measure here is the “mom yardstick.” My 82 year old mother has several hits on the web because of contributions she’s made or community activities in which she’s participated. So when I look for information about professionals and find nothing, I just have to wonder.

Of course, danger lurks in the opposite direction. Stories now abound of people who post too much and too revealing information and live to regret it. A bad profile is one thing, a low profile another. No profile on the web may be just as revealing in an unintended way.

When the AmLaw 100 list came out last month, I wrote that CIOs who want a strategic role must understand law firm economics and where their firms sit in the pecking order. 

On Friday, the American Lawyer, in the June 2008 issue, published its Am Law 200 article and rankings for 2007. The article is chock full of data and comparisons to the AmLaw 100.

Update - Sponsored Link (12 July 08): Click here to buy the 2008 AmLaw 100 downloadable file.

In this Roundup, cost savings from offshore document review, b-school training for lawyers, EDD convergence, and an example of open source law. 

Offshore Document Review
Tusker outsources to India; $25 an hour for an attorney (Austin Business Journal, 18 April 2008) reports on an offshore document review that saved between 80% and 90% relative to the cost of an onshore review. These savings enabled a small company to take on Dell Inc.

Law Firm Leadership Training Spreads
Over the last few years, numerous national law firms have partnered with leading business schools to provide business training. This trend appears to be moving beyond major metro areas. Columbus law firm joins forces with OSU to create leadership course (Columbus Business First, 11 April 2008) reports that Ohio State University has “customized [a] new leadership development program” for Bricker & Eckler.

E-Discovery Convergence
Information Week (21 April 2006) reports in Oracle’s E-mail Organizer that “Oracle is moving into e-mail archiving [which] let IT managers organize, archive, and search e-mail from Microsoft Exchange, IBM Lotus Notes, and SMTP-based e-mail systems.” [See also Oracle Universal Online Archive.] With this type of functionality, corporations should be able significantly to reduce e-discovery collection and processing costs.

Open Source Law
I recently learned about The Online Compliance Consortium in the article Online AML Compliance in Managing Partner (March 2008). The OCC web site home page states “The purpose of the OCC is to help establish best practice and standards for larger law firms in the arena of compliance and specifically compliance training. Founded in 2004 through the collaboration of 14 of the UK’s leading law firms the Online Compliance Consortium has now grown to include over 70 the world’s largest law firms.” The article suggests that the group was formed by leading law firms to “share their experiences and concerns to create a common standard and a portfolio of training programmes for compliance.” Sounds like open source law.

Goodbye Law Office Computing magazine. 

I have subscribed to Law Office Computing magazine for some time. On Tuesday (8/15/06), I received a letter from Small Firm Business magazine, an ALM publication, stating that ”Law Office Computing will no longer be published after the June/July issue.”

I will miss LOC. Though it appeared targeted more toward small- and medium-sized law firms, I found its news and features of interest, even with my BigLaw focus. The May/June issue of Small Firm Business that came with the announcement letter and which is offered as a substitute looks nice, but it’s not technology focused.

The LOC website makes no mention of its seeming demise. But the James Publishing, Inc. web site, publisher of LOC, no longer lists LOC.

I have been remiss in not reporting sooner recent legal technology articles on knowledge management, blogging, and business intelligence.  

KM. Law firms reinvent KM in KMWorld provides an excellent account of KM at one-half dozen large law firms (as reported by, among other bloggers, Excited Utterances).

Blogging. The current issue of Law Practice magazine is largely devoted to blogging, carrying several useful articles. Alan Rothman, relatively new to the blogosphere, posts about this article and asks some interesting questions about the future of legal blogging, including whether blogs will “become certified continuing legal education provider-channels and/or will existing CLE providers adapt blogging tools to reformat and distribute their courseware” and could “a specialized search engine dedicated to the legal blogosphere alone potentially develop into a legitimate legal research tool?”. I previously touched on the second question in my ”Disintermediation Redux” post.

On the topic of blogging, I also found Washingtonpost.com Launches RSS Advertising of interest in the development of blogging. Anyone who reads my blog from its home at Prismlegal.com will see ads associated with the blog fed by the ALM network. Anyone reading my blog via an aggregator will not. Embedding advertising in blog feeds via RSS (really simple syndication) is an emerging trend.

Business Intelligence. Bryan Cave CIO John Alber has written a fascinating article on his firm’s development and use of business intelligence software. He explains that it’s not enough to have a time and billing system or typical financial reporting. Developing actionable information for partners to make the right business decision requires a lot of data massaging and presenting the results meaningfully. Using examples from his firm, John illustrates the power of good BI.

Drum roll please…. ALM (formerly American Lawyer Media) will soon release the AmLaw top law firm ratings for 2004. Read on for a preview. 

Five Am Law 200 firms posted gross revenue in excess of $1 billion in 2004, the largest number ever. The preview of the top 10 firms is here. ALM has provided the preview to this and other blogs in its blogging network.

Some quick (and unrelated observations):
1. Though it may be big news in the legal market that five firms now generate annual revenue greater than $1 billion, that level is relatively small still by corporate standards.
2. To the best of my knowledge, recent mergers have not changed the top-10 rankings. A couple of firms in the top 10 did merge - Sidley Austin with Brown & Wood; Mayer Brown with Rowe & Maw - but that was a couple of years or more ago if memory serves.
3. Anecdotally, I would say that all of the top 10 firms have decent or better technology. I am not sure that would have been true 5 or 10 years ago.

I am often surprised that I have never found a web site with a comprehensive set of links to legal technology resources. I have taken a very small step in this direction. 

Over the weekend, I updated my ”Useful Links” page and organized into Publications, Conferences, Other Resources, and Surveys. It is by no means comprehensive; rather, it reflects those resources I think are particularly useful. One reason it is short is that I do not link to vendors from this page.

I’ve undoubtedly excluded resources others find valuable and am happy to receive suggestions using the comments link below or here privately.

I have previously written about the relative scarcity of large law firms blog. This week, another large law firm has launched a blog. 

The Antitrust Review Blog by Sheppard Mullin covers, as the name suggests, antitrust developments. The blog is attractively designed and the entries appear quite substantive. In addition to topical articles, separate links on the left lead to updates by agency.

As I have indicated previously, blogging by law firms seems a no-brainer to me. Firms already generate content and send it to clients. Blogging that content makes it more accessible and provides a way to monitor hits. Until not that long ago, lawyers scoffed at the idea of a firm brochure. Now, it is commonplace. In my view, the question about blogs and large law firms is not if, but when.

The legal market is consolidating yet again. Well-known consulting company Hildebrandt is now part of the Thomson organization. 

According the Hildebrandt press release, “Combined, Hildebrandt International and Thomson bring unrivaled industry insight, client knowledge and consulting expertise, providing exceptional management, organizational and technology advice and services to the legal profession.”

It will be very interesting to see what impact this merger has on legal technology coming from Thomson. Thomson already has excellent insight into the legal market, but now gains even deeper access, not only to IT and legal research, but also to top level law firm management.

Harvard Law School is searching for a new CIO. Will a premier law school have an impact on legal technology? 

I think not; the academy seems disconnected from the real world in my experience. One of the qualifications listed in the job description: “Very strongly preferred: experience in higher education; knowledge of educational technologies; teaching experience.” If a law school were interested in teaching students about technology of value to practitioners, it would be prudent to include in this list knowledge of or willingness to learn about practice technology. If Harvard Law has any interest in the practical and practice aspects of legal technology, I do not see it reflected in the job description.

Interestingly, however, another qualification is a preference for “superior record of leadership with business partnership orientation.” It will be interesting to see if Harvard partners with businesses on the tech front. How about a partnership with a large law firm to make the education more relevant to the real world?

(At the risk of editorializing - and this is a blog after all…. I attended a “national” law school and am firmly of the belief that law schools can be more practical without impinging on what they view as their core mission. I actually believe law school only needs to be 2 years. If the academy insists on 3, at least let them do something practical.)

Spotted on Rick Klau’s blog, another major acquisition in the legal market. 

LexisNexis has announced it is acquiring Interface Software, Inc., makers of Interaction software, a client relationship management system (CRM) widely used by large law firms.

Over the last few years, both LexisNexis and Thomson Legal and Regulatory (parent company of West) have acquired several software concerns. It looks increasingly like both companies are bulking up. It’s not clear yet how this will play out in the future. Combining multiple products under one roof presumably offers benefits to the acquirors, particularly the potential to cross-sell and to reduce overhead. The benefits to law firm customers is not as clear. Is it a single point of contact for multiple products? Is it integration of products? Lower prices? System-spanning content or taxonomies?

It will be interesting to watch the legal software market evolve. If nothing else, perhaps such acquisitions will continue to inspire entrepreneurs and innovators because acquisitions like this provide an exit strategy.