Someone asked me recently why I think more and more law firms are creating CI roles or increasing their CI capacity, encouraging their BD and Library staff to work more closely so forth. I didn’t really have a good answer on the spot, “cause it makes good business sense, or because market competition and consolidation is increasing” seemed all to obvious and do not address this specific moment in the evolution of the modern law firm.  Last month, I participated in a webinar presented by Ann Lee Gibson, long time law firm CI consultant as a part of the IntelCollab webinar series and unknowingly, Ann Lee answered the question in part.  Her presentation was titled How Competitive Intelligence Helps Professional Services Firms Succeed, and you can view the entire presentation here.  The focus wasn’t specifically on law firms, but by not focusing, certain things became clear.  To begin the various US based professional services firms are compared  by revenue, number of employees and number of professionals.  According to the data, law firms had the highest revenue in 2013, but also the greatest number of employees (costs) but NOT the highest growth rate, nor does the profession represent the largest number of businesses in the professional services.  Furthermore, when compared to Accounting firms, the 2013 data  points out that 75% of revenue in law firms comes from 53 firms, whereas in the Accounting sector that same percentage of revenue is drawn from four firms.  So putting on the CI analyst hat here, what do the numbers tell you? Not surprisingly, especially if you follow any of Toby’s posts, law firms are running inefficient organizations, with leverage issues as a result of the many many owners. I am not the economist so won’t get into the numbers except to say that law firms are increasing CI as way to minimize the impact of the figures.  But even forgetting the economics for a second, you can see from the literature, the blog posts and the new titles that are popping up all across law firms that something is happening.   

Twenty, even 15 years ago firms only had to worry about appeasing clients, doing good work and getting more work from the same or other clients. Few firms were concerned in any systemic way about their competitors and even fewer were thinking about clients in terms of their needs and wants. Today, that landscape has entirely changed.  Clients are driving change at firms by demanding attention be it through: AFAs, LMP, LPO, and/or e-billing. Add to that the growing impact of technology on both the business and practice of law, industry consolidation nationally and internationally, growing in house legal teams, changes to the ownership rules for law firms and firms are forced to be more competitive.  How a firm chooses to be more competitive can (and does) come in varied forms.  Some are shrinking administrative costs and reducing overhead by creating pools of assistants rather than the traditional 1:1 of firms, shrinking headcount or budget for things like KM, Marketing and Library services. Others are taking a different approach choosing to focus on understanding their clients, their markets, their competitors and their own business savvy better.  That’s where CI enters the mix and helps to set the course.  CI is a strategic endeavour in understanding the market condition, the forces of pressure and their impact while also being tactical in informing RFP responses, filling the pipeline and providing colour in addition to background information.  CI, when done well can be the centre point for collaboration and competitive advantage within in a firm. 

There is no denying that the legal industry is changing. The speed of the change depends on where you sit, what you see, and where you want to go, but no one can deny that as the legal industry ship is steering in a different direction, and firms are realizing the power of CI as the compass to help navigate the waters. 

The upcoming August edition of The American Lawyer will feature an article on the innovators of Big Law over the past 50 years. Now, you may initially find it to be an oxymoron to place the word “Innovator” in the same sentence as “Big Law”, but that’s another discussion for another time. What caught my eye was the category of “Outside Influence” and the names and types of companies that were on the list.

The biggest thing that stood out to me was there were two names listed from Pangea3, the Legal Process Outsourcing firm out of New York, Dallas, Mumbai, and Delhi. Although Pangea3 was gobbled up by Thomson Reuters, it still seems to be building momentum in the legal industry as a major alternative to traditional law firms, and its growth over the past three plus years has been very strong.

In addition to the Pangea3 duo, Axiom landed a spot on the Outside Influence list with its 1,000+ person firm with its own twist on how “Big Law” can be conducted during times of flat demand and low traditional law firm revenues.

The late Jerome Rubin, creative mind behind Lexis was also on the list. The whole movement of technology and legal information has probably been one of the greatest influences on the way lawyers conduct business. Of course, it also brought along ideas like billing back clients for the costs… but again, another story for another day.

One of the entries on this list caught me a little off-guard, and at first I thought was a little gratuitous, was the listing of The American Lawyer’s Steven Brill, but then I immediately remembered that the whole AmLaw 100 compilation was the (at least in my opinion) impetuous for the rush to become billion dollar, 1,000+ attorney, Profits Per Partner driven law firms. Without this driver, would we even be talking about the Death of Big Law at all??

David Lat from Above the Law is a shoe-in for Outside Influencer. His online tabloid of the folies of lawyers, especially BigLaw lawyers, has been one of the most popular resources during the hard times of the past five years. ATL is the TMZ of BigLaw, and although many lawyers look down their noses at online tabloid, none of these lawyers ever wants to be mentioned on it.

One of the biggest, and maybe most under-rated on the list is Robert Banks Sr. of the American Corporate Counsel Association. Just as Above the Law scares BigLaw lawyers, perhaps the ACC scares them more. With the ACC throwing out creative programs like the ACC Value Challenge, the association has become a valued resource for Corporate Counsel to bounce ideas off of each other, and to compare notes on how they handle the business of dealing with their outside counsel, specifically Big Law firms. Knowledge like this is slowly putting GC’s in better positions to negotiate with large firms on better rates, better work, and better results (at least financially speaking.) In a time when GCs are constantly being asked to cut outside legal spend, the ACC platform is one of the most valuable resources they have.

There are more on the list, including Steven Bochco for his show L.A. Law, and I’ve put out the press release below. I look forward to reading the full article when the August edition of The American Lawyer arrives in my in-box.

The American Lawyer Honors Top Big Law Innovators of Last 50 Years

 NEW YORK – July 30, 2013 – ALM’s The American Lawyer has chosen The Top 50 Innovators in Big Law in the Last 50 Years and details their innovations in its August issue and online at americanlawyer.com. The winners, picked for their contributions in the categories of Big Ideas, Law Firm Values, Outsiders’ Influence, The Work, and Business of Law, will be honored at a reception in New York City on October 10th.

“Big Law is notorious for its hidebound habits, but over the last 50 years a few dozen men and women have had an outsize impact on the profession,” wrote Robin Sparkman, Editor in Chief of The American Lawyer. “Our research and reporting teams spent six months looking for the people whose ideas, policies, and practices have left an indelible mark on the legal industry.”

The innovators are:

Big Ideas

  • Russell Baker, Baker & McKenzie
  • Ralph Baxter, Orrick, Herrington & Sutcliffe
  • Jerome Cohen, Coudert Brothers
  • Allen Holmes, Jones Day
  • Wang Junfeng, King & Wood Mallesons
  • Peter Kalis, K&L Gates
  • Young Moo Kim, Kim & Chang
  • W. James MacIntosh, Morgan. Lewis & Bockius
  • Owen Nee Jr., Coudert Brothers
  • Regina Pisa, Goodwin Procter
  • John Quinn, Quinn Emanuel Urquhart & Sullivan
  • Ralph Savarese, Howrey
  • Clinton Stevenson, Latham & Watkins

Law Firm Values

  • Hillary Rodham Clinton, ABA Commission on Women in the Profession
  • Esther Lardent, Pro Bono Institute
  • Jonathan Lippman, New York State Chief Judge
  • Robert MacCrate, ABA Task Force on Law Schools and The Profession
  • David Morley, Allen & Overy
  • Roderick Palmore, Leadership Council on Legal Diversity
  • Thomas Sager, E.I. du Pont de Nemours and Company
  • Howard Westwood, Covington & Burling
  • Keith Wetmore, Morrison & Foerster

Outsiders’ Influence

  • Robert Banks Sr., American Corporate Counsel Association
  • Steven Bochco, L.A. Law
  • Steven Brill, The American Lawyer
  • Mark Chandler, Cisco Systems, Inc.
  • Sir David Clementi, The Clementi Report
  • Mark Harris, Axiom
  • Ben Heineman Jr., General Electric Company
  • Sanjay Kamlani, Pangea3
  • David Lat, Above the Law
  • Hugh McLernon, IMF (Australia) Ltd.
  • David Perla, Pangea3
  • Marla Persky, Baxter Healthcare Corporation
  • Jerome Rubin, LexisNexis
  • Amy Schulman, Pfizer Inc.
  • John Walker, IMF (Australia) Ltd.
  • Earle Yaffa, Skadden, Arps, Slate, Meagher & Flom

The Work

  • Richard Beattie, Simpson Thacher & Bartlett
  • Thomas Boggs Jr., Patton Boggs
  • H. Rodgin Cohen, Sullivan & Cromwell
  • Kirk Davenport, Latham & Watkins
  • Robert Fiske, Davis Polk & Wardwell
  • Joseph Flom, Skadden, Arps, Slate, Meagher & Flom
  • Jack Levin, Kirkland & Ellis
  • Martin Lipton, Wachtell, Lipton, Rosen & Katz
  • Harvey Miller, Weil, Gotshal & Manges
  • Charles Ruff, Covington & Burling

Business of Law

  • David Boies, Boies, Schiller & Flexner
  • Andrew Grech, Slater & Gordon
  • Scott Green, Pepper Hamilton
  • Simon Harper, Berwin Leighton Paisner
  • Stephen Hopkins, Eversheds
  • Sir Nigel Knowles, DLA Piper
  • Peter Martyr, Norton Rose
  • Diana Newcombe, Eversheds
  • Raymond Niro, Niro, Haller & Niro
  • Larry Sonsini, Wilson Sonsini Goodrich & Rosati

About ALM

ALM is a global leader in specialized business news and information. Trusted reporting delivered through innovative technology is the hallmark of ALM’s award-winning media properties, which include Law.com (www.law.com), The American Lawyer, Corporate Counsel, The National Law Journal and The New York Law Journal. Headquartered in New York City with 16 offices worldwide, ALM brands have been serving their markets since 1843. For more information, visit www.alm.com.

 

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Image [cc] Tim Pearce

Law firms invest in associates. That seems obvious. They bring in the best and brightest, planning to groom them into future partners. Firms spend considerable sums, investing in these assets. So for fun, let’s take this “investment” as a strategy at face value.

My recollection of the stat is that after five years only two out of ten new associates will still be at a firm. That stat alone suggests ‘investment’ may not be the right word or at a minimum, we would call this a poor investment model. Unless a firm can realize 4 times the return on the associate investments that actually stay, it will be difficult to make the ROI case. 

Perhaps equally interesting from a business perspective is the matter of what is happening to these investments. Where are they going when they leave the firm?

Obviously these trained associates become available for someone else to capitalize on. Historically this was done primarily by clients. As much as they may like to complain about paying to train first and second year associates, they seem to have no problem hiring them once they are trained. To my knowledge, not many clients hire lawyers right out of law school. Why would they? These people are not trained to practice law.

But now many others are joining in, happy to make a return off of the castaway investments of law firms. Non-firms such as Axiom, LPOs like Pangea3 and even new alternative firms such as Valorem Law Group are more than happy to cash in on these investments. Even accounting firms are hiring up trained associates. It’s my read that these new business models are dependent on this flow of trained lawyers.

And why wouldn’t they take advantage of this situation? There’s a glut of these investments out in the market right now, begging to be picked up.

Enter the Conundrum: This pool will dry up … soon enough.

Although the market may currently have a glut of trained, castaway associates, firms are now hiring fewer and fewer of these investments. Not because they expect to improve their retention above the 20% number, but merely because demand for hours is down. So as the demand for castaway associates is rising, the supply is dropping. Adding fuel to this fire – law school applications are down by 30%.

So even though the market is currently over-supplied with these people, the market forces appear to be quickly correcting that imbalance. In many respects this is truly a conundrum. Trained associates are obviously a valued asset, to everyone in the market. Yet the market is seeing fit to devalue them to the point that fewer people even want to try to be one. Or at a minimum, the willingness to train them is disappearing.

As an economist, I am very curious to see how the market will respond once the pool has dried up. You would have to assume the gap will be filled since markets tend to fill a vacuum. An alternative for training these people should emerge. But here’s the real question: Who will be able to make a return on that investment? If you figure that out, give me a call. I may have a few bucks to get things started.

Image (cc) Ashish T

Recently I read a report entitled: Legal Process Outsourcing: LPO Provider Landscape. The report was released in September, but just came to my attention recently. I recommend it as required reading for anyone following the market for legal services.

I have previously commented on how LPOs are coming after law firm market share. This report confirms that and even includes a section called, “LPO Providers Will Move Up the Value Chain.”

To demonstrate the impact of LPOs on the legal market, I thought I would share a few statistics from the report. Emphasis added is mine.

– The global LPO market was estimated to be worth $2.4 billion in 2012.

– The estimate of 28% annual growth rate may be more realistic [versus some reports of 60%].

– India-based providers are the leaders in the offshore LPO space, with more than one million lawyers and 128 LPO providers exporting legal services worth $640 million in 2010.

– The US market [for legal services] is highly fragmented, with 50 of the largest firms generating only 15% of the revenue.

– Prices [for legal services in the US] have increased by 75% (compared to 20% for non-legal business services) in the past decade.

– Microsoft reports that Integreon (an LPO) increased contract turnaround by 20% and increased on-time delivery of contracts to 99.5%.

– As a group, the 27 LPO providers [in the survey] employ a total of 10,858 LPO workers.

– The overall turnover rate [for LPOs] is 15% (Turnover being the percentage of employees who leave each year.).

The average team composition is 22% onshore and 78% offshore.

Is the wake-up bell ringing loud enough yet?

In my role, I am fortunate to see the various market updates on demand, productivity and other key legal market stats. One fairly consistent stat over the past few years has been flat market growth (a.k.a. no market growth). Although there have been minor ups and downs on this stat (most recently a slight up-tick), the overall demand has been and continues to be predicted as … flat.

But is it?

The market intelligence is taken from law firm financials. In the good ole days it may have been safe to assume this data captured a relatively complete market picture. However, I question that wisdom now. If market share is going to providers outside the scope of data captured, then the data is incomplete and not an accurate measure of the market’s activity.

Now Why Would I Think That?

In a recent interview, the co-founders of Pangea3 stated they are experiencing growth of 40-60% per year. Recent market stats on e-discovery services show positive growth there as well. Wait a tick? How can their market be growing while law firms’ is not. Usually these complementary market providers have their business wax and wane with that of firms.

The simple math of 50% market growth suggests LPOs are taking market share from firms. And it’s likely other non-traditional providers are doing the same. Ron Friedmann points out the likelihood that Axiom must be doing just that. As a counter-example of regulatory authorities not noticing this behavior, the DC Bar issued an opinion calling out e-discovery vendors as their offerings appear to be crossing the line in to the practice of law. 

What Does That Look like?

My view: law firms used to provide the complete stack of legal services to clients. Consider seven years ago, first document review in discovery was performed by associates in law firms. Now that rarely happens. This work is going to non-law firms.

So perhaps the market for legal services is not really flat. Instead, whatever growth is occurring is being siphoned off of the bottom of the market by new competitors. Law firms appear to be ceding this market space, since ‘if it can be done by non-law firms, it must be a commodity and beneath our services.’

Forecasting this trend in to the future would likely have non-law firms moving up the stack of legal services, taking on more sophisticated work as they gain market share and experience. But like the DC Bar, I’m just guessing at all of this based primarily on the marketing materials of non-law firms. A big problem for law firms is that whatever is happening is occurring in the shadows since the market data we rely on does not include it.

Real Market Data Would be Nice

So – to all of the legal market intelligence vendors – please start looking past law firm data to a broader, more realistic snapshot of the market so we actually know what’s going on. GM wasn’t just watching domestic auto competitors in the 70’s and 80’s. GM actually watched what the overseas vendors were doing as well. (Although many argue this didn’t help GM that much.)

Part of my job is watching the market. My growing concern is that our market data is not giving us the full picture. And I’m just guessing that picture would further accelerate the impetus for change.

Based on some job ads we have recently seen, it appears Axiom is establishing a presence in Texas. Axiom, as you may recall, is an alternative provider of legal-type services and new breed of competitor to law firms. They have a very interesting business model and have been quite successful in other markets.

Texas firms would be wise to add Axiom to their list of competitors. Axiom provides long-term, temporary attorney placements within client legal teams. This is disruptive for two reasons. First and most obvious, this is work likely being handled currently by outside counsel.  Second, this is a competitor establishing a primary relationship with law firm clients. The first factor is a short-term issue. The second one is very much a long-term concern for firms.

At 3 Geeks we have previously talked about new breed competitors entering the market. Now this appears to be happening geographically and likely by markets (Energy in Houston).

Welcome to Texas Axiom!

Sometimes a 3 Geek post generates responses that expand the idea presented and make it even better. The recent post of Managing the Law Firm Risk Role in Outsourcing is one such example.
My good friend Laney Altamar at Special Counsel keyed in on one of my closing points, “Firms should also consider leveraging technology to better connect and integrate LPO services into their matter management processes.” This statement highlights the need for firms to use technology to directly connect with an LPO or other outsourced provider to truly enable ‘adequate supervision’ per the ethics rules.
Not surprisingly, Laney agrees completely with this assessment. However, she suggested I should ‘up my game’ a bit on the topic. Which lead to an interesting conversation about the ethical duty of ‘adequate supervision.’
My take-away from the conversation is that what ERM is offering is likely necessary, but perhaps not always adequate. In some circumstances, supervision could mean something more like ‘over the shoulder’ oversight. So the real crux of the issue is that ‘adequate supervision’ requires different levels of supervision in different situations. In some cases, partner review of a document might be sufficient. In other cases, project management oversight will do (ala ERM). But at the highest level, supervision would mean actually witnessing the work performed.
Here’s the good news – Special Counsel has a tool, aptly named SightManager, that allows lawyers to view the computer screens of those performing outsourced worked. The screen shot shows what the application looks like in practice. A lawyer is viewing the various screens of outsourced workers and has the ability to zoom in on any of them and watch tasks being performed real-time. Impressive stuff.

Now the bad news – SightManager is only available when working with Special Counsel (which is actually good news for Laney). I give credit to Special Counsel for innovating this way, using technology to truly create a collaborative environment. Perhaps we will see more products like this in the market soon.
In my original post I referenced how I enjoy lively dialogs with ethics counsel on these issues. By chance, my current ethics counsel stopped by my office yesterday. Instead of our usual highly charged debate, when I mentioned the capabilities of SightManager to him, all I got was a smile.

I always enjoy conversations with ethics counsel, whether at law firms or in bar associations. All of the changes in the market tend to challenge different ethics rules. So talking with these people is usually an opportunity to see how new ideas may run afoul of the rules.
At my last firm, I recall one particular conversation about ethical issues in using LPOs. In Texas, and many other jurisdictions, there are limitations to how lawyers can make money on third party services. Many firms just pass the cost along, with no mark-up for administrative overhead, let alone allowing for a margin. The ethics conversation touched on this issue, but quickly shifted to the ethical duties of firms using outsourced services. The duty to ‘adequately supervise’ was the primary reason ethics counsel thought it was a bad idea to utilize such services. My come-back was that if we let the clients decide on the LPO providers, we retain the ethical risk, but lose the ability to vet the provider.
This issue was driven home recently by two disparate events. The first was attending a webinar sponsored by Integreon on the ethics of outsourcing. The main point made by the presenter was the primary ethics duty of law firms is conducting due diligence of the LPO providers. The lawyers’ duty to provide adequate supervision over the services means they better understand the organizational structure, quality control and qualifications of the providers.
The second event was seeing a demo from ERM Legal Solutions. One point made in the demo was that a hosted project management tool like ERM’s could be used to manage work performed by outsourced providers. This got me thinking about how when it comes to an outsourcing situation, due diligence was not enough for lawyers. ‘Adequate supervision’ is a day-to-day, on going duty. And how possibly could lawyers in one location be adequately supervising non-lawyers from another company in another location? Absent a process tool for providing the capability of oversight like ERM’s, lawyers must basically review and confirm every piece of work coming from the outsourced provider. But even then have no direct knowledge of how and when the work was done.
This ‘supervision’ challenge already exists with many third party providers, such as e-discovery vendors. In those circumstances, smart firms are always evaluating the providers, making sure their processes are adequate. LPOs are really on a higher plane in this regard, as their services tread much deeper in to practicing law. With services like “contract drafting” and patent preparation, the evaluation and oversight of an LPO by a firm should be much deeper and hands-on.
My Advice: Law firms bear a significant ethics liability (a.k.a. Risk) whenever an LPO is involved in the work, whether hired by the firm or the client. Therefore, law firms would be wise to proactively engage with LPOs and have their homework done before the need arises. Firms should also consider leveraging technology to better connect and integrate LPO services into their matter management processes. Otherwise, they may end up shouldering all of the risk with no opportunity for sharing in the rewards.

The news of Google investing in Rocket Lawyer got me thinking about the dynamics of the broader market for legal services. On one end of the market we have the discussion about how BigLaw is broken. There is a long and growing list of broken pieces of BigLaw, including: how fees are billed, how marketing is done, how research is conducted, how documents are created, …. You get the picture.
3 Geeks has previously commented on the need for law firms to shift from a cost-plus business model where all revenue is good (and profitable), to a profit margin model where profit (a.k.a. partner pay) is dependant on cost coming in below revenue. We’re not sure what the new law firm picture will look like, perhaps some sort of Law Factory, but we do know it will not be like the picture we see now.
One piece of the new picture emerging into view is being presented by LPOs. These providers present the option of using much lower cost lawyers to perform lower level legal tasks. For BigLaw this means that a segment of work and revenue is disappearing. Although not purely disruptive on its face, this model is disruptive to the cost-plus law firm business model. Outsourcing copies is one thing, outsourcing lawyer work is quite another.
The rest of the legal market has enjoyed poking fun at BigLaw, feeling immune to this force of change. Well – thanks to Google (and LegalZoom), their day has come, with their portion of the market being attacked by “legal forms” shops.
You can argue over whether legal forms offerings and their add-on services are “first amendment speech” or whether they are the unauthorized practicing of law (UPL), but I think that misses the point. The solo/small firm segment of the legal market has been equally comfortable with the way they provide services whilst change whirls around them. Enter the disruptive force, drawn to an un-served market, offering a needed service at a competitive price point.
The Missouri reaction of claiming UPL against LegalZoom is understandable, but IMHO a bit too late for a couple of reasons. First – the market wants and needs theses services and hasn’t been getting them from lawyers. Without the ability to fill this void, the organized bar will in essence be asking the courts (and legislatures) to reduce access to justice. Second – these services have been around for years, evidenced by Nolo Press. I recall years ago the then Utah Chief Justice commenting that if providing forms and minimal guidance on using them was UPL, then the biggest offender would be the court clerk’s office. The point being – attempting to stem the tide of the market in the courts is futile.
Where do these two market trends leave us? Once these two disruptive forces meet in the middle, they may well own the legal market. It’s a variation on the classic military pincer movement, whereby an enemy is attack from both sides, cut off from reinforcements and escape.
Sun Tzu was not a fan of the pincer movement. He argued that an enemy with no where to run will fight ferociously. But will the lawyers? Suing competitors will only get them so far. At some point, to survive, lawyers will have to fully embrace change and find effective ways to compete in a changing market.
Who would you bet on?
ADDENDUM
After writing this post, thanks to a tweet from Jason Wilson (@jasnwilsn), I found this article on Jacoby and Meyers suing some state bars to allow for non-lawyer investment and ownership in law firms. Wow. Here’s a firm feeling cornered and willing to fight ferociously. And instead of suing competitors, they are suing the regulators holding them back from competing. They want to “increase competition, drive down prices, depress some lawyer compensation, and serve people who don’t even know how useful legal services can be.”
But before you change your bet – realize this will need to make its way through the courts, likely up to the Supreme Court. Which means they’ll have an answer in 5 or 6 years. Still, it is nice to see a firm fighting to be competitive.