Strategic Legal Technology

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 International Legal Technology Association’s Knowledge Management Peer Group is conducting its biennial knowledge management survey to probe the trends, hot topics and development of KM in the legal industry. 

Survey results will be published in the KM White Paper, scheduled for June. ILTA encourages all legal organizations to submit survey responses. The 30-question survey will take about ten minutes to complete. ITLA wants only one response per organization, so you should make sure the most appropriate person in your firm, department, or organization completes it.

As an incentive to participate, ILTA will draw three names from respondents –– two winners will receive $500, and a third will receive his/her choice of $500 or a waived registration fee for ILTA 2010, the annual conference (a $1,025 value).

To take the ILTA 2010 legal knowledge management survey, click here.

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.