In-House Legal Departments


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)

Part I of this series (029) laid out some pervasive problems with law firm panel arrangements, and Part II (030) outlined the basics of how we believe those problems can be overcome through correct structure and active management. This final installment will go deeper into what we believe are the most important aspects of a law firm panel approach: the management practices that keep law firms motivated, focus firms on innovation and strong outcomes, and result in high quality and stable or declining costs over time.  Our experience is that law firm panel arrangements can be tremendously successful, and that the success always comes from good management practices – not just panel structure.


A formatted PDF of Dan Currell’s three-part series on convergence is online here. wdh

Quality is fragile, and quality is King

Quality is paramount in law, and preservation of quality is always a key factor informing convergence efforts. This highlights a natural challenge with them: a consolidated preferred provider deal only works if we can define and hold the firm accountable for quality – and that’s very hard to do.

If we bid out a million sheets of paper but do not define quality, then we’ve just committed to a million sheets of whatever is most convenient for the supplier to deliver.  So – paper buyers are careful to define paper quality.  (We all remember Frigaliment . . . you need to specify the right chicken.)

But can we define legal quality? Not usually. We can define who works on the matter, and for clients who are managing counsel closely, this is a good approach. But for most matters the client and firm cannot define in advance the quality or even in many cases the basic character of what is going to be delivered, since the trajectory of a transaction or litigation is so variable. A legal matter could end tomorrow or go on for a few years, often independent of anything the lawyers are doing. Because of this, when all is said and done it’s very hard to know if the firm has delivered on its promised quality of services.

The difficulty of controlling for quality on the front end of an engagement is arguably the most confounding feature of the legal services marketplace and the primary reason why credentials, brand and track record are so critical in law. Quality varies widely from one matter to the next, from one lawyer to the next, from one firm to the next. The fact that we lost a case doesn’t mean we got bad quality representation. The fact that we did very well in a negotiation doesn’t always mean that we had good quality legal work. So we rely instead on a series of proxies for quality: law firm brands, law school brands, past performance on similar matters, and so on.  This is because we can’t define quality.

Most of all, we rely on who does the work. As well we should – it’s the closest thing we can do in most cases to controlling quality. And if the client has the market power, making an effort to control staffing is probably the most important single negotiation move the client can make.  We hire the lawyer, not the law firm.

But the presumption behind everything said above is that once staffing is settled and the matter is under way, there’s nothing much the client can do to inflect quality. This is a common presumption in our experience, and we believe it’s wrong. The same lawyer can do great work and mediocre work in the same day for two different clients; the difference is focus and incentives. How can we set them up for success on our matters?

Incentives matter

There are knowable factors that influence whether and how quality shows up in legal work, and one of them is how we structure deals with law firms. To stick with our theme of the effects of consolidation, here are some effects of consolidation we see regularly.

When the client settles onto a small number of preferred law firms, each firm is thereby formally protected from competition, undermining the incentive to be responsive and hard-working for that client.  Let’s imagine a perfectly typical scenario. You are the managing partner of the employment practice of a large firm that is the sole provider of FidgetCo’s employment work for the next three years. Your firm also has a decent chance of getting more of BananaCo’s employment work, but doesn’t have much of it yet.

You just got a matter in from BananaCo, the new client who might or might not give you more work in the future. You also have a matter for FidgetCo going on right now too . . . and as we know, FidgetCo is committed to sending you all of their work for the next three years no matter what. You have two lawyers who could work on either matter and one of them is better than the other. Where do you send your best lawyer?

The BananaCo and FidgetCo example shows that successful law firm partners will be pressed by market forces to adjust the character and quality of what is being delivered in order to continue to grow their practices. This is not malicious; this is not in bad faith. It’s the free market. Partners make trade-offs that bias towards practice growth because in most firms it’s an eat-what-you-kill environment and each partner needs to kill enough to feed every mouth up and down the hallway. Once a client is secure – and perhaps especially when that security is in writing – firm economics will shift the partner back to business development.

This may be why we see that firms who are on a formal panel for a client are frequently out-performed by law firms working for the same client who are not on that client’s formal panel. The firms that aren’t on the panel want to get on it – and they work harder. The firms that are on the panel believe they have the work sewn up, so they don’t feel they need to work as hard to keep it.

Why can’t we control quality?

In response to these concerns, a client contract can attempt to define which lawyers will do the work, but this is usually hard because staff are so mobile. It’s a free country, associates leave at a rate of 20% or more per year and the partner lateral market is very active. Departing staff, practice group moves, family medical leaves, trials for other clients and other unavoidable factors take staffing decisions out of the client’s hands.

But when we are able to control the law firm’s staffing of our matters, consider the potential effect on a lawyer’s career. We have struck with the law firm a fixed-term contract specifying who will do the work. We can specify that Mary will do our contracts work, because Mary is good. But we can’t force her to do it with passion and focus if the firm isn’t rewarding her for it.

Will the firm reward her for it? If it’s a locked-in, long-term contract on client-favorable terms (i.e., not as profitable as the firm average), why would the firm reward Mary for doing the work? For a host of reasons, working that file is a career dead end; it will not lift Mary out of the role of non-equity service partner. Indeed it will solidify her position there. Will Mary do it? Maybe. Will she leave the firm for greener pastures? Possibly. It’s certainly not the route for Mary to become an equity partner in an eat-what-you-kill firm.

Imagine how different the firm’s perception of Mary would be if she were seen to be bringing in each new project from the client as a newly won piece of work? If the client were seen to be choosing her each time on the competitive market because she’s so good? It’s not just a difference of semantics – it will make an economic difference of the first order to Mary.

These are just small, illustrative points. The point is that consolidated sourcing arrangements in law, unless very carefully engineered, invite the firm to define both service quality and price against a backdrop of limited resources and an internal war for talent.  We can’t know in advance what true quality and price will look like, but we do know in advance that the firm will do everything possible to maintain its revenue per lawyer and profit per partner numbers in any given period. To do this, within the life of a contract the firm’s lawyers have an incentive to square the terms of service with the firm’s economics. And they will always have a marginal incentive to prioritize new business opportunities over work for settled clients.

Can relationships help? Yes, but no unconditional love

We all know from experience that law firms regularly don’t make decisions this way.  They often prioritize existing clients over new business, or go above and beyond for a client where the economics don’t strictly make sense.  But we’ve also seen it the other way.  Why?

I believe we see narrow economics-only decisions when the client and law firm are dealing at arm’s length.  If as clients we cultivate a purely transactional feeling, if we minimize the feeling of relationship, we will reap what we have sown.  Law firm leaders are entirely human in our experience, and cultivating the right kind of relationship will go a long way towards maintaining a consistent quality of legal service. In law, unlike many other industries, we still have a choice about how much we deal at arm’s length versus how much it feels like we’re in a relationship with a firm. A big part of success with preferred provider networks is getting the balance between relationship and arm’s length correct.

This point is rich enough to warrant its own book so I will keep it short with a single illustration. Overall, we want most of the cost benefits of an arm’s length commercial deal – but not quite all. It just doesn’t serve the client well in the long run for firms to feel no emotional allegiance to the client. Yes, our relationships need to conform to the logic of the marketplace, but we need firms to invest in the relationship, build and preserve human capital that serves the client well, and care at an emotional level about the success of the client.

The trick is to do this in a way that doesn’t quite signal unconditional love.

Here’s one practice that clients and firms both benefit from and we strongly encourage. Hold an annual summit attended by a few lawyers from each primary law firm. Firms won’t bill you for the time and they will happily cover some of the cost – it’s good marketing spend for them, builds the relationship, and it’s a nice perk for a top associate to come along if she’s a key player on your files. Spend two days together, set an agenda that’s substantive but also sometimes fun, let the firms compare notes and think about how they can collaborate to serve you better. A common experience here is to discover that firm lawyers do not want to be hostile to their “competition” within the panel. Instead they want to have positive relationships with other panel firms and even discuss how they can work together for the client’s benefit. These folks are also potential sources of referral work for one another.

Can this kind of relationship-building overcome the performance and staffing issues outlined above? Our experience is that it largely does – as long as the lawyers serving you have enough power to resist whatever countervailing political and economic forces may be at play within their firms.

Communication

Good communication is the foundation of nearly all success in the legal world. Equally, bad communication is the basis of nearly every major mess. So the question is – how do we ensure good communication between all relevant parties?

This is a matter of persistent management practice. The primacy of good communication is one of the reasons we favor building a small preferred provider panel – you just can’t get good communication practices in place with 50 or 100 law firms. A smaller list of firms is easier to manage and communicate with, and with more of each firm’s revenues coming from a single client the firm should be more willing to invest time and energy into communicating with that client.

The right way to do this could fill a book, but in short we believe the following practices should be followed.  In practice, they will be followed best by firms who do the most work for you.

  1. Matter plans commensurate in detail with the value of the matter should be in place 2-3 weeks after the start of a representation. The important thing is not that the plan has been written; the important thing is that it has been discussed with the client.
  2. Simple, early-stage performance evaluations should take place 4-8 weeks after the start of each significant matter. Discuss it with the lead law firm lawyer. Get his or her feedback on what the client can be doing better, too. This early evaluation is here to identify problems before the cement dries. It lets the firm and client make corrections. Evaluating a representation only once it’s over misses much of the potential value.
  3. Similar evaluations should take place quarterly or half-yearly after that, again depending on the scale and significance of the matter.
  4. Conduct matter post-mortems on significant matters – a meeting to collect lessons learned and make plans to do even better next time. If you’ve done #1-3 above, this is an easy meeting.
  5. At the level of the firm-client relationship, conduct quarterly or half-yearly reviews of the overall relationship with the law firm. Firms will welcome the chance to talk overall about the workflow, and it provides a critical opportunity to discuss alternative fees, staffing, cost control, quality issues and other key items.

In our experience, lawyers are great communicators who are simply terrible about communicating regularly. The checklist above is hard to stick to – and to do it right. On the one hand, the substance of these communications are what really matters – not the form. But lawyers are generally tempted therefore to skip steps, ignore some of the formalities, and generally erode the ethic of consistent communication. Forces of entropy return us to substantive but highly irregular communication, the lawyer’s natural habitat. And that is the root of nearly all evil in the lawyer-client relationship as noted above.

So it takes an operational mindset and some considerable structure to ensure that these exchanges take place. The bureaucrat’s comfortable path, of course, is formalistic communications with little substance. The only way to do communication right is to stay on the middle path: combine persistent and regular communications with a unbroken focus on client outcomes.

So – what’s the final recipe?

Law firm panel convergence can be done right – it just needs to be tailored to the legal market. The structural basis of success in legal procurement is constant competition in the context of a long-term relationship.  In other areas of procurement, competition is used at the outset of the contract – to set terms to which a vendor is then committed.  But in law, because price and quantity are being adjusted at all times, and because quality can’t well be defined, competition has to be in effect at all times.  Lawyers need to know that their performance on each matter will determine whether they get more work from that client. That single principle is not a complete substitute for defining quality and cost for every matter, but it’s an indispensable backstop. Moreover, communication needs to be constant within the relationship – and if done right, that relationship will grow in a way that helps both the law firm and the client.

How do we make this happen? These are the five principles we laid out in Part II (030):

  1. Double Coverage
  2. Varied Cost Tiers
  3. Sufficient Panel Size
  4. Open Competition
  5. Re-Selection

These structural principles set the panel up for success, but management practices matter even more than structure. Here are the ones we think matter most:

  1. Assertive Change Management
  2. Positive Psychology
  3. Structured Communication

As we have said, these principles have been learned from years of working at the intersection of law firms and their clients. They have guided us as we have constructed our approach at AdvanceLaw, and we believe success in convergence rests on getting them right.

What’s next? See A Law School Course on How Innovation Diffuses in the Legal Industry (032)

In the first part of this series (Post 029), we discussed why there are sometimes serious problems with the way law firm preferred provider panels are structured and managed. In particular, we often see that law firm panels:

  • Take clients “up-market”, raising rather than lowering their legal fees;
  • Reduce firms’ responsiveness, because larger firms tend to be less responsive in general (see our Harvard Business Review blog post on the matter) and also because, by putting a firm on a panel, the client is signaling that the firm won’t lose their work; and
  • Diminish the firm’s incentive to provide efficient service, since the firm is assured of its position as a preferred provider.

Yet we also said that law firm panels are a good (and sometimes essential) management tool if done right. So – how can we do them right?


A formatted PDF of Dan Currell’s three-part series on convergence is online here. wdh

As we begin, a word about how we have developed our views on the matter.  AdvanceLaw is a GC-led group that identifies high-performing lawyers by, among other things, sharing performance feedback within a group of senior in-house counsel. We are involved in outside counsel hiring decisions every day, and we regularly work with general counsel and their senior lawyers to construct and manage preferred provider panels.  We have seen what works in practice, and we have researched the efficacy of outside counsel management practices through years of data collection and through the General Counsel Thought Leaders Experiment.

Here are some elements of what we believe is the right approach.

First, correct structure.  The right law firm panel setup carefully balances constant competition with intentional cultivation of the client-firm relationship. Second, intentional management practices.  The way firms are managed, the kind of relationship they have with the client, and the incentives and motivations they feel as a result will have more impact on their performance than the contractual or formal aspects of the relationship.

Let’s start with structure.  We believe there are five key structural principles:

  1. Double Coverage. The final panel of law firms needs to have at least two viable providers, at different firms, for every economically significant and legally distinct area of practice and major geography. So if your company has a lot of FDA regulatory work, the panel must have at least two strong FDA firms competing for that work at all times. If your company has a lot of California litigation, there must be at least two strong California litigation shops. Competition makes the firms stronger, ensures market pricing, and provides redundancy for the client in case there is a conflict or problem.
  2. Panel Size. The number of law firms involved in a panel will depend on the client’s total legal spending of course, but an American company with a few billion in revenue will need a dozen law firms or more. If this seems like a lot, refer to Part I of this article, which discusses why in the legal marketplace uniquely, consolidating onto a very small number of providers leads to much higher costs.
  3. Varied Cost Tiers. The firms in each practice area should be at different cost levels, and efficient firms should be favored. Look at a firm’s revenue per lawyer numbers, not just their rates. Continuing the FDA example, the two firms with an FDA capability should be at two different price levels so that the competition between them results in price pressure on the more expensive firm, quality pressure on the more efficient firm, and better choices for the client.  This kind of competition can show where more efficient law firms are just as good as their more expensive competitors – but at the same time it will often clarify the unique value delivered by an expensive and sought-after lawyer.  Overall, our research has shown repeatedly that cost and quality don’t correlate the way we might think they do – meaning we need to give lawyers at all price points a serious look based on the particular needs of the matter at hand.
  4. Open Competition. Providers need to know that they are competing for every piece of work. This does not mean regular RFPs and reverse auctions – those should be reserved for certain situations. It just means that no firm has the work “locked up.” Pilots should be run periodically with new firms, ensuring that different options and approaches are always considered.
  5. Re-Selection. Preferred provider panels cannot go on indefinitely. The panel should expire in two or three years, and everyone should know that from the start. When the panel ends, everything is on the table again and there are no guarantees.

So we think this is the right basic structure. But as we mention above, management practice is more important than structure. Put another way, as our friend Casey Flaherty has said, creating a law firm panel is just the first step.  The second step is to do something with it. What should you do with it?

We believe there are three key management practices necessary to getting the most out of a law firm panel:

  1. Assertive Change Management: Lock Down New Matter Initiation. The most common practical outcome of convergence onto a preferred provider panel is nothing: executives, in-house lawyers and others simply continue to hire law firms as before. They may have agreed that a panel approach is best, but current matters are grandfathered in, and when new matters come up, shifting work to a panel firm is never quite right in this particular case. It is no exaggeration to say that in many cases the status quo ante is perfectly preserved after a months-long convergence exercise. To change this powerful inertia, new matter initiation needs to be locked down in a process that drives the right work to the right firms. Also, existing work needs to be closely assessed to determine whether it should also move into the panel. Everyone needs to see how and where all matters go; matter performance assessments must be rolled up and distributed; successes of the new system should be communicated and cost outcomes broadly known.
  2. Positive Psychology. Panel lawyers should be given opportunities to connect, collaborate across firms in a positive way, share best practices and celebrate victories or compete for honors in a friendly way.  One way to do this is to gather key partners at an annual or biannual law firm summit.  Events like this always remind us that law firm leaders are – get this – very human. They respond to incentives – and yet they respond much better to incentives when clear expectations are set, results are communicated, and relationships built. Then they put their best foot forward, their best staff onto matters, and more effort into the relationship. Post-convergence you may only have a dozen law firms . . . but those law firms still have hundreds of clients. Becoming a top-priority client is not simply a matter of forming a panel. You need to figure out how to become a client of choice for the firm.
  3. Structured Communication: Law firms and in-house counsel alike perform better with feedback. Performance assessments should be structured and consistent, and performance conversations should go in both directions. Talk about how the firm can improve, but discuss how in-house counsel can do better too.  Assess at both the matter level and the relationship level.  And share information across the entire in-house group.

These conclusions flow directly from our experience of law firm panel arrangements that work well because they are correctly designed and actively managed. The third and final installment in this series (Post 031) will go deeper on how to carry these out, and it will also consider some of the more nuanced issues in law firm panel management.

What’s next?  See Part III on Convergence: Clients Must Manage to Get Results (031)

We see many companies these days running law firm convergence exercises – generally resulting in a preferred law firm network with fewer “approved” firms than the company previously used. The goal of this exercise is usually to reduce total legal spending and simplify outside counsel management. This kind of effort has a long track record at large companies, and the recent strength of the trend has had a big impact on the legal marketplace. It is, among other things, a significant driver of the continuing law firm merger trend.

Like many corporate initiatives, however, we don’t really know how well it works.  Is convergence always an effective way to get better price and quality? Or is it a center-led initiative that raises costs and creates only the illusion of control?

At AdvanceLaw, we work with about 180 corporate general counsel to vet law firms and provide feedback on lawyers’ performance within the group.  We have worked with dozens of GCs to design and build their preferred provider networks. Our most recent initiative, the GC Thought Leaders Experiment, is a collaboration with 25 general counsel aimed at better understanding outside counsel management practices by collecting and analyzing a large amount of matter-specific data.

Based on both our experience and our research, we believe convergence efforts can be very successful – and they are usually necessary.  But there are significant problems with how convergence exercises are sometimes carried out in practice.  The main goals of the effort can be undermined or even backfire.  Our goal is to make preferred provider networks work better for everyone; the purpose of this series is to outline what we believe doesn’t work – and what does.

We’ll start with the problems in how convergence efforts are sometimes executed today.


A formatted PDF of Dan Currell’s three-part series on convergence is online here. wdh

How it starts . . .

Most companies accumulate law firms over time, adding new firms as needs arise. It is typical to end up with 50, 100 or more law firms issuing at least one invoice each year to a mid-sized public company. It is quite possible to have over 1,000 firms working, at least a little bit, for a large multinational. The majority of spending is likely concentrated in ten or twenty of these firms, but the headache of managing the rest of the herd is considerable. (Nobody seems to know who these guys in San Francisco are and why they did $1,247 worth of work for us in March.)

Experienced in-house lawyers will regard this situation as natural. If you have a big company with lots of legal issues in different jurisdictions and practice areas, this is just how it is.

What’s the problem?

From a procurement perspective, this “natural state of things” looks like a mess. There are three apparent problems with spreading legal spending across so many law firms:

  1. Diffused Purchasing Power. By spreading our spending out across so many law firms, we are diffusing our purchasing power. If we concentrate our spending on five or ten firms – or heck, maybe just one or two – we will get a far better deal from those firms in return for the volume of business.
  2. Management Messes. Nobody can efficiently manage 100+ law firms, and indeed a portfolio of that many firms is often not managed at all. If we can get our preferred provider list down to 20 firms, we can implement effective management practices and stick to them – invoice compliance and review, alternative fee arrangements, performance management, use of alternative providers, matter postmortem reviews, project planning, process management and so on.
  3. Startup Costs. Firms that don’t know the client very well can take a lot of time and energy to ramp up on a matter.  Firms that serve a client consistently over time can hit the ground running on every new matter because they already know the client well.  It stands to reason that working with fewer firms will result in better service because each “preferred” firm will get to know the client better.

The procurement solution

Applying conventional procurement wisdom to the problem of outside counsel spending, the conclusion is easy: we should concentrate our spending into fewer law firms than before. Controlling for quality, we can drive down prices and therefore overall cost by aggregating our purchasing power.  There is much to commend this, which is why companies continue to create preferred provider panels.

But there’s an essential problem with the logic, because the act of concentrating purchasing power onto a small number of law firms alone will rarely result in lower prices. In fact, if not properly designed, this approach can lead to significantly increased legal spending. This is a little surprising, since convergence is intended to reduce legal expenses.

How can conventional wisdom be so wrong? Two reasons. First, economies of scale aren’t commonplace in legal services, so the underlying economic logic doesn’t work as neatly in law as it does in other markets. Second, convergence efforts often push clients up-market to larger law firms with higher revenues per lawyer, raising the basic cost of legal services.

Both of these problems can be overcome with the right design – but first it’s worth understanding how these problems play out in practice.

(1) concentration of purchasing power

The “concentration of spend” tactic is very beneficial in industries characterized by economies of scale. If I need a million sheets of paper but I choose to buy a quarter million sheets each from four different suppliers, it really does cost more for those million sheets to be made, packaged and delivered than if I had ordered the whole million from one supplier. There are serious economies of scale in that kind of business. If I concentrate my spending onto one supplier, some of the efficiency created by that big order is passed along to me in the form of a lower price per page.  (In an efficient but competitive market, half the savings will go to me and half to the supplier – we both win.)

Following this example from the paper market into the law market, if we concentrate our spending with one law firm where previously we spread it across four, will that reduce the cost of production for the law firm?

In theory, yes. And for the most innovative law firms, the answer will be yes. But most of the time, in the actual legal market of 2017, the answer is no.

Legal practice has historically had very few economies of scale. On the traditional model, if a firm was given four times the work, the natural path was for the firm to work four times as many hours.  Things are changing – but they aren’t changing all that fast.  Most law firms still aren’t set up to achieve efficiencies on a day-to-day basis in the way that other businesses regularly do.

But it’s not just that there is a lack of efficiency in law. It’s potentially worse. If there are no efficiencies to pass along to the client but the client nevertheless uses its market power to get a lower price from the firm, how will the firm preserve its profitability? The most tempting option is to save money by reducing quality.

We have plenty of firsthand evidence that law firms don’t do this.  Law is a heavily reputational business, and law firms will fight to serve their clients very well irrespective of profitability in most cases. But that said, it’s unhealthy for a market to be suffused with the temptation to make money by serving clients poorly. We want a better market than that.

(2) bias toward higher RPL firms

In practice, how do convergence initiatives play out?  When we see a multinational company consolidating into a very small panel of law firms, the winners usually include firms like Latham, Freshfields, Jones Day and the like. It’s just not possible to have one or two law firms handling, say, all of your global labor and employment work without getting into that bracket of 1,000+ lawyer firms with $1b or $2b+ in revenues. Nobody else has the necessary office footprint and practice area coverage. And those firms’ revenues per lawyer are $1,000,000 or more.  In all cases, the firms themselves have a lot of market power because they are big.  In some cases, they are bigger – by revenues – than the client.

If a convergence effort is consolidating work into national and global law firms, it is common in our observation that a dozen or more regional or local firms will lose the same work.  These firms usually have revenue per lawyer numbers around half the level of the firms that have replaced them. Since revenue per lawyer is the most fundamental measure of what clients pay, the convergence exercise that was intended to reduce spending has, in many cases, just increased it in a fundamental way.

So this is what we have regularly seen: a client is working with several regional firms whose revenues per lawyer are around $600,000. As a result of a convergence effort, the client leaves those firms for a smaller list of national and global firms whose revenues per lawyer are $1,000,000 or more. The theory behind this is that a bigger purchase will lead to better pricing. But that’s not how law works. One way or the other, the client will end up paying more for what it’s getting.

Put another way, in its search for efficiency, the client has just moved from a more efficient firm to a less efficient firm.

What about quality?  We have little evidence that quality and cost are much related. Big firms have a scope advantage – many offices, many practice areas, more lawyers who are deep and narrow in certain specialties – but our research into matter-level quality suggests that ultimate work quality is about the same as between regional, national and global firms. Not surprisingly, responsiveness from the biggest firms actually tends to be worse in the opinions of in-house lawyers.

To be clear, a move to a big firm may well be the right move. Such firms are in high demand and their fees are, at least to an economist, prima facie evidence of value.  But clients too often believe that the move to a short list of bigger firms will save them money on fees – and this just isn’t so. More often it’s the exact opposite.

Louis Vuitton, esq.

If the explanation above still doesn’t have you convinced, let’s try it this way: we saw that we were spending an awful lot of money on purses and handbags from dozens of different suppliers around the world.  In order to drive a better bargain, we decided to concentrate our spending on a few suppliers of purses and handbags.  But we needed a handful of suppliers who could sell us these products anywhere in the world, and we found that the only providers with a truly global footprint (every airport and city center) were Louis Vuitton, Chanel and Hermes.  So we decided to concentrate our spending with them; that way, we’re sure to get a better deal.

Obviously not.  These products are just fundamentally more expensive than middle-market handbags, and no amount of bargaining or bulk purchasing will make a Hermes handbag reasonably priced.  Market facts immediately trump procurement theory in this story.  And so with law firms, for the same basic reasons.

In both the law firm and handbag examples, the logic of concentrating spend to drive a better bargain is swamped by a confounding variable: global footprint (and in law, practice area depth and breadth) happens to have developed first and most strongly at the tippy-top of the market.  As a result, going to a short list of global suppliers will drive prices up, not down.  Any deal you get from Louis Vuitton will be radically more expensive than whatever you were doing before – because your decision to consolidate means that you are no longer buying the same product.  You can be happy with the quality, you can love the global footprint and the customer experience, you can benefit from only having to deal with a few suppliers rather than dozens.  But you cannot possibly save money by buying Louis Vuitton handbags.

Others Reasons for Convergence

Are there other benefits to going with a very short list of suppliers?  There may be.  The tendency across all areas of industry in the last two decades has been towards large, single-source contracts that make it easier to integrate a supply chain and enhance total efficiency.  In this way the world has tended overall towards large contracts between a single supplier and its customer rather than a range of suppliers working with the same customer.  The total benefit of the single supplier goes beyond price.  It may create greater overall efficiencies because of more reliability, simpler process, better management practices and other factors – and those are very real and important considerations.

We might just bundle all of that together and call it quality: we’re willing to pay more for quality in law because quality ultimately reduces the total cost to the client.  This is why it can make some sense to hire the former Solicitor General at $2,000 an hour or to give Wachtell a percentage fee on a certain kind of deal.  By the same token, it explains why it may be sensible to work with a global firm across a dozen or more jurisdictions for the sake of integrated service.  Those are enhanced features, and they may increase the total overall value of a representation, but they will not reduce its cost.

There are other problems with conventional practice.  Two are most apparent in their effect on the law firms’ day-to-day work.

  1. Firms formally placed on a preferred provider panel know that the work is locked up, so they have little incentive to hustle in order to please the client.  Often, responsiveness suffers.
  2. Costs rise not only because firms are now inherently more expensive but also because they are assured a position in the client’s set of law firms – they are, in a sense, formally entitled to the work.

These problems result from how the preferred provider panel is structured.  Firms that otherwise may have been constantly competing for a client’s business are now assured of getting the work.  Again, this is not intended, but it is a predictable result of today’s common practice.  And in our research, we do see indications that in some cases, firms assured in their position on a preferred provider panel can work less hard than firms who are actively competing for more work from the same large client.

Having said all this, we are in favor of preferred provider panels in part because the alternative is untenable.  Nobody can coherently manage 100 or 200 law firms.  There are tremendous management benefits to cutting that list down to size.

But it does have to be done right, and that doesn’t happen without focus and adherence to a few key principles.  The next installment (Post 030) will focus on how to do preferred provider panels right.   We’ll outline the management practices that we believe achieve the overall results companies are looking for from their law firm panels.

What’s next?  See Part II on Convergence: How to Make It Work (030)

One of the biggest stories over the summer of 2017 was an open letter from 25 general counsel announcing that they are working together to test industry assumptions about the legal market. Although the composition of this group is very impressive, it is also not random. Each company is a member of AdvanceLaw, a network of buyers and suppliers of legal work that seek to drive value by sharing quality metrics and creating data-driven best practices.

Fortunately, Legal Evolution readers are about to get the benefit of some of AdvanceLaw’s insights. Over the next three days, AdvanceLaw Managing Director Dan Currell will post a three-part series on law firm convergence and preferred provider networks — basically, theory versus practice (029), how to build a panel that can deliver value (030), and the necessity of active client management (031).

Over the last 10 to 15 years, many large corporate clients have attempted to use convergence to rein in their legal costs, typically through a process that reduces the number of outside law firms, often from two or three hundred to twenty or fewer”preferred provider” law firms. Convergence is controversial because, among other things, it disrupts longstanding (and often comfortable) relationships between in-house lawyers and established law firms. Also, because the process is run by risk-averse corporate counsel who are winnowing firms for the first time, the results tend to favor the “safe” choice.

Notwithstanding these problems, we are going to see more — and better run — convergence in the future, as clients have a strong incentive to fix the underlying design and execution issues. The state-of-the-art is definitely going to improve.

Dan Currell is uniquely qualified to write on this topic.  Prior to joining AdvanceLaw, Currell spent more than a decade running the General Counsel Roundtable for the Corporate Executive Board (CEB). Between his time at CEB and AdvanceLaw, Dan has spent more time listening to challenges of senior in-house lawyers than virtually anyone in the legal industry.  Further, Dan and his colleagues at AdvanceLaw are now in a position to help shape the future.

I hope you enjoy these posts. WDH.

What’s next?  See Part I on Convergence: Why Theory Falls Short of Practice (029)

Among the many impressive finalists for this year’s ILTA Innovation Awards, the submission for the Telstra legal department stood out as a compelling change management story.  By enabling the right kind of collaboration among its lawyers, the Telstra change initiative reduced the internal workload on the 220-lawyer department by 40,000 hours. Further, by returning time to overburdened lawyers, the department created a culture that is much more supportive of change efforts.

Yet, what is most significant about this story is that virtually any legal organization could replicate this success by taking a few simple steps.

The business challenge facing the Telstra legal department

Telstra is an Australian telecom company that was formally a state-run utility.  Shortly after completing a phased privatization in the mid-2000s, the 2008 financial crisis forced the company into downsizing mode. 10% annual budget cuts were implemented for all parts of the business, including the legal department.

Like many successful change initiatives, this one began with false starts and disappointment.  As the cost-cutting pressures continued to mount, in 2013 the legal department created a long list of key pain points that needed to be addressed for the group to be successful. Recalls Mick Sheehy, Telstra’s General Counsel of Finance, Technology, Innovation & Strategy, “we thought the list was so important we made it everyone’s shared responsibility, including our senior legal leaders, which meant ultimately it became no one’s responsibility.”

A Process to Prioritize, Plan, Implement, and Repeat

With the department struggling to gain significant traction, in 2015 Sheehy attended a design thinking course at Harvard Law School.  Impressed with these ideas, Sheehy returned home and ran a design thinking workshop with a group of his own lawyers, receiving some expert facilitation from a team at Herbert Smith Freehills. Cf. Post 015 (noting key determinants of organizational innovativeness are leadership’s attitude to change and openness to external perspectives).

After once again creating a laundry list of the department’s biggest pain points, the group limited itself to the top four.  Thereafter, they used design thinking techniques to construct potential solutions for each problem and to implement them through an eight-week “sprint.” (Borrowing from the world of software development, a “sprint” is a discrete time period — usually two weeks to two months — where a team creates a working prototype or an updated version of a product. See Agile Glossary.)

Below is the simple process each Telstra work team used evaluate and improve each change initiative:

What makes the Telstra process different that other change initiatives is that it is iterative and enables the group to learn from implementation.  Thus, a decision to continue is also a decision with much better information and a higher likelihood of success.  Likewise, a decision to kill an initiative is less a failure than a prioritization of limited department resources to support the highest impact projects.

Notes Sheehy, “We ran the sprints and we came back to another workshop and we looked at what we achieved and were so enthused and excited that we decided to do the whole thing again. And we haven’t stopped. This is now an embedded process in Telstra legal and we recently ran our 8th Telstra innovation workshop.” Cf. Post 008 & Post 011 (noting simplicity and trialability as among the keys to successful adoption).

Telstra rotates lawyers through the innovation program, known internally as the Legal Innovation Forum, or LIF.  As of August 2017, 35 Telstra lawyers have participated in the program.

Results

Thus far, four “streams” have left the Forum, having achieved their core objectives.  Although Sheehy notes that none of them are particularly exciting on their own, “collectively they’re telling a great story.”  Here are the four streams.

  1. Self-Service NDAs (5,300 hours saved).   Most non-disclosure agreements are standard and low-risk.  By embedding the key decision points into an automated workflow, the number of lawyers hours per annum dropped from 6,425 to 1,125, resulting in an 82% time savings.
  2. Less Legal Report Generation (2,250 hours saved).  The equivalent of two lawyers were producing a weekly report for the CEO that he was not regularly reading. So the reports going to the CEO were cut by nearly 2/3, reducing the time commitment from 3,750 hours to 1,500, resulting in an 60% time savings.
  3. Fewer Internal Meetings (31,500 hours saved).  Throughout the legal department, the numbers of internal meetings was widely viewed as excessive. As part of a LIF initiative, internal meeting where categorized as either “decision making” or “information sharing” meeting. For decision making meetings, organizers were told to only invite people they needed and to make the decision points explicit in advance. For information sharing meeting, each attorney was limited to 2.5 hours per week. Across the 220-lawyer department, this resulted in a drop in internal meeting hours from 60,180 to 28,680 (52% reduction).
  4. Reduce Legal Review of Internal Communications (1,008 hours saved).  A careful triage of the type of internal communications subject to legal review revealed that a substantial volume of review was unnecessary.  Better workflow criteria resulted in reduction of attorney hours from 3,470 to 2,462 (29% time savings).

Telstra’s internal time saving target for these four initiatives was 27,000 hours per annum time.  Yet, they overshot the mark by achieving more than 40,000 hours.  This is the type of ROI available when lawyers use people, process, and technology to “do less law.” See Ron Friedmann, Do Less Law — A Taxonomy of Ideas, June 11, 2015.  It was also enough for Telstra to win the 2017 ITLA award for legal department innovation.

Lessons learned

As noted above, as of August 2017, Telstra had eight workshop/sprint iterations, which is the basis for an enormous amount of organizational learning. What are the key lessons?  Sheehy offers several:

  • Data.  “It’s critical to measure your baseline and know your starting point so you can tell a data driven story so people can understand all the effort you’re putting in is driving results.”  Cf. Post 008 (data makes innovation more observable and thus more likely to be adopted by others).
  • Not reinventing the wheel.  “The problems we’re solving are not unique to Telstra legal department and may be faced by other law firms and departments in the company. Having an outward focus rather than an inward focus is critical.” Cf. Post 017 (noting openness to external ideas and influence as key determinant of organizational innovativeness)
  • Not waiting for perfect; avoiding options paralysis. “We have a tendency to overthink problems when we sometimes just need to get started. Jeff Bezos had a great point when he said that if you’re waiting for more than 70% of the information to make a decision you’re probably waiting too long, and getting something wrong is less expensive than being slow.”
  • Communication.  “All of this has a degree of behavioral change and behavioral change is really hard. We had to focus on the communication. The reduction in meetings was difficult and to get people to think differently on that – a lot of it was down to communication.”

Below is the last graphic from Telstra’s ILTA presentation.  Note that in its original form it was a series of sticky notes generated by team members during the Forum debriefs. In other words, a simple low-tech process is the engine that is powering tremendous organizational efficiency and learning.   Per Sheehy and his Telstra colleagues, the blocks in red are particularly important.

A special thanks to Mick Sheehy and Ali Caldicott of Telstra for making the ILTA slides and presentation script available to me.

alanbryanfutureoflitigAs a law professor, I worry about my students’ job prospects.  One way to manage this worry is to study clients and to work backwards from their needs.  Opportunities tend to find lawyers who follow this discipline.

Yet, making generalizations on law clients in the year 2017 is surprisingly difficult. This point was recently driven home by the juxtaposition of two “voice of the customer” examples at the Ark New Spectrum conference in Chicago last month.  The first example came from Aric Press, longtime editor-in-chief of The American Lawyer, who now spends a good portion of his time doing client feedback interviews through his consulting firm, Bernero & Press.

Example 1

Do law firms need to embrace sophisticated tech-based solutions to retain their largest and most important clients?  Aric put some variant of this question to a senior in-house lawyer who controls tens of millions of dollars of legal spend at a client we’ve likely all heard of.  The response was surprising, even to Aric. “I only need two pieces of technology. Email and my phone. And both work fine.”  This same in-house lawyer praised the firm being reviewed for cultivating a relationship of trust that felt personal. That’s comforting feedback for the service providers.

Example 2

The second “voice of the customer” came from Alan Bryan, Senior Associate GC of Legal Operations and Outside Counsel Management at Walmart. Alan presented the chart above, which graphically summarizes some of his views on the evolution of litigation [click on image to enlarge].

Caveat:  Alan Bryan is skilled and careful legal operations professional, which means he understands the range of interpretations that lawyers assign to graphical information.  A major caveat Alan made during his remarks is that the arrows above “are not to scale” — i.e., they do not reflect the quantum of hours worked or dollars spent. The chart instead shows a likely directional change in the relative mix of service providers, including in-house counsel.  The growing green arrow includes, at least in part, non-traditional legal service providers of the type profiled in “Efficiency Engines,” ABA Journal (June 2017).

So what’s the takeaway?

The nature of legal work among the nation’s largest corporate clients is simultaneously changing significantly and not at all.

On one level, this is frustrating because it means any generalization is vulnerable to the killer counterfactual anecdote. Within firms, this means strategy setting can veer toward melee.  The broader “profession” will also struggle to plan and adapt.

On another level, however, these two voice-of-the-customer examples reveal large client segments that are operating on different time tables. Alan Bryan feels sufficiently strongly about the changing nature of law practice that next year he will be teaching the first second full-semester* “Introduction to Legal Operations” course at an ABA-accredited law school. The course will be offered at his alma mater, University of Arkansas-Fayetteville School of Law.

The legal world is changing, albeit unevenly and in ways that defy simple generalizations.  That said, I would be comfortable wagering that over the course of a 40-year career, taking Alan Bryan’s legal ops course will, in cumulative effect, open as many professional doors as a degree from Harvard Law School, albeit HLS appears to be hedging itself in a very prudent way.  See Underestimate Harvard Law’s New Admissions Strategy at Your Own Risk.  As a field, legal ops is disruptive because it focuses on measurable results. See Post 005 (discussing rise of legal ops and CLOC).  You either have the knowledge, skills and experience to deliver, or you don’t.  Credentials and pedigree can’t fill that gap.


 * Since the fall of 2015, legal innovator Ken Grady has been teaching “Delivering Legal Services” at Michigan State University College of Law.  This is a 2-credit course that functionally covers the terrain of legal ops, including, per Ken’s email, “project management, process improvement, technology, metrics, design thinking, and a few other topics.”  Since January 2016, Indiana Law has been offering a 1-credit Legal Operations course during our January Wintersession. If your school also offers a “legal ops” course, please let me know and I’ll amend this post.

What’s next?  See Example of Automating Private Placement Documentation (014)

Six Types of Law Firm Clients
Six Types of Law Firm Clients

As the legal market remains flat for law firms, the focus naturally turns to clients.  How they think. What they care about. How they spend their budgets. Etc.  Yet, to the extent that clients vary in significant ways, the generalizations aren’t particularly helpful.

Six Types of Clients

There are many ways to categorize clients, but by my lights the most useful is size and organizational structure of the in-house legal department. As shown in diagram above, this metric varies from zero for individuals (Type 1) and business owners (Type 2), to the equivalent of a specialized law firm embedded inside a large corporation (Types 5 and 6). Continue Reading Six Types of Law Firm Clients (005)

A lot. The trend is large and longstanding.  Over the last two decades, the number of lawyers working in corporations has more than tripled, growing from 34,750 in 1997 to 105,310 in 2016. The chart above shows the trendlines.

Most people working in the legal industry know that in-house legal departments have been growing, but has there been an accurate sense of the magnitude — 7.5x faster than law firms over the last 20 years?

It took a fair about of time to pull these data from the Bureau of Labor Statistics and put them into the right format to generate the above chart. Yet, the chart itself raises more questions than it answers.

  • Why are corporations in-sourcing a non-core function? During this same period, outsourcing of various business processes has been growing.  Why is legal treated differently?
  • How long into the future will this trend continue? What might curtail this trend?
  • What are the age demographics of in-house legal departments compared to law firms? Law firms are graying. Will in-house departments avoid this same problem, or will it hit over the next 5 to 15 years?

The orange “in-house line” is so far above the other two sectors that is obscures another unexpected finding.  Since the mid-2000s, government has been growing faster than law firms – what’s causing this rise?  Either the government’s been on stealth hiring binge, or law firm hiring has flattened out in a way that cannot be characterized as cyclical.

Subsequent posts will return to these questions.  Before doing that, however, I want to time build out a simple theoretical framework that we can apply to legal industry data. This framework in rooted in diffusion theory.

What’s next?  See What is the Rogers Diffusion Curve? (004)