image [cc] WilWheaton

In Part 5 of this series we talked about next-generation technologies that have the potential for real change, but mean computers will replace lawyers.

Beyond Private Practice – Some Examples
Law Schools
What They Don’t Teach Law Students: Lawyering,” A title from a November 19, 2011 article in the New York Times. Deeper in the article, “The fundamental issue is that law schools are producing people who are not capable of being counselors,” says Jeffrey W. Carr, the General Counsel of FMC Technologies.”
Law Schools are under heavy attack to change as well. With student loan debt now surpassing credit card debt and with law graduates unable to actually practice law, many even within the legal industry are turning on the law schools. This debate has reached a fever-pitch. Law students are now suing their schools for not preparing them for the realities of the legal market. And law schools are suing the ABA over accrediting standards.
Law Librarians
Long held as a sacred space within a law firm, now law libraries are convenient cost cutting opportunities. Librarians are forced to defend their value and try to maintain staffing levels in order to effectively respond to lawyer research requests. Even clients have joined in this attack, specifying which time keepers are allowed on their bills, many times excluding valuable librarians.
Legal IT
Those in the legal technology space are now under an all-sides attack. Clients want to know specifically which tools a firm is using to be efficient. Firm leadership expects IT to bring every innovation to them, but then declines to fund much beyond basic upgrades. Partners want to cut what they perceive as less-utilized systems (a.k.a. the ones other partners use). Administrative leadership expects that no system will ever go down. Individual lawyers want to switch to iPhones. And IT gets to support all of this. Meanwhile, they are competing against the entire market to retain top technical talent.
Judges
While fighting with every other government agency for funding, they must stay on top of all the new technology, as every day some case is filed over its use or abuse. Meanwhile, they haven’t seen a decent raise in years.
You get the picture …
Part 7 reveals the biggest challenge facing the legal profession – its deep, traditional emphasis on precedence.
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In Part 4 of this series we discussed why firms avoid next generation technology and why that needs to change.

Replacing Humans
To look deeper in to what the future might hold, we will now explore two next-generation knowledge management (KM) technologies. I refer to these as analysis KM tools, as they extend beyond technology that organizes things, and become technology that performs true analysis functions.
LexisNexis has developed an analysis KM product that analyzes knowledge from multiple systems and makes decisions about the content. The Matter Experiences Module of the Lexis Search Advantage product can analyze time entries, documents and other records to determine 1) what type of work a matter is, and 2) what type of tasks a time entry includes. In our profit margin world where we need to understand the costs of providing various services, such a technology will have tremendous value.
Although it sounds straight-forward, most lawyers do not know what type of work a random matter includes. The reason is they never cared about that data point. Instead of labeling a new matter as Patent Litigation, it was called “Company XYZ vs. ABC Corp.” So firms are unable to search and retrieve by matter type. If you don’t know what a service is, you will not know where to begin to understand its cost.
But even when you know the type of matter, you will only be able to see the overall fee. This knowledge has some value. But being able to break the work down into relevant phases and tasks, lawyers will understand their costs at a much more actionable level. Firms can now know how much time is spent on a given task-type for a specified type of work. An additional benefit of having technology perform this coding work is that the results will be consistent and therefore of higher quality and value.
Another, perhaps more interesting and immediately useful analysis KM technology comes in the form of document analysis. KIIAC (pronounced kayak) has a system that analyzes volumes of documents. To illustrate its ability, here is a step-by-step description of it in action:
  1. A user submits 300 different examples of an Agreement into the system. KIIAC analyzes and then returns its best guess at the structure of an Agreement based on the content of the 300 examples. This structure includes a listing of all clauses and their relationships.
  2. Then a lawyer reviews the suggested clause structure and makes adjustments to it.
  3. A second analysis is performed using the finalized document structure. KIIAC then returns an analysis of how variable the language of the 300 examples is. This includes an identification of the most standard language for each clause.
  4. KIIAC can then generate a new document draft using the most standard, non-negotiated language.
The result is actually an identification of the standard way Agreements are written. This is a task humans could not perform.
But wait … there’s more:
5. KIIAC can then compare yet another Agreement against the identified standard, see where the new document is different and if it includes all the relevant clauses.
KIIAC is displacing humans in this process. In traditional practice, lawyers pull a few recent examples of a document type, review them all in an attempt to cull out deal-specific language and then produce a ‘clean’ draft to start the next deal. KIIAC is able to perform the same tasks, but do it using hundreds or thousands of examples. And it does it in a matter of seconds instead of hours. I might add KIIAC does a better job. If the recent examples chosen by the lawyer do not include a specific clause, it may well not end up in the clean draft. KIIAC, in its more comprehensive approach, is far less likely to miss anything. And unlike a lawyer, it can analyze a new draft, say from the opposing party, and in seconds know if it anything is missing from it.
I refer to these new technologies as analysis tools primarily because they perform the tasks of humans. This is a qualitative leap in the type of technology used by lawyers. More importantly, it is technology with a direct impact on profitability. In comparison, an upgraded version of Word has very little, if any impact on the bottom line.
Lawyers need to seek out these types of next generation technologies and find ways to implement them profitably within their practices.
Part 6 in the series looks at segments of the legal market beyond private practice and the forces of change acting on them.
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In Part 3 of this series we talked about new competitors to law firms and some basic economics of law firms to get deeper in to the intense pressures on firms. Here we peeled back the layers of change driven from new technologies.

The Technology Challenge
Ray Kurzweil predicts that given the current exponential rate of technology growth, by 2048 a single computer will have the computing power of all human brains. Kurzweil’s calculations are based on a thorough analysis of numerous technology trends. But even if you discount his ultimate prediction, you really can’t escape the powerful influence rapid technological innovations are having. Compare that level of change to the technology innovations currently prioritized by lawyers and firms. These can be summed up with one word: Upgrades. With some minor exceptions, most firms and lawyers are investing their technology dollars in projects like newer word processing, document management and email management systems. So while the world is automating forms and legal processes on the Web, lawyers are getting better at paragraph numbering and organizing documents.
Why?
Cost-plus thinking. In a cost-plus world, firms react by draining the company of capital every December 31st. This mind-set does not view technology as an investment, but instead as a necessary expense. Worse yet, technology negatively impacts the number of hours and respective revenue generated by them. So why would a firm invest in it?
This model has driven most legal technology vendors to focus on delivering incremental technological innovations to existing applications. So even when a firm actually wants to innovate, they do not have a lot of options.
Running against this grain is the emergence of Legal Project Management (LPM). This concept focuses on applying project management principles to legal matter management. Clients have been driving much of this dialog in their zeal to get efficiencies from their outside firms. Efficiency meaning – do the same work in fewer hours. Firms who have truly embraced this idea (i.e. Seyfarth Shaw) have seen very positive responses from clients. LPM has a ways to go to be fully embedded in the industry. But in the meantime it is driving new technology options.
There are other technology choices that highlight the possibilities and give direction to firms looking to embrace the future. First off, firms should look at the new breed of competitors to see what they are using. LPOs are investing in process automation tools to create standard methods for how tasks are done. This standardization ensures quality and efficiency. It bakes in best-practices for every piece of work. Technology for this is becoming available for lawyers, evidenced by Onit which provides a hosted (SaaS or cloud-based) process automation application for legal departments and law firms.
Vendors like LegalZoom demonstrate the value of providing smart content, online directly to clients. Some large firms have actually deployed similar technology. For example Orrick provides a Start-up Toolkit where clients can generate quality first drafts of the documents needed to form a new company. Both of these examples (process and document automation) are good examples for lawyers and firms to consider.
Part 5 will bring technology further in to focus, highlighting new technologies that perform human functions.
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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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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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Like the series on Marketing 2.0, this series on Staying Relevant is taken from an article written for an upcoming presentation. In 1999 I gave another presentation called Staying Relevant which covered a range of technologies coming online which would significantly impact the legal profession. I suggested lawyers should embrace change if they wanted to stay relevant. Some of my predictions came true immediately (e-filing), others came to be after some years (alternative fees) and others are still waiting in the wings (trusted digital signatures). In this series I review various changes impacting the legal market well beyond technology and again suggest lawyers will benefit from embracing change. This series also highlights the impact of some of my prior predictions, further making the case to embrace.

Part 1 takes a broad look at what has lead to the current climate of change.
“Change before you have to.”
Jack Welch
The Perfect Storm
The legal industry is sailing in a perfect storm of threats to its future. The first storm factor is the economic shift from a sellers’ market to a competitive one. This shift started ahead of the Great Recession. A second factor is the actual Great Recession. With the underlying forces of the market already in flux, this recession greatly accelerated the economic shift. Finally, amongst this economic chaos the pace of technology change continues to accelerate, adding more energy to a raging storm.
The impact of this perfect storm is hitting all corners of the market. It first appeared in the larger firm market, and it has quickly spread. It now includes everything from law schools to the courts, all of which are struggling to deal with vast changes.
To better understand the potential impacts of this storm, let us explore the various aspects of what is happening in different segments of the industry and the forces driving change. As a consequence of this exploration, some predictions will be given, along with some suggestions. However, these comments and various others coming from the market should be weighed against our ability to know the unknown. We have reached a point in human history where predicting the future beyond a few years is quite a challenge. A perfect example is that of Facebook, which grew from zero to 100 million users in less than two years. What things will look like in five to ten years is anyone’s guess. So the best we can do now is keep a vigilant eye on the storm and stay prepared to constantly alter course.
Economic Forces
Up through the mid-2000’s, lawyers across the market were raising rates on a consistent year-to-year basis. This action reflected the relative strength in the market they experienced as sellers. A relatively limited supply of lawyers, along with a growing demand for services, produced consistent growth in revenues. But then things began to shift, slowly at first, but truly at a foundational level.
The changes materialized with clients asking for discounts on rates. Discounts had been given by firms before, but now they became broadly requested and expected by clients. Meanwhile, larger firms continued to push up starting salaries for associates and kept them on lock-step compensation plans, driving up firms’ costs of operation. This economic conflict was hardly noticeable at first, since rate increases and a consistent volume of legal work were still coming in.
To better appreciate the nature of this conflict, we need an understanding of the basic economics of law firms, which are driven primarily by leverage and realization. Leverage is the number of non-partner hours to partner hours. Non-partner hours are those that produce the profits which go to pay partners. Realization is the percentage of dollars realized against standard rates. Realization plays a role since each point below 100%, equates to about a three point reduction in profits. This formula and the profit-squeeze conflict noted above will play a central role in the financial health of law firms going forward. It is therefore essential to our discussions and exploration of the forces at play.
In Part 2 of this series we will walk through the first waves of the storm and how the market has been adapting.

Last week I had the fortune of attending two valuable conferences – the Ark-Group KM and the COLPM Futures Conferences. Perhaps the greatest value to me was the back-to-back participation I enjoyed. This merging of ideas and forums lead me to a new epiphany – or more accurately, an expanded epiphany.
At the Ark-Group KM conference, I was co-presenting with my good friend Kingsley Martin. In our presentation he made this point: Law firms focus on high-end documents for analysis. Clients focus on high-volume documents. His point was that clients were finding value not in gaining efficiencies in Bet-the-Farm work, but instead in bread-and-butter (a.k.a. Law Factory) efforts.
At the COLPM conference there were two things I observed, that combined, make that same point from a different perspective. One was comments from a general counsel (GC) about how BigLaw is not listening. The other was a discussion on how big is the middle segment of the legal market. The GC is bringing the bread-and-butter work in-house (by adding staff) since his outside firms were not addressing that need. The discussion on how big is the middle segment was curious, since people seemed uneasy about actually naming the size of the elephant in that room.
Here comes my epiphany …
The overall size of the market is not growing, or growing very modestly. One stat on this came from another Ark-Group KM presentation. But here is the interesting part – when it comes to the shape of the market, clients have recognized that significant amounts of their work are actually bread-and-butter, in the middle matters. This means the middle of the market is likely growing at the expense of shrinking in the bet-the-farm segment. Or in other words – the overall size of the market is stable, but the shape of it is shifting.
When Ron Friedmann and I posted our Bet-the-Farm versus Law Factory posts a while back, I made the Law Factory argument on the logic that there are too many firms chasing the Bet-the-Farm market segment, making it overly competitive and expensive to chase. This new layer of thinking extends my Law Factory point-of-view, since it argues that bet-the-farm work is shrinking while law factory work is expanding.
For me, this new epiphany further bolsters the Law Factory argument. I understand my thinking is more intuitive than data driven at this point. However, the market continues to highlight clients’ pain which appears to be much more focused on the Factory than on the Farm.
Thoughts on my epiphany?

Consider the degree of trust you should have in your auto mechanic. You will probably never know the quality of work before, during and even after you receive it. You have to trust your mechanic’s diagnosis and then trust the quality of service you receive in the repair. It is difficult-to-impossible to truly know anything about its quality. All you can know is that the car wasn’t working properly before and now it is. What was wrong, what was actually repaired and the quality of the repair could remain a mystery to you forever. This is a called a Credence Service.
Recently I was fortunate to hear a presentation from Blane Erwin of Bridgeway Software on the concept of law as a credence service. Blane brought some original thinking to the challenge of valuing legal services. He laid bare the deep level of trust clients have when hiring lawyers. He described how clients must trust their lawyer’s diagnosis of the problem, and that the solution provided was truly needed and effective. In an environment so dependent on trust, how can clients ascertain the real value and therefore fair price of a service?
But here’s the rub – legal services have long been a credence service. So why the crisis now?
The Trust Breakdown
Many in the legal industry feel the trust between lawyers and clients has been damaged, if not broken. You see it in the articles on value billing and those on the various crises in the profession. To sum it up – many clients feel they have been paying too much for legal services and are now flexing their buying muscle to drive down prices. On its face, this situation defines a broken trust.
What I really like about the ‘credence’ concept is that it clearly defines why that trust must exist. And it suggests ways to repair the damage. Blane offered up one potential solution in his presentation. With some luck and time, he may describe that here as a guest post. (Hint, hint – Blane)
I suggest just having a clear picture of the nature of the trust problem will help lawyers improve the way they price and deliver services to their clients. Consider your experiences with your own auto mechanic. What made those experiences positive or negative?
Think about that next time you engage with one of you clients.

Culture is a very important aspect of how well an organization functions.  Most experts agree, culture is more important than pay when discussing employee satisfaction, and yet, many organizations place no value on corporate culture.  They believe, because you cannot easily measure culture, it does not connect with the company’s bottom line.

Here are the top three motivators for employee satisfaction.

  1. Job security – without positive communication, employees start to feel threatened and unappreciated.  These feelings give employees the impression that they are not valued.
  2. Communication with management – without positive communication from management, business goals and company vision are not shared.   Without this shared experience, the organization will not stand a chance of meeting business goals.
  3. Respect and the ability to contribute value to the business – the feeling of being heard by management is very important to employee satisfaction.  

All of these fall under what I consider to be culture.  An effective culture is positive, values employee contributions, clearly communicates goals, listens and values ideas.  What is most amazing is that this positive culture costs the company very little, monetarily speaking, but has a huge impact on the success of a business.

“A positive culture is not something to be taken lightly.  It can take years to cultivate a positive, customer oriented, collaborative culture and yet that culture can be destroyed in very little time.”

Does culture just happen?  With rare exception, no.  Culture is planned and is part of the overall strategy for an organization.  If culture is not part of your business strategy, how can you expect to have alignment of corporate values?  It is the one-two punch of business alignment and employee dedication that creates a winning team.

In these times when employees are being asked to do more with less, we need to keep in mind the importance of culture within an organization.  If you think about the cost of turnover – how much institutional knowledge leaves with each employee and the impact that bad culture has on employee productivity – you will understand how important a positive culture is and how it contributes to the bottom line.

All this talk of Value related to legal services brought back a value lesson I recall from a few years back. The methodology I saw provides a direct way of assessing any value proposition. In its most basic form the measurement is: If you removed “X,” what will the impact be on “Y.”
For instance – if law firm X were to close its doors at 5:00 on Friday, what will the impact be to its clients on Monday morning? The level of pain they would feel would be proportional to the value the firm currently provides.
As a mental exercise and way of helping our readers assess their value proposition in their current jobs, I provide a contrast of two law firm departments and their value proposition using this method. This analysis is oversimplified to make a point. Consider that before you ‘hoist me by my own petard.’
First up – Marketing
If marketing were shut down on Friday at 5:00, what would the impact on a firm be Monday morning? Absent support for some immediate seminars or RFP responses, there might not be much impact. In the mid-run, a firm would stop putting on seminars and running ads. Or basic marketing functions would shift to partners. Would this put the firm out-of-business? Probably not. They may lose some market awareness, but perhaps not much in the way of work from current clients. However, in the long-run the firm would begin to feel the pain from this short-sided action.
Next up – IT
If IT were shuttered at 5:00 on Friday, a firm would quickly feel it. If you are unable to create, print and send documents, you cannot practice law.
Does this mean if you are in IT you can relax? Absolutley not. The sands of law firm operations (and organizations in general) can shift quite quickly in the New Normal. The lesson here is that you should conduct a value assessment of your current position on a regular basis.
Personally I think that’s the New Way. If you are not constantly looking to improve your value proposition, it can quickly disappear. Think of this as a fun challenge instead of a burden. This New Way values creativity and critical thinking over the mundane and dull. And in my opinion, it delivers a much more fulfilling job.