Strategic Legal Technology

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.

Raise your hand if you’ve read the TREC 2008 Legal Track study released in March. TREC is a great project to help legal professionals understand the accuracy and process of document review. To improve doc review and gain the value of this on-going study, however, TREC organizers and the legal profession need more dialogue. 

Background and Articles about TREC Study. The TREC study “focuses on evaluation of search technology for discovery of electronically stored information in litigation and regulatory settings.” Two recent articles help explain the TREC study and its importance. TREC 2008 Stresses Human Element in EDD by Jason Krause at law.com (1 May 2009) does an excellent job explain the TREC study. Krause also authored another article about TREC, In Search of the Perfect Search in the April 2009 ABA Journal.

The Study is a Hard Read. After the release of Overview of the TREC 2008 Legal Track, it generated little immediate discussion in blogs and at Twitter. The limited coverage is not surprising; I found reading it a tough slog. At risk the risk of being immodest, I have a good background to understand it: lawyer, 20+ years experience with full-text retrieval, three years of college majors-sequence math, and four years of hands-on econometrics experience. So if I have trouble understanding the report, that does not augur well for other legal professionals. It’s a tough read for three reasons: (1) long, (2) academic, and (3) too much passive voice, which makes understanding who did what hard. So I was glad to see Kruse’s articles.

TREC “Interactive Task” Focused on Replicating Decisions of Experienced Litigator. The part of the study I found most interesting focuses on how best to automate or replicate responsiveness decisions an experienced litigator would make. This was the TREC Interactive Task in contrast to the Ad Hoc and Relevance Feedback tasks. The study “gold standard” was the document designation a “Topic Authority” would make. “Gold standard” is a term of art that means the best-established or best-accepted solution. “Topic Authority” means an experienced litigator who best understands the facts and issues of the case and who, time permitting, would personally review all the documents. Topic Authority seems a variant on the more generic “domain expert” or “subject matter expert”.

Potential Issues with “Gold Standards”. The TREC study assumed that the Topic Authority’s judgment is the gold standard. More on that in a minute. Contrast that to the apparent assumption many litigators make. In a March 2007 blog post, The Gold Standard for E-Discovery Document Review , I wrote

“Many lawyers appears honestly to believe that human review is accurate, the “gold standard” for document review. “Honestly held” and “right” can diverge. I, for one, have never seen data to support the commonly accepted “gold standard.”

My concern then was that too many lawyers seem ready to dismiss software designations of documents in favor of lawyer designations, even if the lawyer has no case-specific know-how. I might accept the Topic Authority’s judgment as the gold standard but I don’t accept any old lawyer’s judgment as such (especially not a contract lawyer new to case who might have had only an hour or two of training about the matter).

Even the Topic Authority as Gold Standard raises issues for me. The accuracy and reproducibility of Topic Authority review has not been established. That said, it is not clear what standard is better. On the one hand, this standard acknowledges we must rely on the subjective opinion of an expert. On the other hand, reasonable experts can and do disagree. In contrast to doctors conducting clinical trials, lawyers cannot establish an objective and reliably reproducible standard. This conundrum is perhaps best summed up by the TREC Topic Authority, Maura Grossman, quoted in Krause’s law.com article:

“The decision process that determines what is responsive, and therefore what must be produced, is inherently a task involving human judgment. The concept of responsiveness in e-discovery is not an objective standard, it is ultimately a judgment found in the senior attorney’s head.”

TREC Compared How Closely Different Approaches Came to Replicating Human Judgment. The study examined how accurately different teams – where a team could be human or software or both – came to replicating the Topic Authority’s judgment. Each team had an opportunity to interact with the Topic Authority to refine or tune its approach. After all teams finished the review, researchers compared doc designations and, where results differed, set up an “appeal process” to decide on the correct designation.

I think it would be helpful to consider explicitly how Topic Authority judgment variability might influence thinking about e-discovery issues. We have no data on whether similarly situated Topic Authorities would agree on most document designations. (My doctor friends tell me that in clinical trials, this is the inter-rater variability problem). For example, suppose a future study employs two Topic Authorities per topic and finds a 20% variance in doc designation between them? We need parameters around the variance among Topic Authorities otherwise comparison to software approaches seem suspect. More specifically, if software approach A compares well to Topic Authority A and software approach B compares well to Topic Authority B but A and B vary by 20%, what does that mean? If the variance were under 5%, I think everyone would agree “so what.” If the variance exceeded 25%, I think many would find that troubling.

Conclusion: Need More Dialogue to Make TREC Useful to Legal Professionals. The potential variation among Topic Authorities notwithstanding, TREC offers what may be the best possible approach to evaluating the reliability of alternate approaches to document designation. The study as it stands, meaning a rather academic work, may not provide enough guidance to real-world lawyers, e-discovery professionals, and perhaps most importantly, judges. That said, I think that TREC could be instrumental to the future of EDD. Having a disinterested but highly knowledgeable third party evaluate alternative approaches based on scientific principles (meaning based on valid statistics and reproducible) is the only way to establish reliable standards.

To achieve traction in the real world of EDD, the profession needs to discuss the TREC theory and findings more widely. Organizations such as EDRM and the Sedona Group, which are already deep into e-discovery, have the potential to help digest, explain, and disseminate the findings in a way that make the work more relevant to everyday practitioners. A dialogue with practitioners would not only inform litigators and EDD professionals how best to use study results but might also influence study design to make it more useful to the legal profession.

[Note: I want to express my appreciation to Nicolas Economou, Sandra Song, and Dan Brassil of H5, who helped me parse out some of the finer points of the study.]

Signs of Innovative Life in the Practice of Law in the April issue of Law Practice Management magazine offers multiple authors’ ideas on innovative ideas for law firms. Here, in slightly edited forms, are the two two items I contributed, one on legal outsourcing, the other on working virtually.  

RETHINK ON-SITE STAFFING

Think about the vast “Middle Office” of BigLaw – all the work required to run a law firm that is neither law practice nor entirely routine back-office support (e.g., copy center, payroll, or plant watering). This includes secretarial support, IT, marketing, finance and accounting, HR support, and business research.

I’ve seldom heard of firms consciously deciding (1) the level of support they should provide and (2) how best to provide that support. Headcounts by function seem artifacts of history and management idiosyncrasy. For example, I know of firms where the lawyer to secretary ratio ranges from about 2:1 to 6:1 and IT spending as a percent of revenue from 3.5% to 7%. It’s hard to explain these big variations, especially in otherwise similar firms.

I fear that the tough economic times will compound the irrationality. Your firm may have laid-off lawyers and staff. Has it used the crisis as an opportunity to re-think and rationalize support? Probably not! Why not improve long-term performance while you reduce costs short term?

Consider what a few innovative firms did even before this crisis. These leaders consciously decided to re-tool lawyer support. Orrick opened a global operations center in low-cost West Virginia in 2003. Some British firms moved back-office operations to India around 2005. Top 30 UK firm Osborne Clarke outsourced much of its Middle Office to legal outsourcing company Integreon early in 2009 (See the OC press release).

Now that we are in a crisis, your firm should think hard about the support your lawyers need and how best to provide it. If your firm operates multiple offices, you cannot win the argument that support staff must be in the same building as lawyers. Once free of the “same building” shackles, think creatively about support. Perhaps it makes sense to centralize some functions in one office. Or perhaps you can rid yourself of the headache of owning and operating large teams and let an outsourcing company do it for you.

If you not yet analyzed what support to provide lawyers and how best to do so, now is the time to act. You may find, centralizing, offshoring, or outsourcing provide the support you need at lower cost.

OPTIMIZING VIRTUAL COLLABORATION

Five years ago I wrote an article in Law Practice Management on “working virtually.” Some firms, typically smaller ones, are finally beginning to adopt this model. Will their BigLaw brethren be smart enough to learn the same lessons?

Most lawyers believe the myth that they must work in close proximity to collaborate and sustain their culture. If you tell clients that your firm assembles the best team across all your offices, how can you argue that lawyers must show up in downtown offices? Their colleagues may well be in other cities. As for culture, notwithstanding Woody Allen’s remark that 70% of life is just showing up, simply being in the same place is neither necessary nor sufficient.

I’m not saying do away with downtown, central offices. Instead, firms can offer the option to work at home or in a low-cost suburban satellite office part of the week. This reduces both lost commuting time and the carbon load. Have lawyers come downtown when they actually need collaborate in person. Wow, what a concept: scheduling time for real collaborate instead of pretending it just happens every day. Firms that do so likely will find that sharing offices downtown becomes viable, which can dramatically lower occupancy cost.

Of course, in the current crisis, firms are shrinking, not growing. They are retaining too many lawyers, not losing enough. So the need for space or to accommodate demands for work-life balance may seem remote. Yet now is exactly the right time to make difficult changes. A firm that set out now to optimize how and where its lawyer work and says what it is doing publicly signals clients and recruits that it’s in business for the long term. Most importantly, it would be better-positioned for the inevitable economic turnaround.

Think you have nothing to worry about by ignoring this? Some large firms do allow this flexibility already. And some start-ups are built on the idea of working virtually, for example, Virtual Law Partner, LLP in the US and Optim Legal in Australia.

A recent law suit contends that a law firm’s online research client charge-backs are unlawful. This hints at the bigger issue is what should be overhead and what should be a charged to clients. 

Carolyn Elefant writes in Law Firm Markup of Research Costs: Annoying or Unlawful? at Legal Blog Watch about a plaintiff who “claims that that Chadbourne [wrongfully] charged him $20,000 for computerized legal research services that actually cost the firm only $5,000.” She cites an NLJ article and links to and discusses several blog posts commenting on the article.

I think this suit and her post raise two questions:
(1) What should law firms bill back to clients and
(2) If a service is billed back, how should the rate be set.

My answer to the first: firms charge for whatever they can easily meter. Legal technology - online research, fax, phone, copiers - all come with built-in metering. Books, the library itself, space to store client documents, and circulating periodicals do not. Paralegal work is easily metered; secretarial work is not. (Firms may have missed charging for secretarial time working on documents, which the DMS can meter.)

The second question is harder to answer because it turns on how one interprets the Canons of Ethics. In the past, clients voiced discontent about fax and copying as profit centers though I don’t know if that ever translated into a lawsuit.

Three interpretations of this situation come to mind. Law firms
(1) work hard to allocate costs fairly to clients
(2) are randomly managed and lack a coherent vision of their core business, or
(3) are opportunistic and mercenary.
Am I missing potential explanations?

ILTA’s knowledge management peer group hosts a webinar on June 8th called “Where Is KM Now and Where Is It Going?" 

The topic will cover the current state of KM and its possible future direction in the context of the global economic crisis. This is a basic to moderate webinar for Knowledge Managers, Practice Support Attorneys, and IT Directors. Where Is KM Now and Where Is It Going? registration page.

Speakers:
- Stuart Kay, Director, Global Business Systems, for Baker & McKenzie
- John Gillies, Director of Practice Support at Cassels Brock & Blackwell
- Wendy Small, Head of Knowledge Management, Eversheds LLP.

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?

Incisive Legal Intelligence (formerly ALM Research) recently released a legal outsourcing study. I thought The Law Deparment Legal Outsourcing Study, 2008 would quantify the rapid growth of legal process outsourcing (LPO). 

In fact, it focuses exclusively on law departments outsourcing legal work to law firms. Incisive found that general counsels (GC) outsourced 40% of legal spend in 2008, down from 46% in 2007. The study does not quantify other law department outsourcing such as e-discovery.

With GCs outsourcing almost half of legal work, why do some seem nervous about legal process outsourcing? Many lawyers conflate “outsource” with “offshore”. Offshore is a fine option but several reputable LPOs offer onshore service as well. Perhaps GC misgivings are more about the type of resource than the location. Other than inertia, it’s hard to understand GC reluctance to expand the already broad scope of law department outsourcing by deploying more LPO services.

Law departments can reduce costs by explicitly acting as general contractors to solve company legal problems. Like any GC (general contractor that is, not general counsel), a law department should consider what resources it employs full time and what it sub-contracts. With this mindset, law departments would select a broader range of resources that better meet corporate objectives. As I explained in my post The Right Resources to Solve Legal Problems (May 2008), law departments should think about the complexity and volume of work in a 2-by-2 grid and choose the most appropriate resource.

Delegating resource selection decisions to law firms means missing out on cost savings. Aside from the usual economic conflicts inherent in an hourly billing and cost pass-through system, GCs likely have more bargaining power than their firms. Law department management consultant Rees Morrison notes in Three reasons why legal departments are better positioned to negotiate arrangements with suppliers (15 April 2009) that
(1) GC have more bargaining power than law firms,
(2) GC are more motivated than firms to save money, and
(3) GC can provide better direction to sub-contractors than can firms.
Morrison’s blog post further supports the idea of GC = “general contractor” as well as “general counsel.”

A general contractor approach to meeting corporate legal needs is one of the easiest and least painful way to get more bang for the buck.

[This post adapted from a similar entry I wrote for the Integreon KPO and LPO blog.]