Strategic Legal Technology

Can Wall Street work its magic to reduce legal risk and cost while earning healthy returns? 

Three related themes dominate recent financial news:

• Bundling Assets: investors reduce risk by buying aggregated individual instruments.
• Uncorrelated Risk: investors want asset classes that do not move together.
• Higher Yields: too much liquidity means low yields; many investors put some money in high risk – high reward instruments.

In the 1980s Wall Street invented bonds backed by portfolio of individual mortgages. From these “collateralized mortgage obligations” (CMO) have sprung many similar investments.

Consider the possibility of collateralized legal obligations (CLO). Growth in e-billing provides a rich data source. These data, if aggregated across companies, could enable analyzing litigation risks, costs, and outcomes. By measuring and predicting risk and bundling pending suits, it might be possible to create a portfolio investment.

Companies could hedge legal risks by pooling them. Investors would pay premiums that let them gamble on portfolio outcomes. “Gamble” here is a good thing – liquidity and risk management. Bundled litigation risk may be no less predictable than the weather some investors already bet on.

CLOs would offer general counsels a risk management tool and investors a high risk/reward opportunity uncorrelated with other market risks. So why not apply Wall Street techniques to manage legal risk? If the dollars are there, the ethics issues can be addressed. Comments to clo at prismlegal dot com

Non-practicing lawyers as managers is a fairly recent trend in large law firms. 

Last week, Clark Cordner, Director of Client & Practice Services at WilmerHale, and I explored the role of non-practicing lawyers and “start-up” teams at the IQPC Law Firm Management Series conference, Law Firm Recruitment & Retention Strategies in NYC. Our presentation is here.

Law firms now hire non-practicing lawyers for jobs old and new, for example, marketing, e-discovery, knowledge management, professional development, and practice support. Among other tasks, they help translate from “lawyer speak” to business or technical terms.

Firms considering a new function often seek a non-practicing attorney to lead either an “incremental” or “start-up” approach. The former entails relatively few resources or commitments. This low risk approach, however, also makes success less likely. The latter is harder because it requires a financial and institutional commitment but is more likely to succeed.

Either way, firms must exercise some caution. First, they must “be careful of what they ask for, lest they get it.” For example, some churn in CMO and CIO positions in recent years likely stems from initial excitement followed by balking when the firm learns what’s really involved. Second, they need to consider how to integrate the non-practicing lawyer and any team reporting to him/her. Thinking this through requires a realistic assessment of a firm’s culture and the strength of its caste system. And third, they need to allocate risk fairly between the firm and the new role: negotiate a graceful exit strategy for both the firm and individual if things don’t work out.

The non-practicing lawyer as manager role is still evolving. That it’s a conference topic speaks volumes about the increasingly business-like approach in BigLaw. But is it worth the investment? Instead of dwelling on ROI, perhaps it’s enough to ask does the person and function “make life a little easier for practicing lawyers?”

Getting customers to drive innovation is a common theme these days. Therein may lay one barrier to legal market innovation. 

Customer-Controlled Innovation by Patrica Seybold in Optimize Magazine (Feb 07) is a good overview of how innovative companies collaborate with customers to transform their product development process.

An unstated assumption in the article is that producers and consumers differ. That’s a good assumption in most markets. But in law, at least BigLaw, what’s the difference between producers (law firms) and consumers (law departments). Not that much. Perhaps that’s one reason innovation is so slow. I can’t think of other markets where the training, personality, and work of producers and consumers is so similar.

Making lawyers more efficient means clients need to be tougher. I was therefore surprised to see one typically tough customer scale back on a recent innovation. 

The headline in LegalWeek.com (2/15/07) says it all: GE to ditch e-tendering to ‘deepen relationships’ in Euro panel review. In my post GE Expands Auctions to Acquire Legal Services (1/20/05) I argued that “as competition and pricing pressure increases, forward-thinking law firms will look more to technology to lower costs and improve their ability to deliver service.”

The article does not explain why GE is dropping the auctions. Presumably it found that auctions did not generate the mix of service and price it expected. I am glad that one big company tried an innovation, even if the new approach turns out not to have achieved success. Companies get kudos for trying new ways, especially if they evaluate results and move on when the new way does not work as expected.

Change is hard. To wit, many lawyers have trouble adapting new technology. A very humorous video provides an enlightening perspective on change management. 

Ernie the Attorney pointed to this hilarious video at YouTube. A must see for anyone who’s ever had to explain technology to someone else. It beats the stories about users thinking a mouse was a foot-pedal or not understanding that the computer needs to be plugged in to work.

One aside here… the video also illustrates the power of story telling in conveying information. “Story telling” is a common knowledge management topic of discussion, though not so much in the legal market. Maybe KM managers need to study video production!

Last week I saw an interesting illustration of one way to make sense of ever-growing data volumes. 

Until the Web matured, just finding data was hugely time-consuming. Today, finding is easy; instead, we drown in Web and enterprise data. The challenge now is to distill meaning - to analyze and interpret.

I previously proposed “legal radar” for general counsel: software that scans blogs to identify emerging legal problems. Last week I saw an interesting demo for sophisticated, off-the-shelf software that does this and more. Datops, recently acquired by LexisNexis (press release), identifies problems and risks via semantic analysis. It classifies blog posts, news articles, and other content as positive, neutral, or negative. Companies can track their reputation, emerging product problems, customers, credits risks, and more.

Several visual interfaces give data meaning. Behind the scenes, the software normalizes multiple sources, extracts entity information (e.g., names of companies or people), summarizes documents, and allows drill down to see what’s behind the visual displays.

This class of software seems destined for wide-spread use by corporate marketing, public relations, credit, and compliance professionals. Inhouse lawyers have an opportunity to reduce both risk and legal service demand. In ten years, we may wonder how we survived just with search engines that merely find but don’t tell us what the results mean.

When I see demos, I usually stick to describing what I saw and my views. In this instance, LexisNexis (LN) explained the company’s strategic goals. Given the important role LN plays in the legal market, I thought readers would be interested as well. LN is moving from an information vendor to a solutions provider, seeking to differentiate itself from content aggregators on the one hand and software developers on the other. Datops will be one part of LN Intelligence Solutions, which will marry Web and proprietary news and legal content with analytical tools. Another example is the acquisition of Interaction CRM software, where LN now adds its proprietary content plus workflow tools to enhance the value of Interaction.

It will be interesting to watch this strategy unfold. Personally, I’d love to see Datops integrated with Applied Discovery EDD tools. I’ve frequently argued that the legal market needs to shift some of the work lawyers now do in reviewing documents to software.

I’ve recently found 3 new tools to improve my personal productivity. 

Today I discuss a cell phone with high speed net access. Future posts will cover new back-up software and a VOIP phone. Large law firms have different options but some readers may find info here useful in their personal capacity.

In January I upgraded from a Treo 600p to Treo 700p on Sprint. Two 700p features boost productivity. A small but noticeable gain is much easier-to-use key-board.

The “killer app” is high-speed connectivity to the net (via “EV-DO"). With it, I retrieve e-mail faster. Moreover, the phone is a high speed modem for my notebook PC. So I can web surf and do e-mail via my notebook, at high speed, wherever Sprint has coverage. (So far, DC, Dulles, Denver, and NYC work well.)

Beyond avoiding the expense and frequent tech glitches of hotel and other wifi connections, I can now easily work while waiting for planes and on the train between NYC to DC (I stayed connected the whole way). You don’t need a cell phone for this benefit - the same high speed wireless connection works via a PC card.

Unfortunately, however, the old adage “no pain, no gain” was true here. I wasted many hours getting the phone to work as a modem. As best as I can tell, Sprint had a problem provisioning the phone on its end. Customer service was friendly but not always helpful.

It’s always good to know what your boss is thinking. Now, BigLaw CIOs can. 

Law Firm Leaders Have Mergers on the Mind in LawFirmInc. (2/12/07) reports on the magazine’s first-ever survey of large law firm COOs. The survey has a very respectable 42% response from the AmLaw 200.

The Year Ahead chart confirms that mergers are hot. It also holds two findings that surprise me: (1) doing more business intelligence ranks closely behind mergers and (2) only 1 firm reports “identifying opportunities to outsource administrative functions” as top-3 priority for 2007. I’ve been following both carefully and would have thought BI a bit less hot and outsourcing much hotter.

The Management Table holds its own surprises: 14 firms added a litigation support department in 2006. Hello, what were they doing previously??? Also surprising is that knowledge management is not on the list. I suspect LawFirmInc did not ask about this, which is a shame.

The legal press buzzes with news about a discrimination law suit between an associate and his BigLaw employer. A development today - destruction of a hard disk drive - offers lessons on both e-discovery and records management. 

Destroyed Hard Drive Becomes Focus of Hearing in Sullivan & Cromwell Suit (NLJ, 2/9/06) reports ex-associate Aaron B. Charney, who is suing Sullivan & Cromwell for sexual orientation discrimination, “recently destroyed a personal hard drive to which he had e-mailed firm documents.” Those documents are a factor both in Mr. Charney’s suit and in S&C’s counter suit for “stealing documents and publicly disclosing confidential information.”

Lesson one: if litigation has commenced or is reasonably anticipated, destroying relevant evidence may be spoliation. The reported facts don’t sound favorable for Mr. Charney.

Lesson two is less obvious. To work outside the office, many lawyers e-mail documents to themselves or copy documents to portable storage media. A records management policy should address this fact. An RM policy here would not change the legal issues. The facts, however, remind CIOs and records managers to deal with document copies outside the walls and firewalls of the office. Absent a digital rights management system or draconian limitations, controlling such copying is virtually impossible. A well-crafted RM policy can at least put lawyers on notice concerning how the firm expects them to manage such copies.

What’s hot in knowledge management? What are some unfulfilled KM desires? 

In 2003, a group of NYC law firm KM professionals assembled a list of 20 useful KM resources and ranked them in importance. The top 5 were:
    1. Precedents
    2. Forms
    3. Experience location system
    4. Taxonomies
    5. Matter database

In December 2006, this group surveyed its own members plus firms around the US, Canada, and the UK. Respondents indicated the degree of actual usage of the top 20 resources - the graph below shows key results. The survey is not representative; it is biased toward firms more interested in KM than average.

The results are a classic glass-half-full versus half-empty situation. For #1 precedents, only 60% of firms have “widely” or “regularly” used systems; for #2 forms, fewer than half have systems. And #3 experience location systems are in wide or regular use in only 20% of firms.

I believe the apparent divergence between the 2003 ranking and the 2006 usage reflects a combination of high aspirations, some false-starts, cultural limitations, resource limitations, and technology challenges. All of the top 5 resources require significant substantive involvement by lawyers. Practice support lawyers (PSL), who support these resources in the UK and Australia and to some extent in Canada, are relatively rare in the US.

Though regular use is lower than I would have guessed, I nonetheless believe that KM is on the upswing. (Regular readers of this blog know that I have been skeptical on this in the past.) On the one hand, the data are the data. Plus numerous firms avoid saying “knowledge management.” On the other hand, even the ones who don’t say KM do it. And I see more firms attending conferences and new groups forming. Plus KM, marketing, finance, libraries, and professional development are converging in some of their interests and goals (especially taxonomies and matter databases).

So for me, the survey indicates both the progress made and the challenge of executing KM the right way. I’ll soon cover some additional survey findings that expand on these themes.

You thought the tech bubble burst a few years ago. Well, some of us who live in a different tech bubble have just experienced a pin prick! 

Last week Cisco GC Marc Chandler gave a speech predicting, in effect, the demise of BigLaw, largely at the hand of technology. Several bloggers have already commented: Carolyn Elefant in He’s Talking ‘Bout a Revolution, the Wired GC in Cisco GC Talks Real Legal Tech, Adam Smith, Esq. in “New Delivery Mechanisms That Will Be Highly Disruptive"–Clayton Christiansen Is Talking To You.

Chandler seemed to be opening the door to legal tech nirvana. Life inside the bubble (to mix my metaphors) is good. I thought about all the great things I could say. Instead, I invited well-known law firm consultant Peter Zeughauser to comment. At my request, he posted on the just launched College of Law Practice Management blog.

The post of his title, Boring GCs, says a lot. I highly recommend you read his entire short but poignant post concerning Chandler’s speech. My bubble is much smaller today but not quite burst.

I have posted previously about the UK Clementi reforms that allow outside investment in law firms. Fellow blogger Adam Smith, Esq. reports that several money sources have recently approached large UK firms. 

His recent post about potential investments in law firms, It’s Happening Sooner Than You Think, notes that “the idea is for investors to have a fixed income” and investors “can make savvy investments in labor, as well, and in developing a cross-border technology and infrastructure platform that can provide lasting competitive advantage to your professionals and your clients.”

Let’s be clear on the dynamic here. Valuing the steady stream of law firm profits is easy because, compared to many other businesses, future profits are much less variable and prone to risk. Consequently, there is little arbitrage opportunity in differing views of the value and an investor would have to boost revenue or reduce costs to see a return. As Adam Smith, Esq. points out, technology supports both. Consider some examples: Relationship discovery, business intelligence, and proposal generators can grow the top line. Document assembly, work force allocation, and work flow can shrink costs.

Unlike existing law firm management, investor-led management would, to make their investment pay off, have to drive technological change. Perhaps forward thinking CIOs should hope for outside investors. And the would-be investors need to assess the CIOs and be prepared to replace those who cannot drive true change.