Earlier this year, Lucy Bassli left her position as Assistant General Counsel of Legal Operations and Contracting at Microsoft to become Chief Legal Strategist for LawGeex, a promising legaltech start-up, and to open her own hybrid law firm-consultancy.

Why would one of the legal industry’s most respected legal ops professionals leave the safety and prestige of the world’s most successful software company to try her hand in the legal start-up space?  Many of us have been asking ourselves this question.

Fortunately, in Post 045, Lucy has agreed to provide us with answers.  It is a wonderfully personal and candid story that I hope will spur a lot of beneficial conversations within the industry.  Virtually all legal professionals want a career where they feel they are making a difference.  Yet, we are at an inflection point where it is not obvious how to make that happen.  To make sense of this complex new environment, we need a generation of trailblazers to take the road less travelled and clear out the brush for those who might follow.  I believe Lucy Bassli is part of this elite group.

Thank you, Lucy, for sharing your story.

What’s next? “When I grow I up, I wanna be a Chief Legal Strategist” (045)

I am pleased to introduce readers to the Institute for the Future of Law Practice (IFLP), a new nonprofit collaboration between law schools, law firms, corporate legal departments, NewLaw service providers, and legal technology companies.  Details of this new venture can be found online at www.futurelawpractice.org.

Per the picture above, IFLP (“i-flip”) will be hosting training bootcamps in May 2018 in Chicago (at Northwestern Law) and Boulder (at Colorado Law). The bootcamps are designed to prep law students for sophisticated legal and business work settings. Each student admitted to the program is paired with a legal employer for either a 10-week summer internship or a 7-month field placement. All internships and field placements are paid. The IFLP program currently includes four law schools — Northwestern, Colorado, Indiana, and Osgoode Hall (Toronto) — though the plan is to build an infrastructure that will support and serve a significantly larger number of law students, law schools, and legal employers.

Rather than summarize the contents of the IFLP website, I am going to use this post to answer four questions:

  1. What problem is IFLP trying to solve?
  2. How will IFLP be successful?
  3. Where did IFLP come from?
  4. How can industry stakeholders become involved?

1. What problem is IFLP trying to solve?

Legal education and the legal profession are at an inflection point where traditional models of education and practice no longer fit the shifting needs of the market. The biggest driver of change is increased complexity. Historically, the legal profession has dealt with complexity through specialization and division of labor.  However, the legal profession is now at a point where its members need to learn new tools and methodologies that were not, and are not, part of traditional legal education.

Unfortunately, law schools are unable to make this transition on their own. This is because (a) the shift in practice requires an integration of law with problem-solving methods that are not legal in nature (e.g., data, process, project management, technology, and team-based collaboration); and (b) the state of the art for these new approaches to practice are currently being developed in the field by practitioners and other allied professionals.

IFLP can help fill this void by identifying industry-leading practitioners and distilling their know-how and experience into an organized body of knowledge that can be taught to law students and mid-career legal professionals.

2. How will IFLP be successful?

IFLP will be successful if it can create training and internship programs that serve law students (through high-quality employment) and legal employers (through a rich pool of applicants with an expanded set of skills and knowledge). In its simplest form, our goal is to use education to build demand for new and better pathways to sophisticated modern practice.  The larger the demand, the clearer the signal to legal education on how to retool to meet the needs of a changing market.

IFLP is fortunate to have an anchor set of legal employers who want to create a talent pipeline that combines traditional training in substantive law with foundational training in data, process, technology, and business  (T-shaped lawyers). Further, as we develop IFLP curricula and training modules, these resources can be used to cost-effectively upgrade the skills of mid-career professionals.

IFLP is designed to be an intermediary organization that coordinates the interests of law schools and legal employers. We want to improve the content and quality of legal training in ways that widen the pathway to practice.  Under the best case scenario, students, law schools, and legal employers will converge on an industry standard that better serves the interests of all stakeholders. A half century ago, organizations like NALP, LSAC, and NCBE sprang up to fill an important industry gap. Similarly, in 2018, IFLP fills a pressing industry void.

3. Where did IFLP come from?

The founders of IFLP were inspired by their experience with the Tech Lawyer Accelerator (TLA) program at Colorado Law.  Since 2014, approximately 80 students (most from Colorado Law, some from Indiana Law) have participated in a 3½ week bootcamp at the end of their 1L or 2L year. The TLA focused on technology, process, and business skills, with students spending the balance of their summers in 10-week paid internships. In some cases, the internships were extended to seven months (the summer and fall of students’ 3L year). Colorado Law’s TLA is the foundation for the first iteration of IFLP. For additional background on the TLA, see Post 018 (summarizing topics covered in the 2017 TLA).

During four years of operation, TLA has garnered very favorable feedback from students and employers. But more significantly, we received “pull” from several employers to expand the program’s breadth and capacity.  In response to this pull, a small group of us conducted a needs analysis during the fall of 2017. This involved the formation of several exploratory committees drawn from our professional networks. One committee focused on law schools; a second on legal employers; and a third on the viability of an ongoing nonprofit business model.

Based on the feedback we received, in late 2017, we made the decision to go forward with the creation of IFLP.  As we embark upon this journey, we are very grateful for the support of our volunteer board.

4. How can industry stakeholders become involved?

IFLP is not an exclusive club.  However, to be successful, we have to meet a market test. This means offering an educational product that is valuable to students and employers while also generating revenues in excess of operating costs.  In our first iteration, we are limiting participation to a small number of schools. We need to work through the myriad of issues associated with cross-school collaboration. This is complex and requires us to go slow.  The goal, however, is to create a foundation that can support future growth.

At present, we are most in need of legal employers. If your organization wants to co-create a world-class educational program that can fill your need for world-class talent, please contact us.  We are also in need of industry sponsors who are willing to subsidize IFLP in its early days.  We are fortunate to have a handful of benefactors who are getting us off the ground.  The payoff is affiliation with a promising nonprofit working to align the interests of industry stakeholders. Announcement of our full roster of participating organizations and sponsors will occur later this spring.

For law schools and law faculty, we encourage you to visit the programs in Boulder and Chicago.  We value your input and are willing to share what we are learning.  With success, we will be able to expand to include more member schools.  If you are interested in getting involved, please contact us at this link.

What’s next? Lucy Bassli shares her thought process behind her major career move (044)

The price of legal services is increasing faster than the CPI’s basket of goods and services.  Perhaps that is not surprising to those of us working in the legal sector. However, legal services are also losing wallet share.  In 1987, legal services made up 0.435% of the CPI-U basket.  By December 2016, the proportion was 0.245%.

This second trend is telling us something important about the future of law practice, particularly in the PeopleLaw sector.

This post breaks the analysis into three strands. Section 1 presents the CPI data, including technical information on the CPI sampling and weighting methodologies. Section 2 offers some possible explanations for why wallet share for legal services is trending downward.  Section 3 uses CPI data to compare legal services with cost and wallet share of college tuition and medical care.  (Preview: costs in the meds and eds sectors are outpacing the CPI-U, yet their wallet share is growing.)

1. CPI and “Relative Importance” within the CPI Basket

The chart below presents the relevant CPI data for legal services.  

In interpreting this graph, note two vertical axes. The green axis (left side) is the CPI-U with the base year set to 1986 (Index = 100).  Over the last 30 years, the green and grey bars show the cost of legal services rising nearly twice as fast as the overall CPI-U basket (334.5 versus 218.5).

The orange axis (right side) measures the “relative importance” of legal services within the CPI basket. The  orange trendline shows this statistic over time.  Basically, as the relative prices of goods and services change, consumers adjust how they allocate their money. The BLS tracks these changes through the Consumer Expenditure Survey. Through detailed interviews and spending diaries conducted twice a year from a representative sample of urban households (89% of the US population qualifies as urban), the BLS measures recent consumer behavior and re-weights the composition of the CPI-U basket.

In the chart above, you’ll note a sudden drop in 1997 in the relative importance of legal services (from 0.480% to 0.329% of consumer spending). This drop occurred because the BLS re-weighted the CPI basket for the first time in several years.  Since the mid-2000s, however, the BLS has re-weighted the CPI based on two-year rolling averages. Thus, the relative importance data for 2015 and 2016 are calculated based upon spending patterns from 2013 and 2014. See Relative Importance of components in the Consumer Price Indexes, Dec. 2016. When 2017 data are released, it will likely be based on weights from 2015-16.

Finally, note that the CPI data on legal services is limited to consumer spending. This is the PeopleLaw sector, which other data sources show is on the decline. See, e.g., Post 037 (between 2007 and 2012, individual consumer spending on legal services declined from $65.5 billion to $58.8 billion).  In the chart above, none (or very little) of the data reflect spending by organizational clients.

I share this technical information on the CPI so that readers have the full context for following troubling claim:  As the cost of legal services goes up, average Americans are finding ways to forego legal services. This is likely a major factor for the shrinking of the PeopleLaw sector, see Post 037, and an under-discussed factor in flagging law school enrollments, see Post 006. Many prospective students are drawn to law as a way to help people.  Yet, lawyers working in PeopleLaw are probably telling prospective law students, “It’s getting harder to earn a living.” See Post 037 (discussing results of 2017 Clio Report).

2. Why is the relative importance of legal services trending downward?

Unfortunately, we lack the data to answer this question with precision.  Below I offer two plausible contributing factors

a. The DIY law movement

One factor that might partially account for the decline in PeopleLaw legal expenditures is the rise of the DIY (do-it-yourself) law movement.  The online form-driven products may be an attractive substitute for an office visit to a local small firm practitioner. For a summary of these offerings, see We Rock Your Web review of The Best Online Legal Services.  It is worth noting that many of these offerings have an A+ rating from the Better Business Bureau).

Yet, the DIY companies are not a complete substitute for all legal needs.  We know this to be true because so many of the DIY companies are building out networks of vetted lawyers who can handle the large volume of legal work that cannot be handled by a simple form.

The most successful of these companies, LegalZoom, has positioned itself as publishing-technology-marketing company that throws off legal work to a network of independent law offices.  To protect and grow its brand, LegalZoom carefully monitors the client satisfaction figures of its referrals.  Cultivating and channeling the legal needs of consumers, and thereafter monitoring client satisfaction, is not the practice of law. However, it is a set of services that can potentially benefit both lawyers and the individual clients they serve.

b. Fewer state court filings

A second possible explanation for legal services’ decline in relative importance is waning value of state courts in resolving disputes. This trend line would occur when the cost of a lawsuit, including the need to retain a lawyer, becomes too expensive relative to the underlying problem or dispute.

In Post 006 and 037, I discussed the disturbing statistics in the NCSC’s Landscape of Civil Litigation in State Courts Report, which was published in 2015. Drawing upon 925,000 cases disposed of between July 2012 and June 2013 in ten large urban counties, the NCSC researchers identified 228,000 cases that resulted in a non-zero monetary judgment.  The median judgment amount was a mere $2,441 — hardly an amount that can support the cost of hiring a lawyer. Further, only 24 percent of cases had the benefit of attorney representation on both sides of the dispute.  Stated in the alternative, 3/4 of cases involved a party going it alone without a lawyer.

If things are as bad in large urban state courts as the NCSC suggests, it is likely that the volume of state court filings is on significant downward trajectory. The reason is simple — lawyers won’t file cases where they know, upfront, that they can’t recoup the value of their time.  Further, going to court without a lawyer is a daunting prospect most citizens would prefer to avoid.  Thus, the lower the case values, the fewer the case filings and the higher the volume of default judgments.

An insider in the Illinois court system tipped me off that state court filings were indeed trending downward.  To duration and magnitude of the change, all I needed to do was pull figures published from in Annual Report on the Illinois Courts, which are published online.

Illinois is a good sample because it is a “single tier” jurisdiction that handles every type of civil (and criminal) matter in the state, including small claims. Also, Cook County Circuit Court (encompassing Chicago) was one of the ten jurisdictions included the NSCS Landscape Report.

Below are the number of civil case filings in the Illinois courts from 1997 to 2016.

Since 2009, the number of civil filings (which includes all cases for monetary damages, real property disputes, review of administrative bodies, and proceedings related to probate, eminent domain, mental health, and municipal taxes) has tumbled from 791,000 to 430,000, a drop of 45.7 percent.  It is possible that the peak years (2009 and 2010) were driven foreclosure actions related to the financial crisis.  However, over the last 20 years, civil filings have declined from 634,000 to 430,000 (-32.2 percent).  Yet, the Illinois state population grew from 11.9 to 12.8 million people.

According to a recent report by the Illinois Supreme Court Commission on Access to Justice, “In 2015, 93 of Illinois’ 102 counties reported that more than 50% of civil cases involved a self-represented litigant on at least one side. In some case types, that number rose as high as 80%.”

Now let me boil is down:  At least in Illinois, which I doubt is an outlier, civil state court filings are the decline; and among those that are being filed, a large and growing proportion involve self-represented litigants.  In other words, the entire state-run judicial system appears to be breaking down, in part because the system is predicated on the assumption that all parties are represented by counsel, an assumption that increasingly does not hold.

Faced with a similar challenge, the province of British Columbia in Canada created a new Civil Resolution Tribunal (CRT), which implements mandatory Online Dispute Resolution (ODR) for low-stakes disputes (defined as $5,000 or less plus all condominium-related controversies).  The CRT is designed to be a consumer-friendly online process that operates without lawyers. See, e.g., B.C.’s trailblazing digital justice delivering, Vancouver Sun, Jan. 4, 2018. The UK is poised for a similar move. See, Online dispute resolution creates ‘exciting’ opportunity for change, says new report, Out-Law.com, Oct. 25, 2017.

3. “Cost disease” in the meds, eds, and legal sectors

I became interested in the CPI index for legal services when reading a book on “cost disease” by noted labor economist William Baumol.  See William J. Baumol, The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t (Yale 2013).

What is cost disease?  Basically, large productivity gains in some sectors (e.g., manufacturing, technology, agriculture) can have the effect of increasing the relative prices in other less productive sectors. This is particularly true for sectors that rely heavily on the labor of highly educated knowledge workers.

Baumol first identified this relationship when studying the economics of the performing arts. Baumol and his co-author William Bowen acknowledged that human ingenuity has devised many ways to reduce the labor necessary to produce industrial wares, yet “no one has succeeded in decreasing the human effort expended at a live performance of a 45 minute Schubert quartet much below a total of 3-man hours.” See Baumol & Bowen, Performing Arts, the Economic Dilemma 164 (MIT 1966). Despite the immovability of the musicians’ productivity, musicians’ wages went up with the rest of the workforce.

Within the economics literature, the industries most associated with cost disease are medical care and higher education. But, as Baumol points out,  other “personal service” sectors are also highly susceptive to cost disease. Examples include legal services, K-12 education, local police and fire (basically, most of government), and many others.  Cost disease is a serious policy issue because (a) goods and services like medical care and higher education are perceived as integral to our quality of life, and (b) when their costs rise much faster than the CPI-U (i.e., “cost of living”), it generates much political handwringing.

The graph below compares the CPI-U to the consumer price of three sectors prone to cost disease: medical care, college tuition, and legal services.

The consumer cost of legal services is roughly on par with medical care but significantly less than college tuition.  Yet, as shown in the table below, when it comes to wallet share, both medical care and college tuition are growing in relative importance within the CPI basket of goods and services.

Relative importance in CPI-U
CPI component 1987 2016 Change over time
Legal Services 0.435% 0.245% -43.7%
Medical Care 4.807% 8.539% +77.6%
College Tuition 0.840% 1.807% +120.3%

The large decline in relative importance for legal services suggests price elasticity — as the price goes up, consumer demand goes down.  In contrast, the relative importance of medical care and college tuition suggest price inelasticity — as the price goes up, consumers find a way to pay more.

It is worth noting that in the CPI-U tracks only consumer spending patterns. Americans are spending a larger proportion of their household income on medical care and college tuition.  However, medical care and college tuition are also finances by other parts of the modern economy.  In the case of medical care, this comes through employer-provided health insurance, Medicare, and Medicaid. Likewise, Department of Education student loans enable borrowers to effectively defer the cost of college tuition until after graduation.  Thus, the table above reflects only the costs paid out of current household income.

Yet, different consumer attitudes toward medical care versus legal services arguably have a dramatic impact on the willingness of young people to enter these two professions.  Below is a chart that compares applicants to law school versus medical schools.


Since Post 001 of Legal Evolution, I have harped on the topic of “lagging legal productivity.”  The above analysis shows that if legal services cannot be delivered more efficiently, ordinary citizens will forgo legal services.  This is not a prediction; it is a statement of what is happening today.  State courts are glutted with self-represented litigants. At the same time, lawyers struggle to find clients who can support their practice.

The problem is not the necessarily the escalating cost of a lawyer’s time ($260/hr in the most recent CLIO survey, see Post 037), but our failure to update our institutions so that ordinary citizens can resolve their legal problems in a convenient and cost-effective way.  In other words, it’s time to redesign some of our most hallowed institutions.  This is the challenge of the next generation of lawyers, judges, and legal educators.

When David Cambria sat down with Eric Elfman to discuss his willingness to try Onit software, he stated that if ADM in-house lawyers were required to engage “in a single unnatural act,” the implementation would fail.

Cambria elaborates, “Why are we all so comfortable with Word, Excel, and Outlook? Because these tools don’t have an opinion about how we do our work. Enterprise software, however, always has an opinion.”

Hardened by 25 years of work experience in consulting and legal operations, David communicated his need for workflow tools that did not require his lawyers to change. Further, he needed significant productivity gains and a steady stream of clean, reliable data to better manage the department. A high bar for success.  Yet, according to David, Onit managed to deliver.

Cambria, Global Director of Legal Operations at ADM, recounts this story during Week 6 of “How Innovation Diffuses in the Legal Industry.”  Eric Elfman, Founder & CEO of Onit, was also present, giving his own entertaining version of a project that went on to win a 2017 ACC Value Challenge Award.

By inviting Cambria and Elfman to class, I hoped students would get a glimpse into the type of buyer-supplier relationship that enables a legaltech company to successfully “cross the chasm.” See Posts 024026 (discussing chasm framework, its connection to diffusion theory, and its applicability to the legal industry).

For a summary of Week 2 guest lectures (Pangea3, Practical Law Company, Hotshot), see Post 032. For week 3 (consultative sales at Thomson Reuters), see Post 034. For Week 4 (a deep dive into Axiom), see Post 036. For Week 5 (law firm examples of intrapreneurship), see Post 039.

Crossing the Chasm

I knew I hit pay dirt when Elfman came to class with a dog-eared copy of Crossing the Chasm.  Naturally, I had to ask, “Have you ever crossed the chasm?”  With an enormous grin, Eric replies, “Twice.”

The first time was with Datacert, an e-billing company Eric founded in 1998 with $1,000 of his own money.  The timing and concept were right, as Elfman quickly landed five Fortune 500 clients, making it relatively easy to attract investor money to build out the product and scale. When Eric left the Datacert in 2008, it was valued at $60 million. In 2014, Wolters Kluwer acquired Datacert for $290 million, merging it with TyMetrix to create what is now known as Wolters Kluwer ELM Solutions.  (The acronym “ELM” stands for enterprise legal management.)

The second crossing was with Onit, a business process automation company Elfman founded in 2010. This time, Eric put $1 million of his own money followed by four rounds of outside investment (a mix of debt and equity) totaling $16.4 million.  Eric stated that the company crossed the chasm approximately a year ago when operating income could more than cover ongoing R&D and sales efforts.  “That is not to say we won’t raise more money,” added Elfman. “Simplicity is extremely expensive to create. You also need to have high quality products when customers want to buy them.”

Onit’s core product is configurable software that can be deployed relatively cheaply and pointed at a wide range of legal department needs.  Established applications include legal spend management, matter management, contract management, legal holds, legal service requests, NDAs, and virtually any type of work flow involving knowledge workers.

Onits’ major competitors are enterprise software providers that serve corporate legal departments. However, most competitor offerings are built around a single problem. This means that legal departments tend to have several enterprise systems that can’t talk to each other very well. As discussed in more detail below, legal departments are perennially underwhelmed with their enterprise software incumbents (my observation, not Elfman’s).

Onit currently has 105 employees in the US, UK and India, and $10 million in annual revenue. According to Elfman, for the last three years, the company has been growing at a 50% annual rate.

Corporate legal departments as a target niche market

As I listen to Cambria and Elfman share their experiences, I am surprised by how well the narrative fits the crossing-the-chasm framework.

To refresh readers’ understanding, a company starts life with a generic product that likely impresses technology enthusiasts but lacks the features needed for broad mainstream adoption. Thus, to cross the chasm and achieve commercial success, a company must (a) target a niche market that could benefit from the innovation, (b) identify its biggest pain points, and (c) work backwards to build a “whole product solution” that becomes the “the only reasonable buying proposition” for the target market customer.  Moore, Crossing the Chasm (1st ed. 1991) at p. 110; see also Post 024 (summarizing basic framework).

This is Moore’s “big fish, small pond” strategy, which is designed to create focus on the narrow set of clients and conserve the bandwidth of key personnel.  See Post 025. If executed properly, the post-chasm company has successful commercial relationships with “pragmatist” mainstream customers. This sets off a word-of-mouth campaign that dramatically reduces the cost of sales. Further, once inside the mainstream market, the company is well-positioned to develop and sell future products and services.

In short, crossing the chasm is a one-time event that changes everything for the better. See graphic below:

Well, what is Onit’s target niche market (or small pond)?  Here I get an important lesson in framing.

Virtually all legaltech companies target a discrete problem or complex task that exists within a legal department. These problems or tasks include e-billing, matter management, document management, e-discovery, contract analytics, etc.  When evaluating this market structure, the natural capitalist impulse is to integrate these disparate systems into a single enterprise solution, thus achieving economies of scope and scale. Indeed, this is the logic behind many legaltech acquisitions, including the Datacert-Tymetrix tie-up. Framed in this way (which is the way most legal insiders see legaltech), the small pond is one or two significant problems or tasks inside a legal department.

But that is not Onit’s strategy.  Onit is a business process automation company where legal departments are viewed as a small but influential beachhead that can provide access to rest of the corporation. Thus, the addressable market is not all corporate legal departments (which might be $3-5 billion), but corporate knowledge workers struggling to collaborate effectively within and across business units (probably 100x bigger). Framed in this manner, the small pond is legal department operations.

Few tech entrepreneurs would be anxious to have legal as their initial target market. The field is highly technical; the clientele are demanding; and the financial upside is limited. But Elfman sees things differently.  “The lawyers are the laggards. They are the Department of No. If we can win them over, the rest of the corporation is a lot easier.”

I am inclined to take Elfman seriously because he and his team are obsessively focused on delivering a whole product solution. To fully grasp what this means, we need to understand Onit as compared to its primary competition.

Compared to what?

In Crossing the Chasm, Geoffrey Moore makes the point that prospective clients are unwilling to strain their attention span to hear your pitch. Thus, a product needs to be positioned against what is familiar and established, thus enabling target clients to quickly categorize your product.  Yet, to generate curiosity and interest, the product also needs to be different in a way that delivers a substantial benefit. See pp. 159-61.

As previously noted, Onit’s primary competitors are enterprise software companies that offer solutions to one or more legal department needs, such as e-billing, matter management, contract automation, or data analytics. In my travels to various industry events involving legal technology, I often hear the refrain, “Everybody hates their e-billing vendor.”  The same tends to be true for document and matter management. To date, no company has emerged as the obvious first choice.

Most of these companies got their foothold many years ago when legal departments were growing rapidly and general counsel and their lieutenants felt vulnerable regarding the lack of basic systems and controls. For example, without enormous manual effort, the department could not answer basic questions related to outside counsel spending; or the department couldn’t generate a useful status report on pending litigation; or lawyers struggled to locate prior work product. In each case, there was an enterprise software solution or platform designed to make that problem go away.

Indeed, Elfman tells the story of how he got the idea for Datacert. After completing his MBA at Rice in 1995, he went to work for a litigation consulting firm that specialized in forensic accounting.  While working on an engagement for Exxon, Eric asked the head of litigation about the size of his total annual spend. The AGC responded, “I’m not sure.  Somewhere between $200 and $400 million.”

Elfman describes this exchange as “the moment that changed my life.”  The business opportunity was large and obvious: use technology to apply basic accounting discipline to corporate legal spending.

Datacert and Elfman were extremely successful making sales to a lot of large corporations. Eventually, Datacert would land 130 companies in the Fortune 500, including #1, #2, #3, and #5.  Yet, Datacert also became part of the large cadre of enterprise software companies that legal departments complain about (this observation is based on my own industry knowledge, not any comments made by Elfman regarding his former company).

Root cause

As I listen to David Cambria and Eric Elfman discuss their collaboration, a deeper understanding of the problem comes into focus.

As David points out, when enterprise software is pointed at a specific problem, it develops a strong opinion about how the work should be done. Invariably, that opinion adds steps to the workflow, often without delivering any immediate or tangible returns to the worker trying to do their job. Naturally, people being people, they find ways of minimizing their interaction with the system. Thus, the resulting incomplete and uneven usage undermines the value of the enterprise solution. It also limits — possibly to zero — the amount of usable data the system produces.

In theory, management can fix this problem by mandating usage.  They can fire people. They can reduce or withhold bonuses.  Political capital, however, is limited.  Few bosses want the troops grumbling about how a six-figure software mistake is hindering their ability to do their jobs. So the natural equilibrium becomes enterprise software that is half used. This is usually a modest improvement over the prior state of affairs, but well short of expectations when the licensing agreement was signed.

This recurring cycle explains why David Cambria has such disdain for business solutions that require unnatural acts. Likewise, this is why Eric Elfman was ready to leave Datacert after ten years at CEO.  This was a game he could not win.

What problem is Onit trying to solve?

Eric Elfman left Datacert in 2008.  Two years later, he started Onit with Eric Smith, Datacert’s longtime CTO.  Yet it wasn’t until 2011 that Elfman and Smith came up with the core idea for Onit, which is “collaborative process automation for knowledge workers.”

Not very intuitive, right?

To Geoffrey Moore’s point, it is very difficult to understand an innovation without one or two familiar reference points. This is particularly true with something as abstract as software. Thus, the graphic below proved to be enormously useful to the class.

On the left side (in green) is enterprise software, which attempts to solve problems through top-down controls.  Although these solutions tend to be complex (requiring IT support) and expensive (big up-front fees and implementation), they hold out the promise of permanently eradicating a serious problem. The implicit assumption is that workers will use the system as designed — an assumption that, experience shows, is often unjustified and unrealistic.

On the right side (in orange) are Enterprise 2.0 tools (like Slack, Zoom, or Yammer). Individual users and work teams like these tools because they increase the velocity of employee communication.  Corporations are happy to support Enterprise 2.0 tools because they are cheap and low risk. But they also don’t produce any structured data that senior managers need to assess and improve organizational performance.

Despite billions of dollars spent on enterprise software and the hype and popularity of Enterprise 2.0, Elfman observes that “virtually all knowledge work and processes are executed outside of these systems.” Instead, in most organizations, workers try to do everything with familiar Microsoft tools:

  • Email is the intake and “collaboration” platform, within and across business units
  • Word documents are the “forms” solution
  • Excel is used for tracking and reporting
  • Sharepoint is used as a document repository

Virtually all legal operations professionals will acknowledge that these tools are breaking down as solutions. They are just not fit for purpose.

Onit (in blue) is trying to fill in the middle ground between Enterprise (green) and Enterprise 2.0 (orange). The key innovation of Onit is that it enables a business process owner to work backwards from how people work (people-centric) rather than backwards from an acute organizational pain point (problem-centric) and thereafter expecting workers to get onboard.

“Bring the work to the people”

When Cambria signed on with Onit, he had a vision to “bring the work to the people.” Where are the people in ADM’s legal department? Probably somewhere near a device where they read their email.

Onit is behind a wide range of automated workflows at ADM, including: (1) matter intake and routing, (2) early case assessments, (3) liability reserves, (4) invoice review and approvals, (5) settlement authority requests, (6) recording of matter disposition, and (7) on-demand NDAs. Yet, for most ADM lawyers, Onit is barely visible:  it’s all point-and-click tasks and hyperlinks embedded inside emails — highly natural acts for lawyers. Cf. Post 040 (per “lawyer theory of value,” lawyers have a strong preference to be left alone to do legal work).

Cambria or a member of his staff are usually the “business process owner” for each of these processes.  Onit is simple and flexible enough for them to do a fair amount of programming on their own — no need to involve corporate or department IT. This is ideal because the legal ops team is close enough to the work to gauge what the workforce is willing to accept. And If they are wrong, adjustments can be made cheaply and quickly.

Nudges and the Onit backend

One way that Cambria drives the broader agenda of the department is to include “nudges” in the Onit workflow.  A nudge makes it modestly more difficult for lawyers to override an established playbook solution. For example, if an ADM in-house lawyer wants to retain a law firm that is not on ADM’s preferred panel list (ADM winnowed 700 law firms down to a preferred provider list of 20, see “How ADM Cut Its Outside Counsel Rosters By 680 Law Firms,” Law360, June 8, 2016), a text box appears that requires a written explanation.  Because this choice requires additional work and invites scrutiny from the boss, it is chosen less often.  Explains Cambria, “I’m always mixing the peas in with the mashed potatoes.”

Although Onit is largely invisible to a substantial portion of the ADM legal department, the Onit applications demo-ed in class — i.e., the backend where David and his staff configure workflows and dashboards — is surprising clean and simple.

David shows us the main dashboard he uses monitor the legal department (16 tiles of information).  He also shows one of the dashboards he built for Cam Findlay, ADM’s general counsel, which provides real-time information likely of interest and value to the C-suite.  Some of the tiles use Tableau to display the information graphically (other data visualization programs can be used).  All of these graphics are generated from data captured by Onit workflow systems.  The data are high quality because Cambria has ruthlessly reduced the number of unnatural acts required by his lawyers.

Diffusion theory wrap-up

Eric Elfman readily admits that Onit targeted Cambria as an early adopter and opinion leader.  Cf. Post 020 (discussing the crucial role of opinion leaders in accelerating innovation adoption).  Eric comments, “David got a whole lot of software for very little money. But we wanted him as a reference client.  And frankly, it’s been worth it.”

Cambria was drawn to Onit because it offered him the possibility of improving the performance of ADM’s legal department without requiring this lawyers to learn new technology or do data entry. This is the novel perspective of a true “visionary” customer as defined in Crossing the Chasm.

These are interesting anecdotes. However, if we want deep learning from this case study, it is important to tie what we see back to the empirically validated principles of diffusion theory.

As discussed in foundational posts 008 and 011, innovation adoption — whether it happens at all, and if so, at what rate — is primarily a function of five innovation attributes. See graphic to right.

In addition, software for managing complexity requires us to evaluate these attributes from two perspectives:

  1. Managers making the purchase decision. These are folks with a serious business problem and a limited amount of time and technical expertise, at least with software.
  2. Workers asked to use a new software solution. These are busy professionals who just want to get their work done.

Arguably, legal departments have historically made the mistake of focusing too much on (1) and underestimating (2). This explains their perennial disappointment with enterprise software.

The table below scores Onit from both perspectives using the simple scoring system developed in Post 011 (fast versus slow innovations):

  • Positive numbers (+1  to +3) speed up the adoption rate
  • Negative numbers (-1 to -3) slow it down
  • Mild effect = -1 or 1; moderately strong = -2 or 2; very strong = -3 or 3
  • No effect on rate of adoption = 0
Factor affecting adoption rate Manager Worker Adoption Analysis
Relative advantage 2 3 Managers get complete, high quality data, albeit after a learning curve. Workers are not asked to perform unnatural acts; minimal change management.
Compatibility -1 3 Managers are business process owners and have to learn cloud software related to workflow; new but surmountable. Workers get to stay within email and Internet browsers; basically this is change that feels like the status quo.
Lack of Complexity -1 3 Managers have to climb a learning curve, but its mostly cloud-based drag-and-drop tools. IT support is minimal. Workers carry on business as usual.
Trialability 2 2 Managers can get started at a low cost (e.g., just one Onit application) and build it out as needed. Worker feedback enables quick and inexpensive changes in process.
Observability 2 -2 Managers can see the high quality data pile up.  For workers, there is a limited ability to observe fellow knowledge workers being more productive. This factor is hard to change. It is also why we laugh at Dilbert cartoons.
Totals +4 +9

The key insight of this analysis is that Onit is likely to enjoy rapid adoption with workers, largely because it places so few demands on them.  Although managers don’t have it so good — they actually have to learn a new technology — it’s likely worth it.  As the ADM example shows, worker adoption occurs in a low friction way; also, senior personnel in the legal department can finally see, measure, and manage essential business processes. From a big picture perspective, this is a potential home run.

During class, Eric Elfman observed that technology start-ups are essentially “a series of experiments until something works or you run out of money.”  According to Cambria, Onit works well.  That is very good news for Elfman and Onit.

What’s next?  See Legal Services and the Consumer Price Index (042)

In a recent post at 3 Geeks and a Law Blog, Casey Flaherty puts his finger on a big problem.  The opening paragraphs are too funny not to quote in their entirety:

My friend John Grant [of Start Here HQ] made a mistake.

Many moons ago he was consulting on process improvement for a large law department. He surveyed in-house counsel on their biggest complaints about outside counsel. The response was that outside counsel:

  • Don’t understand my business
  • Can’t tell me how long anything will take
  • Overwork a problem/introduce complexity
  • Don’t give me output in a format I can use

Familiar enough. And so far so good. John’s misstep is that he put the same question to internal clients of the law department. The response was that in-house counsel:

  • Don’t understand my business
  • Can’t tell me how long anything will take
  • Overwork a problem/introduce complexity
  • Don’t give me output in a format I can use

This result was not well received by the law department.

I laugh because I have seen this problem firsthand.  However, it’s probably not as funny if you earn your living selling advice to in-house lawyers.

Casey’s post contains a level of humility and candor that is rare among people, let alone lawyers.  Here is my own paraphrase of Casey’s thesis: “After 10+ years of relevant work experience and countless hours of reflection, I’ve concluded that successful innovation among lawyers is less complicated but more difficult than I thought.”

The Lawyer Theory of Value

Casey’s “lawyer theory of value” is the insight that makes things less complicated.

Casey writes, “The lawyer theory of value states that the key to value is having smart lawyers.  Lawyer time is the primary resource and the primary unit of measure even in law departments that have no compensable time sheets.” Because in-house and law firm lawyers are the same people, they have the same go-to move — stand back and let me lawyer.  For in-house lawyers, however, the reflex varies by problem-solving hat:

  • Hat 1.  When wearing their service-provider hat, they measure value based upon time and effort.  After all, they know how smart they are and how hard they work for their internal clients.
  • Hat 2. When wearing their client hat, in-house lawyers measure value based on predictability and how the service provider helps them get their work done — just like those folks in sales, HR, and purchasing.

Although in-house and law firm lawyers are the same people, law departments “get them at discount and on a fixed fee.”  Thus, for at least two decades, as Casey points out, clients have dealt with budget pressure by expanding their law departments. See Post 003 (documenting trend).  However, as this approach hits the point of severe diminishing returns, Casey acknowledges that legal departments have fully replicated the management challenges of law firms.  The refrain from lawyers is the same: “not here, not yet.”

“What most in-house stakeholders want,” observes Casey, “is more budget, more headcount, and to be left alone.”  We see the same mindset in law firms: “I’ll work hard and track my time. Otherwise, leave me alone.”  Indeed, the perfect symmetry is what makes the lawyer theory of value so compelling. If we apply Occam’s razor, there’s nothing left to cut.

Seeing the world as it really is

if the lawyer theory of value is true, then it has implications for Casey’s broader views on legal innovation.  To Casey’s credit, he catalogues four faulty assumptions he has personally harbored:

  • “First, I’ve taken in-house counsel at their word. I’ve relied on stated rather than revealed preference. … The desire to change may be genuine. But that in and of itself does not make change a priority. … I expected more law departments to be fast followers. Instead, we’ve repeatedly witnessed innovations by prominent law departments remain outliers.”
  • “Second, I’ve imagined change efforts that are deeper and more transformative than they turn out to be. I’ve taken the highlight reel and mentally filled in the gaps to be equally spectacular.”
  • “Third, I’ve observed success in one area [contract management, diversity, outside counsel spending] and mentally grafted it onto others [e.g., litigation management or use of alternative service providers]… [T]his assumption has it backwards. In-house departments are resource constrained. With finite resources, the essence of strategy is choosing what not to do.”
  • “Fourth, and relatedly, I’ve treated in-house departments as monoliths. Because the legal ops head and one AGC have stood up something cutting-edge, I’ve implicitly assumed that the remainder of the department shares their innovative fervor. But politics is the art of the possible. … While innovation may be embraced and effected by a few, the many view it with suspicion and annoyance.”

What makes these admissions / reinterpretations so striking — and useful — is that Casey is as intelligent and experienced as they come. Yet, he is coming clean with insights that he learned from the trenches, admitting that true progress is a lot more difficult than he thought. God help the rest of us trying to sort things out from the comfort of our base camps.

Why does this matter?

Roughly 55% of all legal services in U.S. are purchased by organizations with at least one in-house lawyer.  And this staggeringly high number excludes the economic value of more than 105,000 in-house lawyers. See Post 003. Thus, Casey is writing about the substantial bulk of the legal services market, not a fractional subset.  The portion of the profession fully outside his analysis, see Post 037 (decline of the PeopleLaw sector), has a different set of problems. Albeit, the answer to both requires a substantial redesign of how lawyers — or, more accurately, legal professionals — serve their clients.

I hope Casey agrees with this additional gloss on his analysis: The lawyer theory of value — solving legal problems one at a time with smart lawyers — is an unstated and unexamined preference of lawyers, not a viable long-term solution for the clients they serve. Further, it is not a preference that law students and younger lawyers can afford to indulge. As I collect my law professor salary, I think about this issue on a daily basis.

There is a lot of hard work ahead on staggeringly complex problems. These problems are made more difficult by organizational politics, the personal agendas of those fending for themselves, and necessity of telling people things they don’t want to hear.  Good ideas are, at best, the first 5% of a solution.  We ought to be grateful we have Casey’s brain power and intellectually honesty to help us cope with the rest.

What’s next? See Successful technology adoption: David Cambria (ADM) and Eric Elfman (Onit) discuss their collaboration (041)

If a successful large law firm faced an Innovator’s Dilemma, what would it look like?

On the one hand, the firm has a wonderful set of endowments: (1) longstanding and lucrative relationships with industry-leading clients; (2) a business that requires very little operating capital yet generates significant cash and profits; and (3) an established brand that makes it the safe choice against upstart new entrants.  On the other hand, when the traditional service offerings hit a plateau that is likely permanent, the firm struggles to use its superior endowments to reinvent itself in a way that locks in another generation of prosperity. The graphic above depicts the problem.

Many law firm leaders understand the innovator’s dilemma and worry about the timing and execution of reinvention. Thus, at numerous firms, there are internal innovators, or “intrapreneurs,” who are running carefully vetted projects designed to deliver tangible benefits to their firms. In its idealized form, this strategy raises awareness through small wins, which, in turn, create buy-in and momentum for more ambitious change.

We were fortunate to have three law firm intrapreneurs as guest lecturers during Week 5 of “How Innovation Diffuses in the Legal Industry“:

For a summary of Week 2 guest lectures (Pangea3, Practical Law Company, Hotshot), see Post 032. For week 3 (consultative sales at Thomson Reuters), see Post 034. For Week 4 (a deep dive into Axiom), see Post 036.

To set reader expectations, there was a lot to cover in this class. With three great guests, we ran out of time to probe each story with equal depth.  Also, for the purposes of publication, I need to disentangle the principles and lessons of intrapreneurship from the organizations where our guests have worked. The risk is that a discussion of context will be construed as criticism, and criticism was far from the spirit of our discussion.

To resolve this tension, I use the two problem statements below to meld together common themes. After that are specific highlights of each speaker’s remarks.

Problem statement from within the law firm

When we apply innovator’s dilemma and intrapreneurship concepts to law firms, the underlying subtext is that highly educated and successful partners are, as a group, ill-equipped to adapt to a changing legal market.  Assuming this problem statement is true — and I believe it is — why would it be true?

The problem is certainly not lack of creativity.  Within their substantive specialties, lawyers routinely come up with ingenious solutions.  Rather, the challenge is a confluence of experience, perspective, and incentives that create a powerful mental frame that is very difficult for long-time insiders to overcome.

Specifically, for several generations, lawyers in corporate law firms have carried on their craft within a simple business model that required very little time or attention to maintain. In most cases, if lawyers just focused intensively on their clients’ problems, the economic results got progressively better. This was (and is) powerful operant conditioning. As a result, for many law firm partners, the macro-trends of the legal industry are abstractions that carry very little weight.  The only market that matters is the tiny slice each particular partner serves.

Unfortunately, in very few instances are clients speaking with one voice.  In fact, voices vary by adopter type. See Post 013 (providing examples of two major corporate clients expressing completely opposite views on the need for change). Innovator and early adopter clients are drawn to new ways of legal problem-solving, though they’re in the minority.  Similarly, some early majority clients are pushed toward innovation because they can no longer afford solutions provided by traditional law firms, see Posts 032 and 036 (2008 recession led to surge in adoption for Pangea3 and Axiom).  But a sizable portion of the legal market is content with brand firms billing by the hour. If “my clients” feel differently next year or the year after, we can deal with it then.  This narrow client-centric approach is strongly reinforced by most law firm compensation systems.

The above description explains the paradox of the highly successful law firm unable to play its superior hand.  Thus, the innovator’s dilemma is a real strategy dilemma for virtually all large law firms.

Problem statement from the client side

Although clients don’t speak with one voice, the environment they are operating within is becoming more complex, global, and regulated.  This, in turn, is changing the structure of the corporate legal services market — i.e., the macro-level trends that many partners wave away as irrelevant to their practice.

Arguably, the biggest change is growth of corporate legal departments.  For at least the last 20 years, corporate clients have adapted by growing their in-house legal departments and insourcing more repetitive or lower-stakes work that formerly went to law firms. See Post 003 (showing 1997 to 2016 employment trends for lawyers working in government, in-house, and private law firms).

With more and more legal departments becoming the equivalent of large law firms embedded inside corporations, we’ve witnessed the rise of the legal operations movement (CLOC and ACC Legal Ops) and the rise of the “Type 6” client. See Post 005 (presenting a typology of law firm clients).

Legal operations as a profession and field is coming into being because many large corporate clients need more sophisticated methods and systems for managing legal cost and legal risk.  The ascendency of this role is strong evidence that the business-as-usual law firm billable hour model is on a slow but permanent decline, at least for operational “run-the-company” work that accounts for the majority of the corporate legal services market. See Post 034 (discussing trend through the lens of Axiom); Post 010 (discussing trend through the lens of the managed services industry).

The graphic below depicts the market transformation.

In general, legal complexity increases with economic growth.  For about 100 years, we’ve coped with this problem through division of labor and specialization.  This approach created the large law firm. In more recent decades, as the growth-complexity line has steepened, law firms reaped higher profits.

Yet, we have reached a point where division of labor and specialization are no longer a match for the geometric growth of legal complexity. Although clients and law firms experience this pressure as a cost problem, the root cause is lack of productivity gains.  See Post 001 (discussing systemic problems created by lagging legal productivity). To meet this productivity imperative, the legal industry is starting to migrate to new methods of legal problem-solving that are based on data, process, and technology. Indeed, these pressures are why NewLaw exists, financed in large part by venture capitalists and private equity.

NB: All the analysis and charts above frame a structural problem from the perspective of organizational clients. For this group of clients, the problem of lagging productivity is leading to market-based responses, albeit slowly. For individual clients in the PeopleLaw sector (roughly one-quarter of the legal market and shrinking), lagging legal productivity manifests itself through self-representation or people failing to seek any type of legal-based solution. See The Decline of the PeopleLaw Sector 037. In short, these are two distinct problem sets.

So the question is very simple: for large corporate clients, who is going to create the new paradigm? There are three contenders:

  • Legal departments through more legal operations and in-sourcing;
  • Law firms by skillfully playing their superior hand; or
  • NewLaw, which has data, process, and technology as its core competency but has the challenge of being new and unfamiliar.

The answer is likely to be some combination of all three. Yet, it is also likely that many law firms will fall victim to the innovator’s dilemma and be among the losers.

The challenge for law firms is that the business opportunities of a structural market shift require partners to make business judgments about macro-trends at the same time they are under pressure to acquire, bill, and collect hundreds of thousands of dollars or more in legal fees for the current fiscal year.  Unfortunately, this problem can’t be fixed by changing a comp system to reward a long-term focus, as those with a short-term focus are free to leave and take their clients with them.

Kubicki: Intrapreneurship inside a law firm

Among my three guest lecturers, Josh Kubicki has given the most thought to intrapreneurship as an applied discipline. See, e.g., Kubicki, The Intrapreneur’s Dilemma, Medium, Aug. 20, 2014.  During his guest lecture, Josh asked us to envision a simple corporate pyramid that consists of the CEO (at the top), the C-Suite (layer 2), vice-presidents (layer 3), directors (layer 4), managers (layer 5), and line workers (base of the pyramid). “Obviously, we know who’s in charge.”

“Law Firms,” noted Josh, “are much flatter.” He then picked up a grease marker to draw a stylized law firm org chart.

At the top of the pyramid, which may not be a pyramid at all, are partners who are also owners. Although partners are not the CEO, they do tend to act as CEOs of their own practice, particularly if they keep a lot of other lawyers busy.  However, increasing performance and enterprise value of the firm require collaboration across the partner / owner / CEO class.

To do this well, the law firm intrapreneur has to find ways to break down the partitions between partners — the blue lines above — without engendering fear or resistance.  Further, the intrapreneur has to do it with little or no formal authority.  “No matter what your title is, the intrapreneur is part of the professional staff paid for by revenue-generating lawyers.  So the only tool you have is your ability to make someone’s life better in a relatively simple and low-cost way.”

This reality is why Josh relies heavily on design thinking in all his change initiatives.  Josh drew the diagram below, which he called “the trifecta.”

Innovations start as an idea in an innovator’s head.  Once we move to implementation within an organization, however, we move into people’s daily experience — busy people whose job it is to serve others. Even if an innovation will, in theory, make the organization better off, implementation will fail if individual stakeholders have a negative experience that makes their job harder. Thus, successful innovation (Phase I Initiation + Phase II Implementation, see Post 015) is actually a series of properly designed sub-innovations.

A successful sub-innovation requires making the complex very simple, culturally compatible, and highly advantageous to the end-user, ideally with a very fast return-on-investment. Cf. Post 008 (presenting the key factors in Rogers rate of adoption model). If the coordinated sub-innovations all result in a good individual experience, the larger innovation has a chance of being successful. Seen through Josh’s eyes, the effectiveness of the law firm intraprenuer is less about individual brilliance than empathy, listening skills, patience, and budget, as doing this type of work “is very labor intensive.”

The intrapreneur’s intellectual gift is that, for a variety of reasons, they are not stuck inside the frame of the traditional model, often because of some prior life experience that gives them an outsider’s view. (For one of Kubicki’s transformative life experiences, which he discussed in class, read his Intrapreneur’s Dilemma.)  Yet, Josh was emphatic that humility is the single most important attribute for intrapreneur effectiveness. “If something works, congratulate the adopter for their insight and move on.”

Josh described some of the wins of his team but it would be counterproductive to publish them on the web, as Josh believes the credit goes to the entire Seyfarth Shaw organization.

Eric Wood: making partner as a technology innovator

One of the reasons I am carefully chronicling my class is that I want to create a contemporaneous record of how the legal profession navigated the shift from a world of lawyer specialization to one based on multidisciplinary collaboration.  I am confident that Eric Wood’s story is going to be replicated by hundreds of young lawyers who begin their careers at law firms. Yet, Eric was the first to blaze this trail.

Eric is the Practice Innovations and Technology Partner at Chapman and Cutler.  The key word here is partner.  Eric is a 2008 graduate of the University of Chicago Law School.  After a stint at Cleary Gottlieb in NYC doing capital markets work, Eric moved back to Chicago and joined Chapman as a banking and financial services associate.  However, several years ago, Eric quit doing client billable work and instead focused all of his attention on technology-based initiatives.  During this time, his formal title remained associate. And earlier this year, he was promoted to partner.

Practice Innovations and Technology Partner is a new role within a law firm. During his portion of the class, Eric described his work as primarily “R&D” that fell into three major buckets:

  1. Writing code to build legal expert systems and automate the drafting of documentation for a wide range of legal matters.  Often this includes the design of web interfaces so the systems are relatively intuitive for the lawyers, clients, and other personnel who use them.
  2. Designing new technology products and managing their development, release, and maintenance. Often this involves finding ways to scale innovations across multiple practice groups, including via the development of new staffing models.
  3. Other knowledge management and technology projects, such as building transactional metadata databases and data visualizations, evaluating vendor products, and researching technological developments that might affect transactional practice (e.g., blockchains and crypto currencies).

Eric has no formal training in a technical field.  His undergraduate training is in political science and environmental studies.  Instead, he attributes the initial development of his technical abilities in computer coding and database structures to a desire to impress his friends with fantasy basketball data visualizations. That hobby required a lot of scraping of data from websites followed by computational analysis.

Yet, Eric’s work in the legal field enabled him to see cross-over applications. Prior to law school, as an AmeriCorps volunteer with Wyoming Legal Services, he helped build web content to reach the agency’s far-flung clientele. “We had to scale seven lawyers for the entire state, and it was obvious that only technology could do that.”  Likewise, many late nights as a NYC transactional associate gave Eric many ideas for how to automate unpleasant, time-consuming grunt work.

In 2013, as Eric continued to improve his technical skills, he decided it was time to find a outlet in the legaltech world.  However, during this time period, the firm’s Chief Executive Partner, Tim Mohan, began bringing in outside speakers to explain how the traditional practice of law was on the brink of a major shift.  So Eric requested a meeting with Mohan to explain some of this ideas.

Mohan immediately embraced what he heard and Eric stopped doing billable. Now do the math — taking Eric off the billable track is roughly a million-dollar decision ($500/hour x 2,000 per year).  Yet, what is the price of failing to reinvent?

Relatively quickly, the decision proved to be a wise one.  For example, one of Eric’s projects was the automation of closing document sets for finance transactions.  The market no longer pays full price for the organization, indexing, and tabbing of the full deal documentation, yet this work still needs to be done and delivered to the client in a polished, professional, and timely manner.  “What used to take weeks now takes a minute.”  At roughly $500 in staff time (with wide variations based on the size and complexity of the deal) x 3,000 closings per year, this single project is saving the firm roughly $1.5 million in labor that can be allocated to other value-add projects. And that is just one example.

With the encouragement of the firm’s leadership, Eric regularly gives internal demos that have generated significant curiosity and broad buy-in among partners.  Eric notes that these internal sales were often predicated on the quality advantages of technology — of increasing transparency of changes to complex forms and reducing opportunities for error. Yet, the economics are also very attractive.  Chapman and Cutler is a highly specialized financial services firms that does approximately 40% of its work on a fixed-fee basis.  In this context, technology and process enable the firm to continue to charge less than many rival firms while protecting or improving its margins. This is exactly how innovation is supposed to function.

In addition to Eric, other transactional lawyers at Chapman have begun to invest in technical skills, with several automating significant portions of their practice. Part of this transition is made possible by an accounting system that treats “productive” hours related to firm innovation the same as client billable work. Eric gave the example of one  associate who has logged hundreds of productive hours over the past few years working on projects with Eric and his team. In short, Chapman is building more internal capacity.

This is a remarkable story. But can it be replicated by other other law firms?

I think the answer is “not easily.”  First, a firm needs someone like Eric Wood who possesses both deep legal domain knowledge and strong technical skills. Second, the stars have to align so that a leader like Tim Mohan can enable such a person to focus full-time on innovation and execution. In competitive markets, half-time efforts seldom win.  Third, it undoubtedly helped that Chapman and Cutler is a “small” large firm (~230 lawyers) that is focused on a single industry. This makes it culturally and logistically easier to implement change.

Beckett’s business mindset

As noted in Legal Evolution’s foundational posts, innovation is strongly influenced by connections between different social systems. Being on the edge of two or three systems is more valuable than being in the center of one. This is because multiple perspectives enable a person to transcend the dominant local frame and see problems with fresh eyes.

In addition to knowledge of law, all of our guest lecturers possessed a second or third frame for viewing the world. However, the most pronounced example was Jim Beckett, who acquired his legal frame after working five years in sales and distribution in the food industry, helping to grow market share for companies like Frito-Lay and Haagen Dazs.  During this time, Jim was following the advice of his father, who was impressed with Jim’s people skills and aptitude for business. Ironically, Jim’s father was a lawyer, working in-house at KFC.

Then, several years into Jim’s business career, his father had second thoughts.  “Jim,” his father said, “Law doesn’t have enough people who truly understand how businesses work.  If you get a law degree, you’ll go a long way.”  So, as an older student, Jim returned to Indiana University to go to law school.

Jim shared that law school was very difficult for him because the level of abstraction was so far removed from the practical problem-solving he was used to. It wasn’t until he was a law firm associate that we was able to meld the two perspectives.

The business frame, however, remained the dominant perspective.  For example, Jim discussed how he got his first in-house job at Brown & Williamson (a large tobacco company that later become part of RJ Reynolds). “I was the only lawyer they interviewed who could discuss the business issues that were at the core of the company’s legal work.” Further, rather than pursue upward mobility in the legal department, Jim asked to move to the business side, eventually running an RJ Reynolds operating unit in Puerto Rico.

Jim’s multiple perspectives in law and business was one of the reasons that John Crockett, chairman of Frost Brown Todd, recruited Jim to return to Louisville to run business development for the firm. Roughly 10 years earlier, Jim and John had worked together at the firm as billing lawyers. Jim was hired despite his warning that long-term success was going to require significant change, which would make some of Jim’s efforts controversial.

While the firm implemented many client-centric initiatives, Jim eventually became convinced that he could do more good by helping clients focus their purchasing power. Thus, in the summer of 2016, Jim left Frost Brown Todd to become the CEO of Qualmet, a technology company that provides legal departments with a scorecarding methodology that collects, organizes, analyzes, and shares feedback with their outside service providers.

During his lecture, Jim spoke with passion about what happens when lawyers get in full alignment with clients. “All lawyers want to do a great job. Unfortunately, very few are getting the information they need to take their practice to the next level.”  Jim believes that structured metrics and dialogue will enable clients and law firms to smoothly transition into the world of data, process, and technology.  Jim see this as not as a question of “how”, but “when.” Today’s CEOs expect their GCs, CLOs and in-house teams to drive business value that aligns with their respective company goals and objectives. Jim wants to bridge the “value” gap and sees 360 performance management as a critical piece to accelerate alignment. “Value creation is no commodity,” Jim observed, “So all stakeholders will benefit when performance is properly measured.”

Qualmet’s scorecarding methodology is closely related to Dan Currell’s post on the necessity of active outside counsel management. Convergence alone can’t deliver the desired results. See Post 031.  Thus, scorecarding will be the topic of a future post.

What’s next?  See “The Lawyer Theory of Value” by Casey Flaherty (040)

On Wednesday, November 29 from 6 to 8 pm at Northwestern Law, student teams in my “How Innovation Diffuses in the Legal Industry” give their capstone presentations. Topics include Everett Rogers’ rate of adoption model (see Post 008), the role of change agents (see Post 020), and crossing the chasm (see Posts 024, 025, 026).

If you want to attend and learn, please email me. We have a small class in a big room, and interest from mid-career professionals will energize these terrific students.

What’s next? See Can Intrapreneurship Solve the Innovator’s Dilemma? Law Firm Examples (039)

The graphic above tells a simple, painful, and important story about the U.S. legal profession that we can’t afford to ignore.  The graphic compares the receipts of U.S. law firms in 2007 and 2012 based on “class of customer” data from the Economic Census, the U.S. Census Bureau’s official five-year measure of American business.  Although total law firm receipts increased from $225 billion to $246 billion, receipts from individuals declined by almost $7 billion. That’s a staggering sum.

Ordinarily, with such a large and sudden drop (10.2%), I worry about data quality.  Yet, these data appear to be continuations of trend lines that are several decades old.  Further, recent data published by Clio, the cloud-based practice management and time-keeping system used by a large number of solo and small firm lawyers, reveal that the economics of small firm practice are under severe stress.

As a society and a profession, we are heading to a place that none of us wants to go. Our biggest risk factor is failing to acknowledge the full magnitude of the problem.

The two hemispheres of practice

The structural significance of lawyers’ clientele — individuals versus organizations — was first noted by Jack Heinz and Edward Laumann in Chicago Lawyers: The Social Structure of the Bar (1982) (popularly known as Chicago Lawyers I).

Based on a randomized sample of 800 Chicago lawyers, Heinz and Laumann observed that lawyers tend to serve either individuals or organizations, but seldom both.  Further, type of client was strongly correlated with lawyer income, ethnicity, religious background, law school attended, home address, work address, and bar association membership.  “Only in the most formal senses, then, do the two types of lawyers constitute one profession” (p. 384).  This was the basis for their famous two-hemisphere theory of the legal profession. See also Deborah J. Merritt, Two Hemispheres, Law School Cafe, May 2, 2015.

Twenty years later, Heinz, Laumann and other researchers replicated the study based on a sample drawn in 1995.  See Heinz et al., Urban Lawyers: The New Structure of the Bar (2005) (Chicago Lawyers II).  One of their key findings was a dramatic surge of prosperity within the organizational sphere, with real incomes of large firm lawyers and in-house counsel nearly doubling.  Conversely, among solo practitioners, who disproportionately served individual clients, incomes fell from $99,159 (in 1995 dollars) to $55,000. By 1995, 32% of solo practitioners were working a second job compared to only 2% in 1975.

These are startling and sober statistics generated by careful social scientists. These findings are also 23 years old.

From stagnation to decline

The Chicago Lawyers I and II studies reveal stagnation taking hold within the PeopleLaw sector. Yet, more recently, we’ve moved beyond stagnation to a period of actual decline.  I do not use these words lightly. Yet this is the picture that emerges when the graphic above, which reflects U.S. Census Bureau data from 2007 and 2012, is combined with findings from Clio’s 2017 Legal Trends Report.

Clio is a cloud-based practice management and time-keeping system that has obtained enormous traction with solo and small firm lawyers. The 2017 Legal Trends Report is based on anonymized 2016 data from more than 60,000 U.S. timekeepers.

  • The total sample covers 1,026,000 matters, 10,981,000 hours, and $2.6 billion in billings.
  • Approximately 84% of matters are billed by the hour.
  • The average hourly rate for a lawyer is $260.
  • The average matter garnered slightly less than $2,500 in fees, with traffic offenses the lowest average (~$700) and personal injury the highest (~$3,300).

Yet, what is most striking about the Clio Report is that the average lawyer is billing only 2.3 hours per day.  Of that total, 82% is actually invoiced to the client; and only 86% of invoiced fees are collected. This translates into $422/day per lawyer ($260 x 2.6 x 82% x 86%), or $105,000 in gross receipts over a 50-week year. This is a sum that needs to cover office overhead, healthcare, retirement, malpractice insurance, marketing, and taxes, etc.  And note, these are averages, not the bottom decile or quartile. Further, these are lawyers at firms that have invested in practice management software.

Of the remaining 6 hours in the workday, lawyers are spending 48% of their time on administrative tasks (e.g., generating bills, configuring technology, client collections) and 33% on business development.  The report notes that lawyers spend roughly the same amount of time looking for legal work as they do performing legal work (p. 13).

The danger of not saying the obvious

In Post 006, I reported on statistics from The Landscape of Civil Litigation in State Courts report published by the National Center for State Courts (NCSC). The most startling statistic among many is that 76% of cases involve at least one party who is self-represented. The Report frankly states:

The picture of civil litigation that emerges from the Landscape dataset confirms the longstanding criticism that the civil justice system takes too long and costs too much.  As a result, many litigants with meritorious claims and defenses are effectively denied access to justice in state courts because it is not economically feasible to litigate those cases (p. v).

These are not the conclusions of a fringe group. The NCSC’s research agenda is set in collaboration with the Conference of Chief Justices and the Conference of State Court Administrators. This is the body formed at the urging of Chief Justice Warren Burger.

I’ll now state an obvious truth:  Our legal system as it pertains to ordinary people is unraveling.  Hundreds of millions of people can’t afford to hire a lawyer to solve their legal problems. As a result, they go it alone or give up altogether.  In turn, as the PeopleLaw sector shrinks, a large number of lawyers are under tremendous economic stress.  No amount of tinkering at the edges is going to fix or reverse these trends. Instead, we need a series of fundamental redesigns.

This needs to be said clearly and emphatically. This is because the collective and societal solution to the declining PeopleLaw sector is not for lawyers and legal education to pivot toward corporate clients who can still pay the freight, though this is undoubtedly the direction of drift if we fail to forcefully acknowledge the woeful imbalance of our current legal system.

Redesign or failure

As a law professor, I support innovations that make legal problem-solving more cost-effective.  Indeed, that is the purpose of Legal Evolution. See Post 001 (discussing the problem and consequences of lagging legal productivity).  In the segment of the bar that serves corporations, there is tremendous momentum building to make this happen, primarily because corporations feel an urgency to find cost-effective ways to manage the relentless rising tide of legal complexity.  This is what is driving the legal operations movement. Yet, I’m confidence that very few lawyers want to live in a society where corporate efficiency has become our primary goal. There has to be something more.

As Gillian Hadfield wrote in her recent book, Rules for a Flat World (2017), “People who feel as though the rules don’t care about them don’t care about the rules” (p. 79). The withering of the PeopleLaw sector is moving us closer to a place we don’t want to go.  We have entered a period where we are either going to redesign our legal institutions or they will fail. It’s time for lawyers and legal educators to find creative ways to restore the balance. Step one is acknowledging the magnitude of the problem.

What’s next?  See Student Capstone Presentations: Visitors Welcome (038)

In writing up the week 4 summary of “How Innovation Diffusions in the Legal Industry,” I discovered that it is near impossible to write about Axiom without referencing a larger change narrative.

Founded in late 1999, Axiom was likely the legal industry’s first venture-backed start-up.  Now, 18 years later, with over 2,000 employees in 17 offices in the US, Canada, Europe, and Asia, nearly 50% of the Fortune 100 as clients, and $300 million+ in annual revenue with continued double-digit growth, Axiom has become the leading exemplar of the NewLaw sector.  Indeed, in the graphic above, which is used by Axiom professionals to explain the evolving legal market, the orange in the bar on the right is what makes the “New Model” new.

Yet, here is the rub: 18 years is a long time for something to be new. And that says more about the legal industry “social system,” see Post 004 (innovation diffuses through a social system), than it does about Axiom. It also makes Axiom a great diffusion theory case study.

For summary of Week 2 guest lectures (Pangea 3, Practical Law Company, Hotshot), see Post 032. For week 3 (consultative sales at Thomson Reuters), see Post 034.

Tom Finke’s story

For the week 4 guest lecture, we were very fortunate to have Tom Finke, Axiom’s Managing Director of West Region Operations.  Tom has a JD/MBA from Northwestern, where he teaches a course called “The Evolving Role of the Law Department in the Modern Corporation and Legal Industry.”  Prior to joining Axiom in 2008, Tom spent five years as an associate at Sidley Austin LLP before switching into a series of business roles in the online media space.

Note: this is really a story about how Tom developed a very novel mindset and perspective — a combination of strategy, sales, operations, and law — and how this rare mix of talents is used by a shop like Axiom.  For those interested in having challenging work they believe in, this is not a trivial narrative.

Used cars

Tom Finke is very funny and self-deprecating, attributing much of his career to lucky breaks, starting with a summer stint as a 17-year old used car salesman in Phoenix, Arizona.  Since Tom knew very little about cars, he had to fall back on simple questions like, “what are you looking for?” After that, his only tool was listening.  Eventually he realizes that if you’re sincerely trying to be helpful, a reasonable number of customers will talk themselves into a sale.  Indeed, there are few better ways to qualify a customer than their willingness to walk around a car lot in 110 degree heat.  You just need to walk with them.

Tom’s first big break in law comes with his job at Sidley.  He interviews in the fall of his 1L year. Fortunately, the partner he interviews with loves the used car stories, and Tom gets an offer — before 1L grades come out and anyone from Sidley can review his less-than-Sidley first-semester transcript. Another break was getting into the MBA program at Kellogg, as Tom applied as the law school and Kellogg were expanding the joint program.  As the years unfolded, the training and connections of the dual degree enabled Tom to credibly wear both a business and legal hat.

“It’s hard to escape law”

After five years as an associate at Sidley, Tom decides to transition to a business role.  After a year of searching for high quality opportunities, he discovers that “it’s hard to escape law,” as the corporate world has a limited appetite for experienced lawyers working in business roles.  By then, it’s 1998 and internet is exploding as a new business platform with companies like Yahoo, AOL, and Excite.  The tight labor market creates an openness to less conventional sources of talent, and Tom finds an opportunity with an online classified ads company called Classified Ventures, a joint venture of major U.S. newspaper companies.  He joins as Director of Business Development, not as a lawyer. Later, he becomes president of a separate business unit focused on online auctions.

Repeating advice he received as a young lawyer, Tom tells the class that the early part of your legal career is about “brand building.”  Credentials and reliably good work are what matter for developing a reputation at the firm and with clients.  Yet, when Tom leaves Sidley, a firm client pulls him aside and says, “Now that you are in the business world, it’s all about track record.” In other worlds, to steadily advance, Tom has to put up outstanding numbers over a period of years.

After serving as CEO of an online business that fell victim to the Internet crash, Tom takes a job at the Tribune Company right before 9/11.  Despite the business upheavals of the early 2000s, the Tribune continues to do well as a newspaper publisher and broadcast conglomerate.  Moreover, Tom’s unit, Tribune Interactive, enjoys explosive growth that eventually reaches more than 30% year-over-year. With the passage of time, however, the decline of print journalism accelerates. These challenges coincide with a plan to turn the publicly held Tribune Company into one of the world’s largest ESOPs.  That transaction ultimately puts a crushing debt burden on the company’s balance sheet.

As the entire economy drifts into a tailspin in the fall of 2008, Tom sees the writing on the wall and contacts one of his best friends from Kellogg, who is running the Chicago office of McKinsey & Company. The colleague passes along a tip that a company called Axiom was looking for someone to start their Chicago office.  Tom applies and in December of that year gets the job. A week later, the Tribune Company files for bankruptcy.

The early days of Axiom Chicago

When Finke joins the Chicago office of Axiom in December 2008, the office had two full-time employees — one attorney along with a junior analyst — and roughly $10,000 in booked revenues.  His second day is the office holiday party, which includes 15 attorneys on Axiom’s “wait list” — i.e., approved for assignment to Axiom clients but without a current match.  Ironically, the sole actively engaged Axiom attorney is working onsite in Des Plaines (a suburb of Chicago) and hence couldn’t attend.

Despite the stark imbalance between qualified attorneys and paid client work, Tom remembers going home that night and telling his spouse, “I think this company has a chance.”  Why? Because he is blown away with the quality of lawyers/people that Axiom has managed to recruit.

Tom comments, “I was very lucky to start in 2008, as general counsel were looking for something different.  Because of the financial crisis, they had budgetary pressures and no ability to hire additional in-house attorneys.” Relatively quickly, the office added three powerhouse Chicago clients: Accenture, Baxter, and Wrigley.  “Because our attorneys did a great job for them, they allowed us to use their name as a reference client.  I often joke that I said the names of those clients more often than my children’s names in 2009 and 2010, but it might be true.”

Obviously, this is a key diffusion theory point, as these clients were viewed by in-house peers in Chicago as early adopter/opinion leaders, see Post 020, signaling that Axiom is a credible supplier of high-quality legal talent.

Tom is very direct on this point. “When you have no brand of your own [like Axiom in Chicago in 2008,] you have to leverage off of someone else’s.”  In diffusion theory, this connects to the “cultural compatibility” factor for innovation adoption.  See Post 008 (discussing key factors related to rate of adoption). Axiom attorneys had the same educational credentials and work experience as a law firm associate, yet they were 40-50% less expensive and had in-house experience. By the end of 2010, sales for the office exceed Tom’s long-term projections by several million dollars. Indeed, Axiom total revenues as a company went from $25 million in 2007, to $50 million in 2008, to more than $300 million in 2017.

Axiom’s evolving business model

As we make our way through life, most of us want to conserve our mental energy by putting things into familiar boxes. Because Axiom doesn’t neatly fit within any established box, accurate categorization has long been a challenge for the company, albeit the effect is often an underestimation of the company’s capabilities, growth, and client base.

Since its founding, Axiom has curated a highly credentialed and experienced legal workforce that can be used to cost-effectively manage peaks, surges, or temporary gaps in corporate legal departments. This is the Axiom’s secondment (or talent platform) model. It continues to generate significant revenues and growth.  However, since just after the financial crisis of 2008, Axiom has been building out large teams of lawyers and other professionals in several “centers of excellence.”  For this workforce, which focuses on large-scale specialized projects and managed service engagements, the value-add for clients comes in the form technology, process, and data analytics that drive up quality, predictability and transparency of the delivery of legal services while driving down per-unit cost.

Depending upon the engagement, the talent platform and service delivery models can be paired together.

An example: The Kraft/Mondelez spinoff

To illustrate how the key pieces of the business work together, Tom picks up a grease marker and begins diagramming a corporate transaction.

A publicly held company — in this case, Kraft Foods, Inc. —  wants to spin off approximately 1/3 of its business into a new publicly-traded entity that focused on the North American grocery store business.  But here’s the problem — to enable this transaction, Kraft Foods has thousands of contracts with customers and suppliers that need to be identified, organized, and evaluated so the in-house lawyers can develop a game plan for assignment, termination, buyouts, and renegotiations, etc.  Kraft identifies 40,000 documents that are potentially relevant to the transaction. For cost reasons, having a large law firm manually review and abstract the contracts is off-the-table.

Looking for a solution, the Kraft legal department contacts Finke at the Chicago office of Axiom. By 2011 (the year the transaction got underway), Axiom had developed expertise in process-driven document review for litigation.  Drawing upon the resources and capabilities of its service delivery center in Chicago, Axiom retooled its Relativity platform so it could efficiently and reliably identify and eliminate duplications and other extraneous documents. After the service delivery unit does its portion, the 40,000 documents yields 10,000 contracts. Then, leveraging process and project management skills, attorneys in the delivery center review the 10,000 contracts to determine the impact of the spin-off.  The final step in the project is to obtain consent from counterparties and re-negotiate many other counterparty contracts, which is legal work  completed over a period of months by more than 10 Axiom lawyers from the talent platform.

The combination of Axiom’s talent and service delivery platforms was a significant enabler of the Kraft/Mondelez spinoff and subsequently became the basis for Axiom receiving a 2013 ACC Challenge Award. It is worth noting that Kraft’s strategic counsel for the transaction was Cravath Swaine & Moore.

Where things are going

The Kraft/Mondelez transaction was a major milestone in Axiom’s history, as it marked the beginning of a new line of business to enable major corporate transactions. This new area of emphasis in 2012/2013 substantially coincided with a decision to get out of the litigation document review business, which Axiom’s leadership concluded would need a massive investment in technology to remain competitive.

During class, Tom shows a slide that summarizes of Axiom’s recent deal work:

  • 80+ corporate transactions completed over the last two years
  • Specific examples of M&A support, spinoffs & divestitures, reorganizations, and joint ventures for an impressive list of corporate clients
  • $400 billion in transaction value over the past four years
  • 500+ Axiom contract specialists and M&A lawyers

Axiom is also growing, likely at the expense of other service providers, particularly law firms.

With this information in mind, it is worth putting side-by-side Axiom’s evolving legal service delivery model with the Post 013 evolving litigation model created by Alan Bryan, Walmart’s head of legal ops and outside counsel management. [click on graphic below to enlarge.]

It is obvious that both graphics are signaling the identical future — one where law firms are called upon for strategic and exceptional events and the balance of the run-the-company work is split between in-house departments and outside service providers based upon efficiency and value.

A changing talent market

According to Finke, the evolution of the legal market over the last decade has created significant industry-level pressures on talent.  Since 2008, major law firms have hired significantly fewer entry-level associates, which in turn impacts Axiom’s traditional talent pipeline.  Although Axiom’s flexible work model and blue-chip client base remain highly attractive for many law school graduates, higher student debt-loads affect the timing of when lawyers can make the jump.

Tom notes that over the last decade, in-house lawyers have become “the owners of core operating functions” and that “BigLaw is competing for marketshare with their clients’ legal departments and losing.”  Cf. Post 003 (showing rapid increase in in-house lawyering over last 20 years). At present, over 70% of the lawyers on Axiom’s talent platform have in-house experience, which clients generally find more valuable than law firm-only experience, at least for work that supports a company’s business units. Thus, in recent years, consolidated legal departments following a corporate merger have become an important source of talent for Axiom. Yet the market overall is tightening for the right kind of experienced lawyers.

The key takeaway is that the traditional law firm apprentice model is breaking down. The incoming numbers are lower; and from the client perspective, the law firm skill set has become less valuable.  Ultimately, these economic realities impact law school applications and enrollment, particularly as student debt loads remain at historical highs.  Tom noted this was a industry-level problem with no easy or risk-free solution.

An focus on technology

Recent additions to Axiom’s leadership arguably signal the company is positioning itself for a future where technology will be a major differentiator.   In the fall of 2016, Axiom’s co-founder and CEO Mark Harris recruited Elena Donio, former CEO of software giant Concur, to replace him.  Furthermore, Axiom recently hired a chief technology officer, Doug Hebenthal, who formerly served as Director of Engineering at Amazon and held numerous technical positions at Microsoft.

Referring to Hebenthal, Finke observed, “If someone had told me in 2008 that Axiom would one day hire a CTO of that caliber, I doubt I would have believed them.  But our business has evolved in response to a changing market. And tech-enabled delivery of legal services is clearly where things are headed.”

Diffusion theory takeaways

The methodology of the class is take in take a deep dive into examples of legal industry innovations — always a combination of people and organizations — and to examine relative successes and failures through the lens of diffusion theory.  In most cases, we are referencing Everett Rogers’ rate of adoption model, which was covered in foundational post 008 and summarized in the figure below [click on to enlarge].

Within this model, the “Perceived Attributes of the Innovation” category tends to be the most important.  Without a sufficient quantum of these factors, the social system adoption process will not get triggered.

Applying the rate of adoption model to Axiom’s 18-year track record of growth, the combination of three factors appears to be key:

  • Relative advantage: 50%+ cost savings over law firms.
  • Cultural compatibility: work done by attorneys with BigLaw training and in-house experience.
  • Trialability: giving Axiom small, low-risk projects until the client obtains confidence in the lawyers’ ability.

The 50% cost saving by itself would have been insufficient for Axiom’s adoption. Further, the financial austerity created by the 2008 financial crisis was a key factor in changing the relative advantage calculus. 50% saving post-2008 was a lot more valuable than 50% pre-2008. Cf. Post 032 (David Perla also acknowledging that the financial crisis was a major accelerant for Pangea3).

Likewise, Axiom invests heavily in “Efforts of Changes Agents” by fielding a large team of consultative salespeople.

In the fall of 2016, I had the opportunity to participate in a meeting of Axiom’s Western Region sales team. Basically, to handle sales in the Midwest (Chicago, Minneapolis, Detroit, St. Louis, and Ohio), Axiom employed 15 full-time sales professionals.  Of the group, the vast majority were MBAs; only two had law degrees, and only one had practiced law.  I asked why Axiom had built out the sales team in this way.  Tom acknowledged the advantage of the JD credential.  Yet, experience revealed that it was easier to get an MBA to acculturate into the legal world (such a Rebecca Thorkildsen from Week 3) than to get a lawyer to (a) feel comfortable providing pure business advice and know-how to prospective clients, and (b) deal with the frequent rejection that comes with a sales role at a company seeking to disrupt the industry.

By necessity, law is ceding ground to various allied professionals. Because this brings new perspectives, this bodes well for future innovation.

What’s next? See The Decline of the PeopleLaw Sector (037)

On the occasion of his Lifetime Achievement Award, Legal Evolution is pleased to republish Mark Chandler’s 2007 speech, “The State of Technology in the Law.” This speech arguably marks the beginning of the current era of law practice in which large corporate clients assert more power and authority within the relationship.

At the time, the Chicago IP Litigation blog commented, “Anyone involved in the private practice of law should take the time to read it. … I can assure you your clients are reading it.”  Likewise, the prominent law firm economics blogger, Bruce MacEwen, wrote, “I’m quite confident I’ve never used the phrase ‘must-read’ on ‘Adam Smith, Esq.,’ but this is my first nominee.” The headline for the WSJ Law Blog read, “Law Firms: ‘The Last Vestige of the Medieval Guild System.” 

Mark Chandler:

I hope to offer a somewhat informative perspective on the effect that changes in technology will have on the practice of law.

I offer you three questions for our discussion today.

  • First, how is technology driving change in knowledge-based industries?
  • Second, what are the key areas of vulnerability in the legal services business to these technological changes?
  • And third, what will it take to succeed in this changed environment?

Now as you can imagine, I have my own ideas on these questions. I don’t pretend to be unbiased.  Where you sit does affect where you stand.  You may profoundly disagree with my conclusions about these three questions. But they are questions that need to be grappled with by anyone who is in the business of providing legal services.  Once again,

  • How is technology driving change in knowledge-based industries?
  • What are the key areas of vulnerability in the legal services business to these technological changes?
  • And finally, what will it take to succeed in this changed environment?

Let me tell you a bit about my company and why these questions are so interesting to me.  Cisco sells products and services which connect people around the world, from home networking products, such as the iPhone series, to the core routing and switching systems used by the world’s largest telecom companies.  We do so at an annual run rate of $32.8B, which would place us at about number 60 in the 2006 Fortune 500.  Our operating expenses are about 35% of revenue and falling. Our gross margin is close to 65%, and we bring nearly 22% of our revenue to the bottom line, before interest and taxes. Nothing that would make a large law firm envious, but we’re proud of it. We have $19.5B in cash, generate over $2B of cash flow from operations each quarter, and have bought back $37B of our company’s stock in the last 5 years. We have about 51,000 employees working in 80 countries.

I offer these data points from the perspective of a general counsel who is required to run his department just as other corporate departments are run.  This is more and more the case in American industry.  The legal department in Cisco is as metrics-driven as manufacturing, HR or sales. I have 4.7 employees in my department per billion of revenue, total legal spend is about .38 percent of company revenue, and non litigation spend about .16 percent.  I spend $34M internally, and about $75 million per year with outside counsel.  I know just where I stand on these metrics vs. my peers, because we share the data.  My numbers are pretty good, but I still don’t know how to be as efficient as Larry Tu at Dell.

The bottom line is that I’m driven by the same need for productivity and scale improvements as is the rest of the company.  It’s simple. As Cisco gets bigger, the share of our revenue devoted to legal expense needs to gets smaller.  Letters from law firms telling me how much billing rates are going up next year are therefore totally irrelevant to me, or as we say in Silicon Valley, orthogonal to my concerns.  Think about it: not one of the CIOs of your firms expects to get a letter from Cisco explaining how much more our products will cost next year.  And not one of our suppliers comes to us to tell us how much their prices will go up next year.  Well, that’s not quite true.  The law firms try.  But from my perspective, I don’t care what billing rates are. I care about productivity and outputs.

Turning then to the first of the three questions, how is technology driving change in knowledge-based industries?

My core message is that access to information is being simplified.  The price of information is being driven toward its marginal cost of production.  Disintermediation is occurring at the fastest pace since Martin Luther proposed that a Catholic priest wasn’t a necessary part of a relationship with God. Traditional command and control organizations – think of the US Army and the record labels – find themselves outmaneuvered by small decentralized organizations who know how to build networks – think of Al Qaeda and the Iraqi insurgency, and Kazaa and eMule.

How many people here have read Tom Friedman’s The World is Flat?  Friedman is right.  Easier access to information, symbolized by the Internet, is revolutionizing the global economy.  I was at a community lecture a couple of years ago by Michael Spence, who won the 2001 Nobel in Economics.  He described the networking of computers as the most important development in economic history since the opening of trade routes from Europe to Asia in the late Middle Ages.  The reason: because where work gets done, and how it gets done, is being radically altered.

Those who thought they had a corner on information find that’s no longer the case. I was talking with a friend recently who is a senior technology officer at a large high tech company. She’s from India and was describing a problem a friend of hers in India was having — the friend’s son wanted very much to go to one of the IITs, or India Institute of Technology campuses.  They were so oversubscribed, with the emergence of 300 million middle-class Indians seeking advancement, that he was rejected.  The parents were complaining that because of that, their son was forced to go to Cornell.  Now everyone I tell that story to laughs at first.  But there’s a moral there – the corner on information, on knowledge, on the transmission of knowledge, that we think we have in this country, that we think we have in this profession, just isn’t there any more.

What’s happened in the recording industry provides a great example.  Tower Records’ liquidation is the end of an era.  iTunes, to say nothing of eMule and Kazaa, represent the beginning of a new one.  Recording industry revenues are down 25% in the last five years.  The ability for any centralized organization to dictate how information will be packaged and delivered is going to zero, as individuals take control of how information and knowledge is generated and offered.

With Trip Advisor and ePinions, what is the role of Fodor’s and Frommer’s? With Wikipedia, what is the role of Brittanica? With Amazon and reader reviews and blogs, what is the role of the bookstore? Did you know that the membership in the American Booksellers’ Association has declined from over 4,000 to about 1,800 in the last twelve years. There was no law of nature dictating that this would happen between 1994 and 2006.  It happened because of technology.  One bookseller said he knew it was over when he saw the mailman delivering packages from Amazon to the tenant upstairs.  With eBay and craigslist, what is the economic model for daily newspapers?  From printing boarding passes to tracking packages, to repairing complex software to deciding where to dine and stay and how to buy a plane ticket, tasks previously undertaken by human beings – and often highly trained human beings at that – are now accomplished through well designed expert systems.

I recommend you check out a fascinating new book called The Starfish and The Spider by Rod Beckstrom and Ori Brafman.  They very succinctly trace the power of decentralized, knowledge sharing technologies to undermine enterprises and industries which are based on a command and control approach to information. Simply stated, people around the world are building their own communities to connect with each other and share knowledge.

Political leaders recognize the fundamental nature of this transformation.  I saw in the paper two weeks ago that the acting President of Turkmenistan kicked off his election campaign with a call for greater Internet connectivity.  Put that in the time-warp category: how would you have reacted if twenty years ago someone told you the acting President of Turkmenistan kicked off his election campaign with a call for greater Internet connectivity? I was at a dinner several weeks ago with Alejandro Toledo, who until July of last year was President of Peru.  Toledo had grown up as one of 16 children in a destitute village in the Andes highlands.  Thanks to having met Peace Corps volunteers at the age of 14 he got a scholarship to the US.  He has two graduate degrees from Stanford, and is the first person of native American descent to lead his country. 46% of Peruvians live on less than $2 per day. Toledo is passionate about helping the poor in Peru.  He told me his first priority is education generally, and his second is getting the people of his country connected to the Internet.

So for question number 1 — how is technology driving change in knowledge-based industries? — my answer is that the networking of computers is transforming the nature of knowledge accumulation and distribution.

So let’s turn to question 2: what are the key areas of vulnerability in the legal services business to these technological changes?

At a famous presentation at Black and Decker, a consultant held up one of these, a drill, and asked the Black and Decker executives if this is what they sold. They all recognized the product and answered “yes”.  He then suggested to them, that from the customer’s point of view, what they are selling is this, a hole in a board.

From the law firm think perspective, “sales” too often means a one to one relationship with a lawyer who bills by the hour.  As a client, I can tell you what I want to buy is access to information, strategy, and negotiation, and, in the case of litigation, to courtroom skill as well.

There’s a fundamental misalignment at work here.  Law firms cannot afford to own the business risks of their clients, have a lot of employees to pay and also have to allocate the limited resources of extraordinary star partners.  On the other hand, clients want access to information and counseling and want to pay for value received. Put more bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour.

The current system also misserves the lawyers themselves, particularly the associates, also known as the next generation of partners.

In most of my major law firms, I see more and more problems retaining associates.  I am inundated with resumes of top notch associates who don’t want to work in large law firms any more. The chairman of one firm told me that only people in their 50s and 60s are willing to put in long hours these days, that associates regularly turn down the chance to work on major deals if it interferes with social plans or a vacation.  He finds a lot of younger lawyers self-centered and self-indulgent. Since I’m 50, I wasn’t  personally insulted.  But this reminded me of something I read recently, a complaint that “affluent parents have become role models for luxury and licentiousness, and have moved far away from caring about whether their children develop habits of discipline and self-restraint.  As a result, young people are increasingly impudent and have a total disregard of the respect they owe to themselves and others.”  Pretty strong stuff. This was written by Tacitus in 75 AD.

Those who grew up with the Internet just view the world differently than you and I do.  I’d like to ask everyone to raise your left arms. Go ahead. Left arms up.  Now, everyone who is wearing a watch, put your arm down.  I will tell you, that if all of us were under 30, the results would be the reverse. People under 30 do not wear watches. They use their cellphones.  My college senior daughter wants a wristwatch to wearexclusively at job interviews, since she thinks she’s supposed to.  My friends, we are dinosaurs, we don’t get it.

The difference in outlook goes deeper than that of course.  Some of you may know Dick Gross, a mathematician who is Dean of Harvard College. I once heard him tell a group of parents that if they want to communicate with college-age kids, they better learn Instant Messaging.  He told of coming into his 16 year old son’s room while the son was doing homework, and finding five IM conversations going at once on the computer. He asked, “How can you get work done when you have five conversations going?” His son answered, “Dad, you don’t understand, this is how we communicate. For us, IM is like email was when you were a kid.”  I must ask, “If five conversations are open at once, how do you bill the time?”

This generation, brought up on Wikipedia and Kazaa, believes that information should be free.  Upending one’s life to support inefficient means of communication, driven by a billable hour system, to maintain a relatively slim chance of making partner, is antithetical with that upbringing.

But if the economic system of the firm is frustrating to associates and even some partners, I can tell you that from the standpoint of a metric driven general counsel, it is more than incomprehensible.  It looks like the last vestige of the medieval guild system to survive into the 21st century.

About a year ago, I testified before a House subcommittee regarding the Internet in China. It was a lengthy hearing, and it was grueling.  I was pleased with the results, largely because I’d spent two days beforehand being prepared by Ambassador Charlene Barshefsky at WilmerHale.  If you shouldn’t leave home without American Express, you shouldn’t go to the House without Charlene.  At the risk of mixing my credit card metaphors, her help was priceless.  The total bill for her services was about $10,000.  I have spent 300 times that amount to get mediocre assistance in patent disputes.

The legal industry has spent millions on IT, largely to speed access to information. Yet the only way I can get that information is through an individual billing me by the hour.  In many cases, my in-house team has more sophistication than the highly-paid associates who mine the knowledge management system to generate a memo.  I’m just not allowed to access the information without paying for someone’s time.

The systems exist today to change the delivery of legal information to clients.   But that change would challenge a model that today delivers high profits.  Every big company, including Cisco, is using those systems to make our support services more effective, and to drive down the costs of providing service. Law firms are not doing this as effectively to drive savings to the customer.  Clay Christensen of Harvard Business School has written, and I quote, “Large American law firms are just about the most profitable businesses in the world.   Speedier information-gathering capabilities allow large law firms to increase utilization of less experienced lawyers without passing cost savings on to their customers.”  So changing the service delivery model will be disruptive, and not just because associates are kept busy doing work that a machine might be able to do better.  Changing that model will also cut into the effectiveness of cross-selling.  From a client’s point of view, cross-selling is an effort of star partners to leverage the loyalty they have earned to drive hourly work to other parts of the firm.  Today, there is little incentive for law firms to apply risk-reward logic to the amount of legal services provided.  And General Counsel know that.

The growing scope of knowledge availability will endanger this system.

When technological change comes, it is easy to get left behind.  Richard Susskind, who’s a brilliant English commentator on the legal profession, and who gave me the Black and Decker example I offered earlier, observes that when law gets standardized, it can be outsourced, co-sourced, integrated,aggregated, syndicated and sharedOne-to-one consultative advice gives way to one-to-many information services. And the client becomes empowered.

My contention is that the very source of success for firms today – the ability to manage client access to information and require clients to use bespoke 1:1 systems – will be the source of failure in the future.

So my answer to question number two is that the greatest vulnerability of the legal industry today is a failure to make information more accessible to clients, to drive models based on value and efficiency.  The present system is leading to unhappy lawyers and unhappy clients. The center will not hold.

And that brings me to the third  question: What will it take to succeed in this changed environment?

Clay Christensen got it right when he said of our industry, “the forces that act upon service sector businesses are the same that act upon all companies.”  And he predicted that a new class of providers will “develop new delivery models that will be highly disruptive to established firms.”

My answer to this question is therefore simple: first, winners will be those who are able to standardize services to meet clients’ cost management and predictability needs where very good is good enough.  Second, those who can differentiate themselves by providing the top notch of customized services, where that is needed, will also win.  In some cases, one firm may be able to do both.  But my bet is that despite the consolidation trend we’re seeing today, top quality boutiques will thrive while the cost structures of larger centralized firms will put them at risk.

All around the periphery of the legal industry, standardization of information is happening.  Check out www.taxalmanac.org, which uses wiki to create sophisticated, easily-searchable on-line discussions, and ultimately counseling, by tax professionals on a variety of topics.  The legal work of generating residential leases and individual tax returns is now largely done by software.

Let me give you a few examples of the way this is now spreading to first tier corporate legal work.  Let’s start with patent prosecution.  At Intel, Bruce Sewell bundles patent disclosures and prosecution of the applications is awarded based on a reverse auction.  The most successful firm is in Australia.  At GE, Brackett Denniston has over 60 patent lawyers and agents, US trained and supervised, working to prosecute patents at GE’s Global Research Center in Bangalore.  At Cisco, we pay a fixed fee for patent prosecution, and advise our firms to find ways to lower costs, since the amount we will pay will go down by at least 5% each year. We also have a fixed fee arrangement to review unsolicited offers of licenses which seem to arrive quite regularly these days.  Bart Showalter, the partner at Baker Botts who leads that effort for us, said the fixed fee scared them at first, but over time they developed a systematic approach to the work, and as he put it, “the system made us more efficient.” To get the measurable results we need, we are driving the use of knowledge sharing technology throughout the process.

In the corporate secretarial arena, at Cisco we got tired of the choice between the overhead of dealing with a hodge-podge of local firms and high billable hour rates from so-called global firms.  So we are working with one firm on a solution. We’re aiming for a 20% cost reduction compared to our current global costs.  Now this firm doesn’t have a huge global network of offices – but are ready to revolutionize the way information is processed and shared.   Our goal will be accomplished by standardization of forms and open interfaces, making a smooth multi-vendor operation out of what had been a series of job shops.  And we want to help them to sell this approach to other companies and other law firms.

In contract processing, we have an online contract builder that allows our employees globally to build their own NDAs  and other contracts.  With electronic approval and digital signature, they can go from creation to execution to archiving.  Five years ago, Cisco had to build its own system. Today we’re buying off the shelf.  Within the next five years, a substantial proportion of the Fortune 500 will be doing the same.

Counseling will be the next frontier, as tools like taxalmanac spread to other legal areas, from sweepstakes rules to export regulations to human resources to securities law compliance. We’re working with eight other Fortune 500 companies, and a number of law firms, to create a site called Legal On Ramp.  Legal On Ramp will allow direct access to knowledge management systems of law firms. The site will organize information and allow collaboration using Wiki technology.  If you don’t know what a wiki is, I suggest you learn very quickly. Sites will be segmented by company to protect privilege.  It will also help drive follow-on questions to firms for fee generating work.  And you can bet securities work, especially ’34 Act and Section 16 compliance, will be one of the first targets for providing standardized information and shared experience.

Today, all of Cisco’s US corporate, securities and M&A work is done superbly by Fenwick and West operating on a fixed fee, based on an expected number of transactions, with fixed prices for extra transactions.  Gordy Davidson came to me recently and offered to keep the fixed fee the same next year, despite rising hourly billing rates.  He thought he was being generous, or at least practical.  I turned him down.  I told him I wanted a 10% cost reduction.  But my goal was not to reduce my costs while hurting Fenwick’s profitability.  I suggested he propose a service level agreement for me, his client, to fulfill.  The SLA will oblige Cisco to take on lowest -value-add tasks that were consuming 15% of Fenwick’s total lawyer costs, and that we can do ourselves with our administrative staff.  I told him I expected only a 10% fee reduction, however, and that he could keep the remaining 5%.  In this way, we become a better client, and we both win.

We are doing the same thing in litigation. We have a fixed fee with Morgan Lewis  for all of our US commercial litigation.  Not surprisingly this has made Cisco litigation avoidance a key goal of Morgan Lewis.   We’re driving down the time that human beings have to spend reviewing electronic documents.  We bid out discovery work based on cost per gigabyte.  In some cases we’ve outsourced document production to a different law firm than the firm that is providing counseling or other support.  But what we had to build ourselves five years ago is now becoming the norm.

Now as I said at the outset, you may disagree completely with my analysis, with my prescriptions, or both.  You might even think I’m just trying to sell more networking equipment.  But I ask each of you to grapple with the three questions I posed and come to your own conclusions.

How is technology driving change in knowledge-based industries?  What are the key areas of vulnerability in the legal services business to these technological changes?  And what will it take to succeed in the new environment?

The opportunity is there to recognize the business realities that will be driven by new technology. We can seize the chance to offer more value to clients. We can seize the opportunity for our own employees to be more engaged and productive.

Our mutual success depends on it.  I’m fortunate to have great counselors like Gordy, Charlene, and Bart.  They’ve helped ensure, through past practice and good preparation, that my company has no issues with its stock options, minimal comments on our 10-Ks, and only one piece of litigation listed in the last 10-Q, and that one has subsequently been resolved.  I need those counselors to themselves have healthy businesses. Successful outside counsel is an integral part of Cisco’s success.

We should all be very proud of our profession.  We help drive compliance with the democratically-enacted laws of our country.  In the last five years, we’ve accomplished extraordinary things. Since the dark days of the Enron collapse and the advent of Sarbanes Oxley, we’ve restored credibility to the institutions that are the backbone and the motor of the greatest economy in the world.  We defend those who have done the indefensible, even when the government threatens us for those efforts. We work to preserve the rule of law.  In our daily work we do not fear, in fact it is our obligation, to speak truth to power.

We are in the midst of an economic  revolution that is the most important event in economic history since trade routes opened from Europe to Asia.  We must reach out and seize the golden ring that is just within our grasp.

Thank you for your attention today.

What’s next? See A Deep Dive Into Axiom (036)