10/16/14

The Next Target

Previously I posted on some knowledge gained at the Bridgeway Conference in Nashville. I wanted to add one more item to the list.

Jeff Paquin, who now works with Bridgeway, gave a presentation called Legal Department 2050. He started by looking back at the evolution of legal departments and then projected forward on what the future might hold for them. In looking back he noted that since the mid 80's, legal departments have grown substantially. Back then about 5% of the legal budget went to pay the in-house team. A recent report shows this number is now approaching 50%. Quite a bit of this growth has occurred recently with legal departments pulling more work away from outside counsel.

Numerous reports and posts have shown that in-house legal departments have become one of the biggest competitors for outside counsel. This is not news to law firms since they are hiring these people directly from those firms. Later at the conference I had one client comment to me on the challenges they are having maintaining relationships with law firms, since they keep hiring their primary relationship lawyers away from the firms.

Jeff then took this concept and projected it forward. He runs a group called the Legal Futurists Society. Based on the collective thinking for this group, they see this growth peaking in the next 10 years.

Jeff posed a question to the audience. He asked what we saw resulting from this trend. A hand shot up quickly followed by, "Scrutiny." Everyone agreed that as legal departments' personnel came to represent greater portions of the budget, cost concerns would shift from law firms to the legal departments.

Here are my follow-on thoughts:

#1 - My reaction beyond 'scrutiny' was that legal departments are just becoming law firms. This means they will now be burdened with all the same problems a firm has in terms of infrastructure. What do they have for document management? What about KM and all of the other tools firms have in place? This will be a significant challenge for them, since law firms are still trying to figure all of this out and they are years ahead of legal departments.

Which leads to my second thought ...

#2 - In-sourcing doesn't appear to be changing the model much. Legal departments don't seem to be 'doing law' much differently. They are just doing it with lower cost resources. So the cost savings realized will only be marginal. And it won't take long for corporate leadership to realize that limitation - and to notice the size of the department has grown considerably.

So I think Jeff and the group are right. A lot more scrutiny will come to bear on legal departments. As they grow in size and cost, the cost saving target will shift from law firms' to their backs.

What's good for the goose ...?

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10/14/14

Listening to Clients

Last week I was able to attend the Bridgeway Customer Connective Conference in Nashville. Unlike many of the conferences I attend, this one is directed at clients, not law firms.

One of the sessions I attended really got my attention. Pratik Patel and Peter Eilhauer of  Elevate presented on a Practical Data-Driven Roadmap for Spend Management. This was primarily a case study on how one client approached cost control for their outside counsel. Pratik gave an excellent presentation on how the client took a methodical approach to understanding its legal spend by analyzing how and where it had been spending its budget. Then they took a step-by-step approach to tackling the problem.

One component of the analysis was understanding the rates the client was paying on a practice-by-practice basis. Normally I find this type of analysis marginally useful, since rates are only one component of cost control. However, the practice breakdown was interesting, since it separated out different specialities. This meant tax lawyers were not being lumped in with labor lawyers.

With this breakdown the client was able to determine market rates by timekeeper level for each type of service. For their needs, it didn't matter whether these were market rates on the broader level or not. Then they identified firms with rates above these client-based market rates.

And here's where it got interesting. Pratik asked the audience how many firms pushed back on the client when they asked the firms about the discrepancy. He prefaced this by saying the client expected that number to be 50%. People gave various guesses, including mine which was "low."

The number was 5%.

Pratik singled me out - since I was the only law firm person in the room and asked me why firms didn't push back. I replied it was firms' superior negotiation tactics in action - which got a good laugh. Then on a more serious note, someone else commented that he viewed it as an admission by the firms that they had been over-charging the client.

Ouch.

The Lessons:
  1. Pratik made a point early on that the client did not want to push too hard on their firms. They want their law firm partners to be financially healthy. In fact the other presentations I saw at the conference echoed that sentiment. Although clients are wary of their firms, they don't want to be mean about it.
  2. And when firms react as if they have been charging high rates, they can be sending a bad message. If they act like they have been treating the relationship poorly, then they shouldn't be surprised when clients view it that way.
  3. Lastly - law firms need to grow a pair. They employ very talented people. Instead of always bending over, they should have some confidence in defending their prices. Failing to do so means they will undersell the value of their services.
The legal market needs to mature around these ideas. This chaotic, wild west situation is resulting in many unintended consequences. As usual, I continue to recommend that lawyers take a more proactive approach to dealing with all of this change. To shy away from this, only leads to confusion and unhealthy relationships.


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10/1/14

The Exponential Law Firm - Part 4

The following is the final part of a 4 part post expanding on my short introduction to an ILTA session entitled, Do Robot Lawyers Dream of Billable Seconds? If you have not yet listened to the full session (and you have nothing better to do for the next 90 minutes), you should go listen to it now. If you would like to download and read the entire 4-part post you can get it here.




What does an Exponential Law Firm that can survive in this type of environment look like?

I would be lying if I said I knew for sure, but I think we can look to a number of trends and begin to get a fuzzy picture of the future.

More Legal Processing will be passed off to computers

We like to pretend that everything we do is custom tailored for every client, but it is simply not true. We are already past the point where we need to improve efficiency in order to provide a better price to our clients. In the near future, we will need to improve efficiency in order to make a profit. That means we will need an honest assessment of the work that can be automated, or performed by algorithm, and the work that will require custom analysis by specialized attorneys. Then we will begin pricing that work accordingly.

The rise of the Legal Processing Engines

This obviously goes hand in hand with the above, but one of the implications of this change is that the output of biological legal processing units (most attorneys) will shift from customized legal work, to engine building and maintenance. The focus of many firm attorneys will no longer be on individual clients, but on entire types of matters at once. Attorneys will no longer slave over a single contract, but over the engine that builds that type of contract.

Engines will manage as much work as they can and spit out any unique or unusual work to be reviewed by senior attorneys. That “unique” work will be analyzed and evaluated to determine whether it can or should be incorporated into the engine for future use. Over time the engines will do more and more complex work.

The rise of the Legal Engineer

Inherent in the rise of the Legal Engine is the role of Legal Engineer. We are already seeing this role pop up at many firms. These are people with legal training and technology “know how”. They are equally comfortable analyzing contracts and programming new applications. There are very few people who fit this role today in big law firms, but firms who want to survive post disruption will hire these people by the truckload. The engineers will be responsible for creating and maintaining the firm’s engines. As laws change, or interpretations change, the engineer will modify the engine appropriately.

Machine Readable Documents

Once we are using engines to process legal matters anyway, it will make sense to just go all the way and make all legal documents machine readable. Gone are the fuzzy shades in meaning between contains and includes, or the differences between shall and must, to be replaced by the definitive  and =.

Proactive Practice of Law

In this world, firms will stop being reactive. The idea of waiting for a client to approach the firm before working on a matter will be unthinkable. Legal engineers will build engines based on legislation and firm sales associates (or Partners) will pitch those engines to potential clients.

Is this Science Fiction?

Simply put: computers process information more consistently, accurately, and faster than people do. They are networkable, scalable, and manageable in large numbers by relatively few administrators. If I am right in my assessment that what we actually sell to clients is Legal Processing, then no, this is not science fiction. In order to compete in an exponentially changing industry, we will have to move the bulk of our processing from biological to digital processing units.

If Diamandis’ exponential framework is correct, then we are approaching a digital disruption that will fundamentally change our industry forever. The players will change. New firms will quickly morph from newcomers into industry leaders. Many of the old guard will fail to change and will subsequently fail entirely. And a few will probably stick around, doing things much as they always have for a very select, demanding, and equally slow to change clientele. At least until those clients also get disrupted.

Whether or not I am right about what we sell, or that the framework directly applies to the legal industry, is almost irrelevant. The 6 Ds Framework provides a useful model for imagining the kinds of changes that could take place in our industry, based on the kinds of technological changes that have already upended other industries.

The only thing of which I am absolutely positive is that both lawyers and IT personnel, as a general rule, do not think much beyond the next immediate hurdle. They approach the world linearly, solving problems as they arise, and planning for a steady progression of linear events. But if we are already on a path of exponential change, then our standard linear approach to managing firms will be our demise. A purely linear response to an exponential threat is the equivalent of no response at all.  


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9/30/14

The Exponential Law Firm - Part 3

The following is the 3rd part of a 4 part post expanding on my short introduction to an ILTA session entitled, Do Robot Lawyers Dream of Billable Seconds? If you have not yet listened to the full session (and you have nothing better to do for the next 90 minutes), you should go listen to it now. If you would like to download and read the entire 4-part post you can get it here.


What does this mean for legal service delivery?

The examples above are not directly comparable to the legal services we provide. I deliberately did that to illustrate the 6 Ds concept before completely confusing the issue by describing how it applies to our industry. As it is, I’m sure more than a few of you have read the examples above screaming, “Yes, but that has nothing to do with us! What the hell are you talking about?”

I am more than willing to concede that I may be wrong about the legal industry passing a threshold of digitization in any way similar to the entertainment industries or physical goods manufacturers. Or, that Diamandis may be wrong about industries passing that threshold and then necessarily conforming to his exponential framework. But for the sake of argument, let’s say that Peter and I are not wrong. We are definitely passing a threshold, an industry wide digital disruption will eventually take place, and we will begin to conform to the exponential framework just as others have. That begs the question, what does a dematerialized, demonetized, and democratized legal services industry look like, and how could a law firm survive in it?

The Dematerialized Practice of Law

It’s likely that the first complaint against applying the 6 Ds framework to the practice of law will be that we are not a material industry, and that we therefore have a distinct advantage over manufacturers or sellers of things. We don’t produce material goods, unless you count mountains of documents, and even if we become entirely paperless there will be no change in our service.

That might be true, but let’s think about a service provider who has already gone through this digital threshold: travel agents. Travel agents still exist of course, although in nothing like the numbers they did 20 years ago. They provided a service, with almost no material aspect and yet they were one of the first industries to be decimated by the rise of the internet. It turns out most people were happy to book travel themselves as long as it was easy and inexpensive. How many people or companies would gladly handle their own legal services if they had access to resources and knowledge, for a low price, and they didn’t actually have to deal with a real live attorney?  If such a thing were possible, how many attorneys could the industry continue to support?

The Demonetized Practice of Law

We have seen downward pressure on legal prices since the downturn of 2007.  That has mostly come in the form of clients demanding discounts on hourly rates or fixed fee arrangements. But suppose clients, even large corporate clients, had a new option: they could pay a monthly fee for unlimited access to a firm sponsored set of expertise engines that handled much of their routine legal needs. They could pay month to month for this a la carte service, or they could sign a 2 year contract which also entitled them to steeply discounted hourly rates for legal services not covered by the engines. Setting aside for the moment, whether such a thing is possible, or more to the point, whether the bar associations would allow it, what would that do to legal service prices?

The Democratized Practice of Law

This is the good news, if the prices of legal services decline precipitously and the delivery of legal services becomes much more widely available, then the pool of potential clients will be significantly larger than today’s client pool. Smaller companies and individuals who currently choose to do without external legal counsel and instead turn to LegalZoom or other form providers, could suddenly be approaching big firms to handle their legal needs.

Some of you are thinking, “But that’s not the kind of law we practice, we do big law for big corporations.” To which I will respond, look around you. The era of the big corporation is ending. The average lifespan of a company on the S&P 500 has fallen from 60+ years in 1960 to just over 15 years today. There will probably always be some big corporations, but I don’t think they will be the norm.


Relatively small companies like AirBnb (600 employees) and Uber (~1,000 employees) are taking on much larger and more traditional service providers, and they are having success. AirBnb and Uber are valued at $10Bn and $15Bn, respectively. These are new types of companies that grow quickly, by connecting people who have services to offer to those who need them, and taking a percentage. This is relevant to us on two fronts: 1) If given the choice of monthly subscription fees for access to legal engines or more traditional legal services, which do you think these startups would choose? AND, 2) How long before the law firm equivalent of AirBnb or Uber start selling them these services?

(Tomorrow: What does an Exponential Law Firm that can survive in this type of environment look like?)

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9/29/14

The Exponential Law Firm - Part 2

The following is the second part of a 4 part post that expands upon a short introduction I gave to an ILTA session entitled, Do Robot Lawyers Dream of Billable Seconds? If you have not yet listened to the full session (and you have nothing better to do for the next 90 minutes), you should go listen to it now. If you would like to download and read the entire 4-part post you can get it here.



The 6 Ds: An Exponential Framework

Image from Peter Diamandis' presentation to ILTA.
On the first day of this year’s ILTA conference, I attended the keynote session presented by Peter Diamandis. Diamandis is the founder of the X-Prize and Singularity University. In corporate-speak, Diamandis is not just an “outside the box” thinker, he tore the box apart, set the pieces on fire, and urinated on the flames. I watched his speech in rapt attention, increasingly fired up by what he was saying. I imagined the headlines that would appear in the news the following day, “Angry Nerds burn down Gaylord Opryland Hotel!” or, “Diamandis Sparks Legal Geek Riot”. But strangely, at the end of his talk he received polite smattering of applause and the assembled nerds quietly stood and shuffled out of the ballroom toward the first coffee break of the day.

It was clear that not everyone heard what I heard. Because I heard Diamandis say, “Most of your firms will not exist in a few years. Much of this conference is a waste of time. You should all go find new jobs.” Of course, he didn’t put it that bluntly, but if you pull his remarks together and add up all the pieces, I think that was the underlying message.

One slide in particular had a profound effect on me. So much so that I scrapped the introduction I had written for my session later in the week and instead talked about this one concept: The 6 Ds.

Diamandis calls the 6 Ds an Exponential Framework. I struggled with that name for a long time, but I couldn’t come up with a better one either. It’s not a process; the Ds don’t necessary happen sequentially. It’s not a workflow, or an organizing principle. Model, pattern, and path don’t quite fit either. It’s just a framework that industries begin to take on once they cross the threshold of the first D.

Digitization

Perhaps you can begin to see why I needed such a lengthy preamble to this post. We have already crossed, or we are at the very least currently crossing, the digitization threshold in the practice of law. Diamandis’ framework suggests that crossing that threshold has entirely foreseeable consequences and that if we want our firms to survive, we must prepare them to exist in a completely different industry than the analog one we have lived in to this point.

The premise is that digitizing a product or a service throws an entire industry onto the Moore’s law bandwagon. Change within that industry immediately becomes exponential as processing power doubles and prices halve every 18 months.

I will cover each of these in turn, but the remaining 5 Ds that follow from this initial act of Digitization are:
  • Deceptive (initial change)
  • Disruption
  • Dematerialization
  • Demonetization
  • Democratization

Deceptive

This D is tough because it is the only one that describes a state of being rather than an action or direct change. The idea is that even though change immediately begins to happen exponentially, it still appears to be slow or even non-existent. This mis-perception is a product of our human inability to intuit exponential change. In real terms, even exponential growth appears static at very small levels. For example, without a high powered microscope, you would have a difficult time recognizing the initial exponential growth of bacteria in a petri dish. One cell becomes two, two become four, eight, sixteen, thirty-two, and so on.  For a long period of time, you would swear nothing is happening at all, and then BAM! an obvious explosion of growth. The rate of growth in that example is constant, but our perception of it is that it happened all at once; out of the blue.

Arguably, this is where we currently are in the legal industry. We are digitizing our practice and we have begun the process of exponential change, but that change is still small and very hard to see.

Disruption

Disruption is the elbow in the graph; the point at which change goes from near horizontal to near vertical over a very short period of time. That’s the point at which it becomes impossible for anyone to seriously argue that a significant and industry altering change has not occurred. The horizontal underline that turns into the letter L in the word “exponential” on the image above was created in Excel. It is an actual graph of steady exponential growth. You can see conceptually how deceptively small change can sneak up on an industry and give way to massively large disruption.

Diamandis argues that we have seen many industries crossing the digital threshold and that they all begin to follow this same framework. The last 3 Ds represent the post-disruption world.  They don’t necessarily happen in any particular order; they are more like directions that a digitally disrupted industry begins to head.

Dematerialization

Once a product or service is digitized, the materials (physical goods and associated services) begin to disappear. Kodak learned this the hard way when most people decided that the crappy digital camera attached to their phone was good enough. They stopped carrying dedicated cameras, and buying and processing film. Sales of physical books are down since the Kindle debuted. Who buys CDs or DVDs anymore? Physical media is wasteful, and expensive, and unnecessary. Just enumerating the physical goods that have been supplanted by the “phone” in your pocket would take pages.

Demonetization


Disrupted industries have seen the total amount of money that customers are willing to spend for non-material goods decrease significantly post-disruption. That is not to say that there is no money to be made, simply that the players who survive are often fighting over a smaller pool of available revenue or they have to grow significantly in volume to make up for the decrease in per unit cost. For example, digital music and movie downloads can no longer command the same premium prices that CDs and DVDs once did. Entire secondary industries based on distribution of physical media have dried up. Virgin Mega Stores and Blockbuster Video, once multibillion dollar juggernauts have disappeared and been replaced by digital distributors, like Spotify and Netflix, selling monthly unlimited access to entire libraries of media for the former price of a bargain bin album.

Democratization

Finally, the 6th D follows naturally from the 4th and 5th. If a good or service is now digitized and available online, and its price is now affordable to most people, then it is democratized.  Everyone can have access to it. This is the digital publishing revolution of which we at 3 Geeks have taken terrific advantage. Fifteen or 20 years ago, we could have published a newsletter that might have reached a couple of hundred people within a small region of the US. We would have had publishing and distribution costs. We would have probably charged a subscription fee. We would have needed someone to manage all of that for us, because frankly, we’re too lazy to do those things ourselves. Today, however, we have readers all over the world who read our non-sense daily and it costs us nothing but our time.

(Tomorrow: What does this mean for legal service delivery?)

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