2/19/17

Rising: Supply Chain Management and Alternative Legal Service Providers

Last post, I offered some skepticism about one conclusion--the billable hour is already dead--in the annual Report on the State of the Legal Market from The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute. I tried to be emphatic that this minor point of incredulity did not take away from the overall brilliance or usefulness of the Report. Yet I spent an entire post on the subject.

I have fallen into the same trap. I once opened a piece with the premise that the billable hour is not the sole topic worthy of discussion:
The billable hour is not the immediate cause of all that ails the legal industry. Freedom from the tyranny of the billable hour would be a fine start. But there is much more to do and discuss. For proof, look no further than law departments. Many corporate law departments suffer from the same pathologies as law firms despite having cast off the perverse incentives of compensable time sheets.
We have a culture challenge that is more than a matter of modifying a single incentive. My piece focused on the rise of legal operations and procurement. It cited massive increases in in-house staffing and technology spend, as well as tipping points in the use of metrics and RFPs. I touched on the BigLaw caste system, along with the rigidity and fragility of the traditional law-firm partner and compensation models. I used cybersecurity as an example of why law departments and law firms need to engage in data-driven dialogue on topics not taught in law schoole.g., the integration of process and technology into the delivery of legal services.

Naturally, since the thesis was that there are many topics to discuss beyond the billable hour, the comments section quickly devolved into a forum solely to debate the merits of the billable hour. It is my own fault. The billable hour is catnip to the kind of legal professional inclined to take part in an online discussion (including me). Like Antwan Rockamora, I had to expect a reaction.

Whenever I try to not talk about the billable hour, I am reminded of this take from the phenomenal Kevin Colangelo. As one of the primary forces behind Panagea3, Kevin experienced first hand the staying power of the billable hour:
Despite our best efforts to be “innovative” in terms of how we priced our services, clients and prospective clients always found shelter in the billable hour. Offers of unitized rates for drafting and negotiating contracts were always met with something like “And how many hours of work does that represent?” It quickly became clear that although we were doing what the market had asked us to do (i.e., offer fixed, unitized and other alternative fee arrangements), the only way that the market could understand the value of our pricing was to stack it against the only measure of value on which we’ve all been conditioned to rely: time.
Vince Cordo of Shell and I discussed this dynamic at length in the ACC Docket. We tired to explain why a law department that had moved exclusively to AFAs would bother with a reverse rate auction (we also tackled 'shadow billing' here). And that is at a company that successfully transitioned to AFAs. You get story after story from Toby and his compatriots in pricing who regularly respond to client demands for innovative fee arrangements only to find that, in the end, many clients opt for a slightly deeper discount on the traditional billable hour.

Again, the billable hour is not the only piece of the puzzle. The value proposition Colangelo was selling was not predicated solely on the fee arrangement. Whether they are for or against alternative legal service providers, I suspect there are very few participants in the legal marketplace who would take the position that moving business from a traditional law firm to TR Legal Managed Services (what Pangea3 became) or Elevate (a subsequent Colangelo company) or [pick favored provider] has no impact unless accompanied by abandonment of the billable hour.

And that's the topic I want to discuss: Alternative Legal Service Providers

"Oh, that's just labor arbitrage" is sometimes deployed by people like me to sound dismissive of a particular cost-saving measure. We're not saying the savings aren't real. We're just saying that it is not all that interesting. Using an alternative provider, however, can be just labor arbitrage and also the first step on the path to interesting.

To take extreme examples that some people believe have been eradicated (nope, not yet, not even close), there are too many clients out there who could quickly save millions by finding alternative means to accomplish tasks that keep (much diminished) armies of junior associates in hours. Due diligence, document review, routine contracts, low-level fact investigation and organization, etc. They could cut costs dramatically through simple substitution of hours charged at between a third and a tenth the billed law firm rate.

The substitution need not even be 1:1. With rates being a fraction of what they were, the transition costs and subsequent friction introduced by collaboration across multiple organizations can increase inefficiency, add hours, and still produce significant savings. The bottom line is that if you can get the same quality at lower cost, you should do it. Labor arbitrage is a perfectly valid path to cost savings. It is just not that intellectually interesting.

But what can become interesting is that moving work to an alternative provider is an admission that the work is not the exclusive domain of high-cost, high-status experts. Once you've done that, a world of possibilities opens up.

This is the thing that scares so many lawyers. Much of what we do could be handled by an ambitious high school sophomore. Much. Not all. The abstract legal insights and the articulating thereof can generate immense business value. It is also hard to replicate. But executing on those insights—i.e., converting them into concrete deliverables like contracts and motions—while absolutely necessary is often more labor intensive than skill intensive. It is the advocacy/counsel/production/content matrix that I long ago appropriated from Jeff Carr. The genuine value of the advocacy and counsel has served to excuse our awfulness at production and content.

Yet the disaggregation movement has been slow. The multi-sourcing of legal work has taken time. That it did not happen overnight was often cited as evidence that it would/could never happen, that outsourcing would remain a "gnat in an elephant's ear." Well, that gnat is starting to buzz awful loud.

Because alternative providers can be the harbinger of alternative methods for delivering legal services, the pace at which alternative providers are growing is an indicator (leading? lagging?) of how the market is changing. In addition to the Report, The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute also released The 2017 Alternative Legal Service Study, which pegs the alternative provider market at $8.4 billion. I remember a few years ago when it was controversial to suggest it was a $1 billion market. That's considerable growth, especially compared to law firms that have seen flat demand this entire decade. The $8.4B looms even larger if you account for the displacement effect, i.e., law firms losing $4 for every $1 paid to alternative providers.

But the Study isn't all about law firms losing. Law firms are setting up alternative providers. Law firms are integrating alternative providers into their own delivery of legal services. Where 60% of corporate clients are using some form of alternative provider, law firms aren't far behind at 51%. The Study also suggests that "many firms are exploring the idea of serving as a 'general contractor' for matters where ALSPs are leveraged to maintain or increase margins while maintaining or expanding service offerings and staying competitive."

The Report further explores this concept:
Opportunity for a New Focus on Supply Chain Management. In response to the growing influx of nontraditional competitors in service areas historically dominated by lawyers, many law firms – in addition to focusing on their core practices – have chosen to expand their service offerings into other related areas that complement the firms’ existing legal expertise but are beyond the scope of traditional law firm services. While these ventures currently constitute a very small part of the legal market, there has been a noticeable increase in the number of firms willing to experiment with such approaches.
One particularly intriguing opportunity for such expanded services responds to the growing client willingness to disaggregate work among many providers by reimagining a new role of the law firm as the overall coordinator for all of the services being provided to the client. In this supply chain management role, the law firm would offer not only the core services that only lawyers can provide but also the overall supervisory function that would ensure that all of the work of various vendors providing services to the client is consistent with the needs of the project, delivered in an efficient and cost-effective way, and acceptable against agreed upon standards of quality.
And here is where it gets truly interesting for me. Now we are talking about integrated systems for delivering legal services. While it can start out as just labor arbitrage, there should be returns to scale as dedicated alternative providers gain institutional experience and insights at delivering types of services that were previously doled out to a rotating cast of law firms and matriculating junior associates. Since we've already conceded that the work does not demand a high-skill, high-status expert, there should be opportunities to introduce automation and other forms of technology into the service delivery process. While transitioning to an alternative providers may have upfront costs and introduce some frictions, in the long run their capital structure and culture should be better suited to innovation.

It is also a replicable type of success that can build on itself and move up the value chain. The Study observes that, "the most common use of ALSPs is low-risk or standardized, high-volume tasks" but "corporate law departments were more likely than law firms to say that they would look to alternative providers in situations where specialized expertise was required, indicating some willingness to allow ALSPs to play at least some role in more bespoke tasks."

We're transitioning to a multi-polar world. Customers, law departments, law firms, alternative legal service providers, legal technology companies, etc. But the logic of the multi-polar world has been evident for a long time. Why do we just now seem to finally be moving in that direction? Why do clients need a general contractor or supply-chain manager? Good questions. I'll try to tackle at least one of them in my next post.


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D. Casey Flaherty is a legal operations consultant and the founder of Procertas. He is Of Counsel and Director of Client Value at Haight Brown & Bonesteel. He serves on the advisory board of Nextlaw Labs. He is the primary author of Unless You Ask: A Guide for Law Departments to Get More from External Relationships, written and published in partnership with the ACC Legal Operations Section. Find more of his writing here. Connect with Casey on Twitter and LinkedIn. Or email casey@procertas.com.



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3 comments:

Friedrich Blase said...

... Aren't law departments in large part just one element of the supply chain? Great stuff, Casey, as always.

D. Casey Flaherty said...

Friedrich, that is why I included customers among the multi-polar world. Many of them access legal services (from firms and, more and more, from alternative providers) without the intermediation of a law department. There are also more opportunities for self-service.

Kenneth Tung said...

Casey, This indeed seems a topic in which most of us will be stuck for a while. Having said that, we have seen that business process outsourcing (BPO) was a race to the bottom for the suppliers, but at the same time BPO has driven up the wages in populous markets like Bangalore and Hyderabad. If the hydraulics between demand and supply works to is logical conclusion, a more sustainable disruption will come from automation and (less skilled) individuals augmented by machines and algorithms. The implication of this for LPO will be a an important guidance for us.

At the end of the day (perhaps months and years away), the legal service industry will transition from time unit, or INPUT, as the common standard in comparing "value" or processes to THROUGHPUT and OUTPUT that will be defined by customers. That will be the day when we will look back to the billable hour from that almost mythical era when the profession was mostly opaque. For now, to borrow a saying from a friend, "it's darkest before... it becomes pitch black".

 

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