1/27/12

Staying Relevant - Part 3: Competition Takes Many Forms

Image [cc] marcokalmann
In Part 2 of this series we covered the beginnings of major change in the legal market along with the initial responses from firms and lawyers.
Non-Traditional Competitors
An emerging and compelling reason for lawyers to make different business decisions is coming from new breeds of competitors. One example is the Legal Process Outsourcer (LPO) market. These companies started as off-shore (typically India) based providers for first document review in litigation. They hire English speaking, American law trained candidates in other, lower wage countries. These much lower-costing, well-enough trained lawyers were appropriately suited for this level of work. So well-matched to the tasks, that in very short order, these document reviewers became viable competitors. Most lawyers glossed over this market encroachment, seeing it as commodity level work no longer worthy of their skills. In reality, this meant millions in fees were no longer going to US lawyers.
The LPOs originally targeted law firms as their customers. But law firms were slow to respond to these offerings, in part due to the ethical constraints of profiting from third-party services. But firms were also concerned about diluting the law firm brand with low-level services. The result was that LPOs shifted their sales and marketing efforts directly to clients. With the acquisition of the Pangea3 LPO by Thomson Reuters, the market saw strong validation of this model. LPOs are now offering a broader range of services including: Contract Drafting, Contract Review, Patent Application Drafting, IP and M&A Due Diligence and other services.
It should be noted that these legal-type services are being provided by non-law firms directly to clients. To date, it appears that no regulatory authorities are investigating these practices leaving these new competitors ample opportunity to go after the legal market, which they appear to be doing. As law firm revenues have gone stagnant or declined over the past few years, LPOs have been experiencing 50% growth per year.
In the solo / small firm segment of the market, other competitors are appearing. For example, LegalZoom is a provider of online legal forms which also provides customer service to assist clients in completing the forms. Some states have taken issue with LegalZoom for, what they believe to be, engaging in the Unauthorized Practice of Law (UPL). These states’ efforts do not seem to be having much impact on LegalZoom’s growth. The company reports raising $100 million in funding to-date and $100 million in revenue for 2011. This market for online legal content was further validated via Google’s $18.5m investment in Rocket Lawyer in mid-2011. These providers are taking full advantage of 1) the ability to raise capital, and 2) next generation technology. Lawyers are barred from the first activity and generally unwilling to engage in the second one.
Profit vs. Revenue
Lawyers and firms have been living in a cost-plus business model world for the past 50 years. ‘Cost-plus’ is having the cost of a service plus a profit built into the pricing. Hourly billing rates are a manifestation of this model. As long as there were enough billable hours to go around, profits were virtually guaranteed. This model created a mind-set bent on billable hours and revenue, for which the industry is well-known. The challenge for firms now is that these rules no longer hold true. The shift that began in 2006, accelerated by the recession in 2008, changed that dynamic.
AFAs presented a viable alternative to work through the shift. Instead of looking at just hours and rates, fees and cost of delivery became part of the equation. Now firms began looking at matter financials in a profit margin way.
Most businesses operate on the margin model. Although not a complicated formula (price minus cost equals profit), it is still an elusive one for lawyers. I contend that by the end of 2009, firms were unknowingly operating in a margin world. Unknowingly since their compensation models are founded on a cost-plus model that rewards revenue versus profitability. Therefore firms have a structural blind-eye to the profit squeeze problem. They are unable to even expose the problem, when they really should be focused on resolving it.
A Suggestion
At one point in 2010, a law firm partner asked me if I could do one thing to restructure a firm for the future, what would it be? I gave a simple answer: Change the financial conversation from revenue to profit. Most of the challenges facing firms would come in to focus and receive the attention they need and deserve if that one criterion were in place. Every effort in a firm would shift from supporting a cost-plus model to the margin one that actually exists.
Part 4 provides a forecast on the technology aspect of the perfect storm. This rapidly advancing force brings serious challenges, and hopefully some opportunities to lawyers.

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1/26/12

Google Author Tags: Google's All Up in My Business

Today, I spent a lot of time messing around with Blogger, Feedburner and Google+.

There is a lot of change afoot with the upgrades in Google+.

Integration for the most part has been pretty smooth--I like that if you have a Google+ account and a Blogger account, it is fairly simple to integrate and feed your new blog posts to your Google+.

But what isn't so easy is integrating co-authored blogs into Google+.

Thanks to a tip from HubSpot, I found a bit of a work-around by setting up a Google+ author tag. But I'm not completely confident it will work. Plus, I had to do something that I was completely loathe to do--submit my Gmail account to the public domain. Ugh.

Why does Google insist upon getting all up into my business?

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Skip the Library; Increase Your Risk

Image [cc] Slippery Tiger
I have found that librarians at law firms walk a tightrope strung over the thorny issues of cost, risk and user demands. We have a reputation of being "gatekeepers" or impeding advances in legal research by holding on to old media at the expense of new media. Although it may be true that there are a few Luddites clinging to the idea of a traditional brick & mortar library, those Luddites are few and far between. Most librarians are actually ready and willing to adopt new ideas, media, technology, user experiences, and procedures, but they are also responsible for advising the risk involved in the adoption to the overall firm in which they work. There are times in which the risk outweighs the cool factor in moving forward.

One of the common themes I'm hearing from vendors these days is that "we need to get our products in front of the attorneys because the librarians are too challenging to work with." It is a logical thought on their end because librarians are challenging. We look past the "whiz-bang" interface and start asking the questions of "how much does it cost?" or "who can access it?" or "does it work with our current infrastructure?" or "what happens if someone gets into something we didn't put in our contract?" or "if we bill clients for the use of this product, can you work with us to make sure we follow ABA guidelines?" In other words, we ask challenging questions and won't move forward until those questions are answered.

There is a reason that law firms hire librarians to manage their external legal research content. We mitigate risk – both ethical and fiscal for the firm. We report up to the powers-that-be in a firm and present the pros and cons of new products, give our recommendations, then implement the decisions that are made. Sometimes the potential rewards are worth the risk, sometimes they are not. Like it or not, librarians do not make the final decision, however we do relay that decision to the vendors (so to them, it seems that we are the problem.) There are librarians out there that never want to bring in new products or technology, but they are rare – and getting rarer.

When vendors successfully do an end-run around the library and get a Partner to sign off on a contract for their product, the librarian spends the next year attempting to undo the damage. Pull any law librarian to the side in at a conference and have them tell you the horror stories of what happened when a Practice Group bought a product (usually somewhere in the vicinity of $25K) only to find out that the firm already had a similar product (sometimes the same exact product), or that the product actually didn't solve that problem the Practice Group thought it would. The story usually ends with how much time the librarian spent on getting the contract reworked into an existing deal (reducing the overall cost, but retaining the product) or finding some way to get out of the contract after tracking down the contract signed by the group.

Many librarians would love to adopt the newest version of a legal research product and be on the bleeding edge of technology. However, our biggest duty to the firm is to make sure that we first look at the risks associated with taking on the latest and greatest products. Skipping the library (either by a vendor, or someone on the inside of the firm) may get a product into the firm, however, it rarely comes without introducing some unforeseen risk to the firm. The librarian is then asked to fix the problem, and usually a note goes out reminding members of the firm that all contracts have to be negotiated through the proper channels, and that "X" vendor must from this point go through the proper channels. For the vendor,  the short-term victory turns into a long-term damage to their reputation within the firm. Even worse, now they have to go, hat in hand, to the very librarian they excluded, and work to make amends.

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1/25/12

Staying Relevant - Part 2: The Initial Pain and Response

Image [cc] edkohler
Part 1 of this series set the stage for the perfect economic storm, covering the forces pushing change in the legal market. Part 2 covers the first pain felt in the legal market and how firms have reacted.
Along Comes 2008
Even before the Lehman collapse, clients had already started sending signals to law firms about rate concerns. But after the collapse those signals became directives. Some clients went as far as sending letters dictating rates for 2009. A good friend summed the scenario up well when he noted, “The Guild was broken in the General Counsel’s (GCs) office.” What he meant by this statement was that legal departments and legal budgets were no longer getting a pass when it came to cost reductions. The CEO had come to the GC for his annual “you need to cut costs” visit, but this time wouldn’t take “I can’t” for an answer. In some situations, the CEO brought in Procurement and instructed the GC to use this group as a resource to get control over legal costs. Prior to this, GCs were cautious about pressuring outside firms on rates, fearing they might not represent them in the next large case if they were offended by discount requests. The CEO gave them something bigger to fear.
Alternative Fee Arrangements (AFAs) began to rise in popularity at this time. At least they were in conversations. But many times the GC would ask for AFAs, not really knowing what they wanted out of them. The fallback was another 5% discount off of rates; which the clients pretty much got whenever they asked for it.
Firms Respond
As their clients were attempting to do, law firms gave major focus to their own cost cutting in 2009 and in to 2010. One report documented more than 12,000 lay-offs from large firms in 2009 alone. Law firms sought and found many ways to cut costs. It was an exercise not conducted in quite some time, so cost reductions were easy to identify. Of course these cost reductions had an impact on the legal market vendors, further extending the financial pain into the market.
One cost factor left relatively untouched in these efforts was partner headcount. Partners, as owners, are not as easy to terminate. As well, there is a loyalty to partners, making this type of cut a last-ditch approach. And in the short-run, it was easy to avoid. The cost savings turned out to be more than enough. Many firms posted record profits (on lower revenues) in 2009 and 2010.
But these cost cutting measures can only go so far. Firms faced continuing challenges in 2011 with: 1) no more easy cost cuts available, 2) clients continuing to push on rates and prices driving down realization, and 3) less-than ideal leverage (a.k.a. too many partners). Simple economics indicates that under this scenario, firms began facing a real squeeze on the bottom line. Additionally, the market for legal services is not growing. There are some practices showing modest growth (e.g. Patent Litigation), however the overall size of the legal market is not changing and firms wanting to grow their revenue to sustain profits must do so at the expense of other firms.
You may have noticed I did not refer to the economic shift as going to a buyers’ market. My sense is that the legal market is now in a traditional, competitive market; one where firms have to employ a broad range of business strategies and tactics. In the old sellers’ market, the only differentiator was that of perceived legal skill. Lawyers only needed to market their skills, resulting in clients sending them work. In a competitive market lawyers need to show clients an arsenal of differentiators. I shy away from labeling this all as a buyers’ market, since I feel that label obscures the need to utilize all types of tools. Until very recently, there were many lawyers who held to a belief they could just wait this whole storm out and once it passed, bask in the warm glow of another sellers’ market. Given the deeper shift in market economics, this belief is unwarranted. Approaching the market as being competitive in a new and enduring way will lead to better decisions.
Part 3 brings new players in to the equation and offers a suggestion for how lawyers might refocus to meet this challenge.

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1/24/12

BigLaw Partner Richard C. Hsu's - The One Page Blog

… and I thought I was alone… unique… special in some way. I thought I was the only blogger at my firm, but it turns out I was not alone. Yesterday, I found another person at my firm that was blogging. Not just any person either, but  ("gasp") a Partner!! Luckily, it turned out that he didn't know about my blog either. We found out about each other, not through an internal communication, but through a Tweet that was sent out that I happened to see in my Tweetdeck Search column. When I reached out and talked about our shared blogging interest, we both had the same reaction… "Cool!" I know I was a little embarrassed that I hadn't known about another blogger in the firm, but now that I know, I'm letting everyone else know about it too!!

Richard C. Hsu is a Partner in the King & Spalding Silicon Valley office and came over with a group of IP lawyers from what was then Townsend, Townsend & Crew (now known as Kilpatrick Townsend & Stockton.) But, enough about his day job… more importantly, he's a blogger at The One Page Blog. Hsu's blog (at the cleverly named hsutube.com … go ahead, say it out loud) focuses in on IP issues, as you might expect of an IP Lawyer, but the interesting angle of this blog is that it presents the information in a visual way using video and other images rather than just text.

Richard discusses his thoughts behind why he is blogging in the section of his blog titled "Lawyer's Confessions" where he admits that, although he is a super techie (CalTech grad and experienced programmer), he has found himself somehow "out of touch" with the new generation's mode of communications. He reminds us that, despite our experiences, there seems to always come a day when someone younger comes in and makes us understand that in order to "get with it" we'll need to climb outside our own comfort zones. For Hsu, that meant playing to the strengths that comes with age/experience, and that is understanding strategy.  He says it best in his explanation of technology and technology strategy:
On the other hand, technology strategy is not technology.  It is strategy.  And strategy’s half-life is more like plutonium:  what worked a thousand years ago works today, and will work in a thousand years....  Invest in understanding strategy now, and you will understand it just as well — probably even better [in the future.]
It is great having someone on the inside that is testing the waters of blogging. I'm sure that we'll be bouncing ideas off of one another from time to time. Hopefully we'll inspire others to pick up the urge to blog about what inspires them.

I know that Richard has inspired me to try to get my daughters to contribute their skills to help me blog, as he has done with his daughter Maya:



Now that's cool! Go check out (and subscribe to) The One Page Blog.

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