Done something innovative in the legal market? Then get recognition for it.
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 can apply. Innovation can range from technology, to new business models, to marketing campaigns, to creative office design.
Review the InnovAction web site and consider submitting an application. For more information:
The College of Law Practice Management is accepting entries for the 2011 InnovAction Awards through June 1st at www.innovactionaward.com. Rules and application forms are at http://www.innovationaward.com; .
Originally the award recognized innovation that was “never been done before”. The College felt that such a stringent standard meant we could not recognize the many important innovations that put a new spin or execution on old ideas. The judging criteria are:
- Disruption: does this entry change an important element of the legal services process for the better, and marketplace expectations along with it?
- Value: is the client and/or legal industry better off because of this entry, in terms of the affordability, ease, relevance or its effect on legal services?
- Effectiveness: has this entry delivered real, demonstrable or measurable benefits, for the provider, its clients, or the marketplace generally?
- Originality: is this a novel idea or approach, or a new twist on an existing idea or approach?
If you are fortunate enough to have created a competitive edge, let the world know. But do it by June 1st.
Because I am a Trustee and because I believe in legal innovation, I want to recognize the sponsors who make this award possible:
Practical Law Company
ABA Law Practice Management Section
Attorney at Work
The Canadian Bar Association
International Legal Technology Association (ILTA)
Altman Weil, Inc.
Association of Legal Administrators
Legal Marketing Association
Two mainstream media articles last week illustrate the power of collective intelligence. Both make me wonder whether large law firms take full advantage of their scale.
Herds on the Street (Jonah Lehrer, Wall Street Journal, 19 March 2011) describes how traders at one hedge fund exchanged information with instant messages (IM). With the “the average trader engaging in 16 IM conversations at a time… this ceaseless messaging wasn’t a distraction. Instead, it allowed traders to pool their information” to make more winning trades.
Users Help a Weather Site Hone Its Forecasts (Daniel E. Slotnik, The New York Times, 20 March 2011) reports that a weather channel taps 20,000 amateur-operated weather stations around the world to ‘crowd source’ real-time weather data. With data readings from more locations, forecasts can improve.
Both examples illustrate collective intelligence, one within an organization and the other in the world at large. With social media, such “crowd sourcing” examples abound.
How many large law firms meaningfully access their collective intelligence? Knowledge management (KM) tries to do so with processes, incentives, and systems to capture, share, and re-use know-how. Even successful KM program rarely tap the full potential and many firms lack active KM programs. BigLaw marketing touts its global reach and full service but I cannot recall seeing claims that high lawyer headcounts yield better advice or results. A missed opportunity?
If we could quantify the amount of sharing by firm, I wonder if it would correlate with client win rates - or with firm realization rates. And might we see a big differences that turn on partner compensation? I wonder whether the legal market lags other professions in tapping the collective intelligence of a large organization.
Toby Brown of 3 Geeks and a Law Blog and I consider in this joint post the impact of “Law Factories” on the future of large law firms.
Introduction – by Toby Brown and Ron Friedmann
Law firms face an uncertain future: competitive markets, intense price pressure, and client demands to change. So they are beginning to ask fundamental questions about the nature of their business. These include what shape should a firm be and how will a firm approach this new market? Will firms be “Law Factories” that provide services to numerous market segments? Or will they be niche players that protect their brands in high-end markets and maybe even spin-off sub-brands for servicing mid-level and low-end markets?
We started discussing this question after an ILTA session last August where Ron was a co-panelist. The panel suggested that law firms would eventually need to choose one of two strategies: bet the farm or law factory. This oversimplifies but helps air important issues. This question is not academic - consider Howrey’s demise. Managing partner Bob Ruyak attributed the firm’s fall, in part, to more efficient e-discovery vendors and document review, which is a type of law factory.
So we decided to take up this question and in a side-by-side blog post. Both views are shared on both of our blogs. We hope this spurs dialog on how firms are structured and sell themselves to their clients. We welcome comments, input and even offer up guest posting opportunities for those who want to take on this subject with us.
LAW FACTORY LESSONS FROM HILTON HOTELS by Ron Friedmann
The Business Analogy: Hilton Hotels
As a frequent traveler who typically stays at Hilton brand hotels, it strikes me that hotels offer a useful analogy for thinking about law factory versus bet-the-farm firms.
Hilton offers multiple sub-brands to appeal to different buying segments. Conrad and Waldorf Astoria cater to the luxury crowd. At the other end of the spectrum, Hampton Inn appeals to the budget-minded. Multiple brands in the middle offer different feature-price trade-offs: Hilton Hotels, Hilton Garden Inn, Embassy Suites, Homewood Suites, and Doubletree.
Each brand operates in a discrete location; indeed location is an attribute that separates brands. Individual Hilton brands also tend to have similar architecture and design. Because location, architecture, and amenities differ significantly, brands have different cost structures. A Hampton Inn in a distant suburb without room service, doorman, or concierge costs less to operate than a downtown Hilton Hotel offering these plus other amenities.
All Hilton brands presumably benefit from centralized, shared services such as branding, marketing, purchasing, and the all-important loyalty program, which Hilton has just started promoting heavily. Though not precisely a shared service, I assume Hilton shares hospitality know-how across sub-brands. (Do they have a formal KM system!?!)
From the consumer perspective, I suspect most frequent travelers understand the difference among Hilton brands and choose the sub-brand based on trip-specific travel needs and budget.
Lessons from Hilton
The Practice Area Analogy
What can law firms learn from Hilton? One analogy is to consider practice areas (e.g., M&A and T&E) as sub-brands. Consider two practices seldom seen at top law firms: immigration or labor / employment. If bet-the-farm firms such as Cravath, Davis Polk, or Slaughter & May were Hilton or Marriott, they might also have these and other “law factory” practices. Like Hilton, they could house the lower-end practices in separate offices with cheaper real estate.
Simply paying less rent, however, does not make a non-premium practice profitable. The entire support structure for lower margin practices must change: less lawyer support (e.g., fewer secretaries), more fixed or alternative fees, and higher leverage.
Hilton and its competitors clearly know how to operate properties at different price-value points. It is not at all obvious that law firms do. I can’t think of many (any?) that run practices with dramatically different volumes, margins, and support requirements.
Why are there no obvious examples? Perhaps clients would not buy multiple services from “law firm chains”. That seems a weak hypothesis to me. The better explanation is that law firms lack the management talent and capital. Regulatory constraints may also play a role.
Absent these constraints, we might see the emergence of law firm holding companies that can take advantage of shared services and be the equivalent of Hilton. Watch the UK, where outside ownership will be allowed soon, and Australia, where it is already allowed.
Matter Tasks as an Analogy
Another analogy is to view unbundled (disaggregated) tasks within a single practice as akin to sub-brands. For example, in M&A, the core merger agreement is like the Conrad or Waldorf but many lesser agreements are more like Hampton Inns.
The market seems to be moving in just this direction today. The proliferation of service providers - for example, boutique law firms, high-volume staffing companies, high-end staffing companies (e.g., Axiom), and legal process outsourcers (LPO) - suggest the market is already disaggregating tasks.
A key question is one law firm can unbundle sub-tasks. We do have some examples. In the UK, Berwin Leighton Paisner has its Managed Legal Services and Lawyers on Demand and Herbert Smith its Northern Ireland document review center. In the US, WilmerHale and Orrick have low cost centers (Dayton, OH and Wheeling, WV respectively) where staff attorneys support law practice.
In my recent Integreon blog post US Legal Market Trends Favor Law Firms Working with LPO I suggested, based in part on a recent Citi / Hildebrandt report, that large law firms can benefit by partnering with LPOs to support high-volume legal work. Of course, working for an LPO I might be biased. That said, large law firms have little experience running high volume legal support operations with industrial discipline. Of course firms can “industrialize” – the examples cited are instructive – but as a practical matter, mindset, management, and capital constraints make it difficult .
My current conclusion is that law firms will struggle to manage both bet-the-farm and law factory. Law firms today develop deep but rather narrow capability. Beyond management, capital, and regulations constraints, I would add lack of courage and imagination. A more neutral way of phrasing this is by reference to The Innovator’s Dilemma (Clayton M. Christensen), which explains why successful organizations rarely change their business model and why upstarts often eventually eat their lunch. We may yet see a bet-the-farm law firm operate an industrial-strength law factory but I suspect it will not be at an AmLaw 100 firm.
Suiting up for the Law Factory - by Toby Brown
The Banking Analogy
“Commodity” is a dirty word at most law firms. It implies a ‘less-than’ level of expertise and is not the sort of brand any thoughtful lawyer would want for their firm.
But should they?
The opposite of ‘commodity’ in this context is “Bet the Farm” work - high-end, high-value niche services; the kind clients gladly pay full hourly rates for. In even the recent past, a lot of firms have been able to get away with pricing all of their services at bet the farm rates, since they held the market power and could designate a greater portion of their services as high-end, high rate work. But that’s not the case anymore, as evidence in the market by expanding buyers’ market power, and the rise of discounts and AFAs. I have argued elsewhere that lawyers, via their monopoly position, were able to artificially hold off the commoditization of their services. The bottom-line: most firms services are no longer in the high-end niche portion of the market. Pretending to be there, doesn’t make it so.
So where does that leave law firms? I see they have two options. First – stay very focused on the high-end, high margin niche segment of the market and then develop lower brands as noted in Ron’s post. Or firms admit they can’t play exclusively in that space and embrace the commodity concept a.k.a. as a Law Factory play. I believe the latter approach makes sense for most law firms, merely based on the fact that there is room for only a very few firms in that high-end segment. But … will embracing commodity services tarnish a firm’s brand, excluding it from high-end opportunities?
Banks present a feasible model for law firms to consider. They serve a very broad piece of the market, yet maintain a high-value brand. They sell basic banking services to the mass market and sell specialized services to high net-worth individuals and companies.
A Law Firm Scenario: The Three Tiers of the Patent Litigation Market. From a Case Study I am preparing, I will paint a picture of a new patent litigation market. I suggest this is a relatively accurate picture, but know some variations and modifications of the exact numbers should be in order. In any event, this concept demonstrates the Law Factory approach from an economic / market perspective.
Tier 1 – High stakes matters. This is the classic “Bet the Farm’ work. I would put it at 15-20% of the market, and declining.
Tier 2 – Mid-level stakes. These matters will have valid legal claims involving enough money they require a reasonable legal response, but not at the level of Tier 1. This segment of the market has seen increasing price sensitivity. Two to three years ago the work may have commanded fees near Tier 1 level. Put this segment at 50-60% of the market and growing.
Tier 3 – Nuisance matters. This tier covers questionably valid legal claims and thus low financial exposure. This segment has high price sensitivity and clients benefit from quick, low cost resolutions. Put this segment at 20-25% of the market, relatively stable but with occasional spikes.
Given this market dynamic and utilizing the banking industry concept above, how might a law firm approach this market?
What this segmentation tells us is that the mass of market spending is occurring in Tier 2. And since prices are dropping that this work is begging for some innovations to moderate the costs. So although Tier 1 may have had good margins, it’s a shrinking market with a large pool of competitors. Unless your firm is willing to invest significant dollars in securing this market segment, which will cut into those margins, you will be wasting your time. This doesn’t mean you will ignore this segment, but only that you approach it smartly. Tier 2, in contrast, presents much greater opportunity for market growth and reasonable, sustainable margins. To do well in this segment, a firm will need to “commoditize” some of its work.
In contrast, Tier 3, may well fall off the radar of larger firms. To be profitable here requires serious changes in the personnel and compensation structure of a firm.
The hard questions for law firms are - Can they actually make these changes and then maintain their brand across market segments?
I would suggest a relatively simple and easy to accomplish approach would be to target Tier 2 work and watch for Tier 1 opportunities within your client base. A given client can have work in all three tiers. So, by holding the client relationship strong via Tier 2 service, you create the opportunity for getting Tier 1 work from them without having to overspend on market protection. The internal challenges will come with making practice management adjustments in order to be profitable in Tier 2. I suspect a number of firms have slipped into this approach by accident. However without making changes, their margins in Tier 2 are disappearing and they will struggle to maintain quality service. Absent a proactive approach here, Tier 2 work will move away from a firm to the more innovative firms, leading to a dissolution of Tier 1 opportunities.
As an aside, let’s assume for a moment a firm adjusts internally to serve all three segments of this market. Should they then go after smaller businesses or other “low end” clients? This is not a brand risk. JP Morgan Chase servicing low-end markets will not hurt its brand, but may in fact enhance it as it demonstrates depth and strength.
Although you do reach a point when banks will not service a segment. But it’s not a brand issue that stops them. Instead it’s the “cost of customer acquisition and maintenance” that stops them. When no other organizational structures are available and it becomes impossible to make money on a customer segment, the banks leave the segment. Currently this is shown in the growth of “payday loan” check cashing services, an alternative provider serving this segment.
This shows that concerns about brand reputation issues can be addressed when law firms chose to embrace commodity type services.
So the elephant left in the room is: Can law firms restructure in this way? I would argue that structures for servicing Tier 1 and 2 markets are definitely possible. However, I question how many law firms will have the institutional will to implement them. Suggesting that certain partners’ comp should be adjusted to reflect their real contribution to the bottom line will be a difficult conversation. This means the less radical the adjustment, the more likely it is feasible. I would argue that shifting to a Tier 2 provider fits this approach. Process innovation combined with Legal Project Management (LPM) should suffice for this.
In contrast, firms that chose the “Bet the Farm” approach will need to dramatically increase their investment in expertise, marketing and client relationships. This approach seems much more challenging for a firm, since their willingness and ability to make large investments in their firm is quite limited.
The Law Factory is not only possible, it may be the only viable option for a large number of firms. Absent this type of approach, firms will see a shrinking market and declining margins. In a market that is driving the commoditization of services, failure to embrace that change will result in many failed firms.
A new report on knowledge management from the UK highlights KM best practices, barriers, and outcomes.
The February 2011 report, The Knowledge Imperative (14-page PDF), is by OMC Partners, a “a management consultancy that works with leading legal and professional services clients to reduce costs while increasing the effectiveness of their operations.” The KM report was commissioned by the Practical Law Company (PLC). (For additional OMC reports, see the OMC News & Events page)
To write this report, OMC interviewed 50 lawyers, knowledge managers, and other professionals at 10 leading UK law firms. It is not a “how to KM guide"; rather, it provides an overview and brief analysis of KM best practices, barriers to KM, and the benefits (outcomes) that can be realized when KM is done effectively.
The findings suggest an optimal ratio of Professional Support Lawyers (PSLs) to lawyers (at 50 to 1). The findings and analysis suggest that firms should rely on a 3rd party service for significant KM support:
“Creation of generic knowledge is pushed ‘down or out’. That is, it is either allocated to cheaper internal resources or passed to external providers, benefiting from economies of scale. There is an openness to collaborating with external providers, creating strategic partnerships that help the firm meet client demands.”
Given the impact PLC has had over the last decade on the number of PSLs in large UK law firms, this finding is not surprising. From my day-job perspective working for a legal outsourcing provider (Integreon), I have long believed in the compelling logic of relying on a “shared service” where possible. PLC is, of course, an example of this. Prior to its advent, a significant portion of PSL work across UK firms was duplicative and did not provide competitive advantage. By relying on PLC, many large UK law firms have been able to reduce the ratio of PSLs, allowing them to focus on higher value, firm-specific, competitive-advantage creating work.
The report is also a good reminder of the difference between the US and UK market when it comes PSLs. Few large US firms, at least in their US offices, have PSL ratios even approaching those commonly found in the UK. (Some large US firms are now increasing the number of PSLs though in my view, it is premature to call this a trend.)
Experienced KM professionals will find few surprises in this report; nonetheless, I recommend reading it. It has a business perspective meant to appeal to law firm management, a perspective that KM professionals must always keep in mind.
Last month I suggested in Wall Street Traders Trust Computers, Why Don’t Lawyers? that the time has come to rely on automated document review in discovery. A comment by Keith H. Mullen of Winstead Attorneys raises a great question, which I address here.
[I drafted this post before the New York Times article yesterday (5 March 2011), Armies of Expensive Lawyers, Replaced by Cheaper Software. I will discuss that at the end of this post.]
Mr. Mullen commented:
“Good comment and question. My first thought: predictive coding should be one screening tool - but like artificial intelligence, it is ‘artificial’ - at some point, there are subtle issues that even humans view differently - don’t reasonable people disagree? So, just as the artificial intelligence movement failed (even Susskind moved on), at some point it takes a human being to be the ultimate judge or screener. What do you think?”
I am not entirely sure of the ‘right’ response to Mr. Mullen’s comment. Consider how the TREC study, an e-discovery full-text evaluation sponsored by NIST, deals with document designation challenge. It names a senior law as the ‘topic authority’ who is the arbiter of document designations. By naming one and only one person with final say, TREC avoids the problem of conflicting expert opinions.
Mr. Mullen is indeed correct that two or more human experts often reach different conclusions. In a case with multiple topic authorities who do not agree on a document designation, I can think of two possibilities:
- with enough work, they could reach unanimous agreement or
- no amount of work suffices to reach unanimity.
If the former is true, then I suspect we could extract the underlying ‘know-how’ or logic and embed that logic in a computer system. Whether economics and practical considerations actually so allows is a different issue. If the latter is true, then presumably a majority vote of the experts wins.
“Majority wins” is bred in our bones but is not an empirically sound basis to reject the analysis of sufficiently sophisticated software, especially where that software embeds the heuristics of multiple experts. Given the cost of actually causing multiple topic authorities to review more than a small sample of documents, I suggest society is better off relying on computers.
If the experts mainly agreed and if computer designations frequently varied from the expert consensus, then I would reject computerized review. The limited empirical studies to date, however, suggest that experts rarely reach consensus and that computers are more consistent at document review. That is, computers may not t always get the right answer but that does not mean we are better off with the divergent views of multiple topic authorities.
So I will stick with the conclusion of my prior post that “courts should reverse the presumption. They should presume that predictive coding is reliable. The burden of proof should shift to predictive coding opponents to show that it is not reliable.” Let the proponents of human review explain to the court why diverging expert views is better than consistent computers.
The Times article does not present information new to e-discovery professionals It is important though because of the impact it might have on not just the substantive discussion but who is in on the discussion of predictive coding. When CEOs and CFOs read it, they may well ask their GCs, “are you doing that that articles talks about?” GCs will find that they likely have to explain and quantify the risk of relying more heavily on computers. Today, I suspect that many a GC is not well prepared for that conversation.
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? ]