Continue Reading Huge, If True: How Microsoft’s Big Ideas Could Transform Legal Buy (069)
I was very fortunate to be invited to the most recent Microsoft Trusted Advisor Forum, which took place on September 20 at Microsoft’s Redmond campus. The Forum featured 13 key Microsoft legal service providers (12 law firms + one of the Big Four) giving presentations on an innovation that “demonstrably improves legal service delivery to Microsoft.” Although ambitious and unprecedented, the Trusted Advisor Forum on Innovation is but one small moving part in a much larger and well-resourced strategy.
This strategy was announced last summer in a widely read essay by David Howard, CVP & Deputy GC at Microsoft. See “Microsoft’s New Strategic Partner Program,” LinkedIn, July 27, 2017. What caught people’s attention was Microsoft’s commitment “to move 90% of our work to AFAs within two years.” The mechanism for achieving this goal is the Strategic Partner Program, which asked 13 law firms to co-create solutions within the context of long-term business relationships. This collaboration theme was recently re-enforced at Microsoft’s Global Summit when General Counsel Dev Stahlkopf asked all of Microsoft’s outside counsel to “[p]artner with us to continuously improve and innovate.” Zach Abramowitz, “Why Microsoft is Hosting Their Law Firms in Redmond This Week and Why it Matters for Everyone Else?,” BigLaw Business, Sept. 18, 2018.
These are big ideas. Someone, however, has to execute.
This task has been given to Jason Barnwell, Microsoft’s Assistant GC for Legal Business, Operations and Strategy. To give the Strategic Partner Program continuity and weight, Barnwell and his team started running the Trusted Advisor Forums. Last fall the topic was Artificial Intelligence. This spring it was Competition and Data. Later this year will be Diversity & Inclusion. Sept. 20 focused on Innovation.
Both Jae Um and I were at the Sept 20th event. We felt it was sufficiently important for the broader legal industry that it warranted two detailed write-ups. Mine (068) applies the lens of diffusion theory to the SPP/Trusted Advisor Forum innovation, examining the obstacles to adoption and the likelihood that MIcrosoft, through its leadership and systems-level approach, will eventually be successful. (For a primer on diffusion theory, see Posts 004, 007, 008.) Jae’s post (069) goes deeper into the substance of the Innovation Forum. Both 068 and 069, however, discuss how and why MIcrosoft’s efforts matter for the broader legal industry.
To handicap the odds of Microsoft’s Strategic Partner Program (SPP) becoming a major success that influences other Fortune 100 legal departments and eventually the broader legal industry, it is worth focusing on three factors:
Factor #1 strongly favors Microsoft’s: Jason Barnwell is a 1 in 10,000 talent. No less remarkable, however, is that Barnwell has the full backing of senior leadership (Brad Smith, President & CLO; Dev Stahlkopf, CVP & GC; David Howard, CVP & Deputy GC) along with numerous Microsoft practice group leaders at the Deputy GC-level who told Barnwell, “I’m in.” Barnwell also has the bench strength of 13 legal professionals, including Rebecca Benavides (Dir. of Legal Business) and Tom Orrison (Dir. of Legal Ops). See Post 017 (innovation in organizations crucially depends upon the attitudes of leadership and the presence of “champions”).
Factor #2 cuts strongly in the opposite direction: The SPP is an innovation that Microsoft wants its key outside service providers to adopt (i.e., embrace, improve, own). Yet, using Rogers rate of adoption model (Post 008), the still-evolving SPP faces enormous challenges to adoption, particularly with regard to relative advantage and cultural compatibility (see full analysis below). It is all-too-easy to misunderstand or underestimate these challenges, particularly within the elite segment of the bar where Microsoft needs to operate.
Which brings me to the #3 factor: If Barnwell and his team can forge ahead for six to eight years, I would put the odds of success at 90%+. This is because the SPP/Trusted Advisor Forums reflect a multiple iteration/repeat player design that can reshape cultural norms and re-orient relative advantage toward the long-term. With some luck, the “Microsoft system” can do for legal departments what the Cravath system did for law firms 100 years earlier. This would be a much needed refresh for everyone.
In this post, I’ll delve deeper into the three factors listed above. But first, let’s review the set-up of the Microsoft’s Trusted Advisor program, as it provides specific context for understanding Microsoft’s core innovation, which is the SPP.
Trusted Advisor organizations were invited to make presentations on two topics:
Presenters were instructed to focus on “an innovation that demonstrably improves legal service delivery to Microsoft.” Because Barnwell knows his audience, these instructions were parsed in a detailed explainer sent out in advance. Organizations with past and future presentations (7 of 13) had 20 minutes to present, including a short Q&A. Organizations with only a future presentation (6 of 13) were allotted 15 minutes.
Sure, everyone is bound to be nervous presenting on innovation in front of Microsoft and their industry peers. But other aspects of the Forum further raise the stakes. Specifically, Trusted Advisor organizations were strongly encouraged to invite other in-house professionals. Thus, in the room were (to name but a few) Adobe, Amazon, American Airlines, Fedex, Glaxo-Smith-Kline, Intel, Liberty Mutual, Starbucks, T-Mobile, etc). According to Barnwell, Microsoft opened this particular Forum to other law firm clients because “we don’t want to be the only client asking you for this type of commitment.”
The Trusted Advisor Forum on Innovation was designed in collaboration with Casey Flaherty. During his opening remarks, Barnwell cited Flaherty’s 2016 ACC monograph “Unless You Ask,” as his primary blueprint. Flaherty was retained by Microsoft to help organize and run the Forum.
Regarding follow-up, which clearly bears Casey’s fingerprints, the last section of the explainer lays out the tentative plan:
The [Innovation] Forum is an experiment. The current thinking is we will reconvene in a year to report back and publicly commit to a new round of innovations. But we will see how this goes.
Our commitment to continuous improvement is not an experiment [emphasis added]. These types of projects will become part of our annual feedback cycle and will be on the agenda for my site visits. In addition, I recommend you start, if you haven’t already, situating these projects in a larger strategic plan with a target operating model and a digital transformation roadmap. You do not have to share your entire vision at the Forum. I will ask about it when I come onsite.
Suffice it to say, Microsoft is trying something new.
The September 20th Trusted Advisors Forum took place in Building 92 on Microsoft’s Redmond Campus. Although not labelled as such, Building 92 appeared to be a conference center. Our room was on the second floor, roughly 100′ by 200′, with 30′ ceilings and two all-glass walls (front and side) overlooking a wooded landscape. The set-up was 15 round tables with plenty of room to spread out. I have been in a lot of law firms, but very few have a room that could hold 200 people so comfortably. Remarkably, Building 92 had a lot of other activity that day and could have easily handled three of four similar events. We were but one corner of one floor. This is how things roll at an $85 billion global software giant that employs 115,000 people.
I share this information to make a simple point: The person running an outside counsel initiative at Microsoft is bound to enjoy a lot of power and influence. But that does not make the person an exceptional leader. Jason Barnwell, however, combines the two attributes.
In his opening remarks, Barnwell explains that today participants are Microsoft’s “long-term partners” and that Microsoft intends to “invest in the relationship.” Barnwell reminds the audience, “We serve the same client, but all of us have to be committed to doing better. In this program, success is learning; failure is not trying.” Barnwell continues, “Those of us in CELA [Corporate External and Legal Affairs] are updating our culture to embrace a growth mindset that stresses a learn-it-all instead of a know-it-all approach. We expect to see this reflected by our Trusted Advisors.” Finally, Barnwell emphasizes his goal of creating a “psychologically safe place” for Forum members to share and collaborate.
How many lawyers do you know in positions of senior leadership who use the term “psychological safety” to describe the environment they aspire to create?
The term psychological safety has made one other appearance on Legal Evolution, in the context of effective change strategies. See Post 057 (citing research from Google showing that psychological safety is the key attribute of high-performing teams). Professor Amy Edmundson at Harvard Business School defines the term as a “shared belief held by members of a team that the team is safe for interpersonal risk-taking. … [and] a sense of confidence that the team will not embarrass, reject or punish someone for speaking up.” Edmundson, “Psychological Safety and Learning Behavior in Work Teams”, 44 Admin. Sci. Quarterly 350-383 (Dec. 1999).
Barnwell’s background sheds some light on his unconventional style. Barnwell is originally from South Carolina before heading to MIT to obtain a degree in Mechanical Engineering. During his last semester and the summer after graduation, Barnwell worked as a Developer/Technology Specialist for the Harvard School of Design. In 2000, Barnwell headed to California, where he worked as a software engineer for four years. In the fall of 2007, he enrolled at USC Law.
The key point point here is that long before he entered the legal field, Barnwell was thoroughly socialized into a systems method of thinking. In a sidebar conversation, Barnwell told me that he knew within the first 30 days of his associate position at Heller Ehrman that the firm was awash in work that could easily be automated. At his next firm, Barnwell observed a strong focus on profits with little attention paid to how the work was performed.
Thereafter, Barnwell concluded that law firms would not be a good long-term fit. Thus, he resolved to spend another year in private practice to learn how to be an MVL — “minimum viable lawyer.” In the fall of 2010, Barnwell joined Microsoft. Since then, he has been promoted from attorney, to senior attorney in a variety of roles, to assistant general counsel. See Barnwell’s LinkedIn page.
Among in-house peers, Barnwell fits the classic innovator profile–i.e., intellectually venturesome with an interest in new ideas that lead the innovator out of conventional peer networks into more far-flung social and professional circles. See Post 007 (defining adopter types from Everett Rogers, Diffusion of Innovations). Within lawyer circles, Barnwell describes himself as “a nerd” and an “odd duck.” I was recently added to an external email list where Jason passes along new sources of learning relevant to the workplace. Here is a sampling from that list:
If Jason Barnwell was still working in a law firm, these intellectual pursuits would be a distraction from ambitious billable and origination targets. Perhaps that’s a clue to the root cause of law firms’ innovation woes. Regardless, Barnwell is continuously adding to his toolbox so he can drive better results in his own area of influence.
In Diffusion of Innovations, Everett Rogers describes how the creative insights of the innovator often flow from their status as a “stranger,” a concept originally developed by the German sociologist Georg Simmel. See “The Stranger” (1908). Rogers notes that a stranger “has a unique view of the system in which he or she is a member” and “can more easily deviate from the norms of the system by being the first to adopt new ideas.” Diffusion of Innovations at 42-43.
Among elite lawyers, Barnwell is a stranger: he is a scientist and software engineer who can’t be co-opted into believing that law is special or different. Yet, he has remarkable EQ and political instincts on when to push forward and when to back off. This is what makes Barnwell a 1 in 10,000 talent. Now he’s in a position of significant influence and authority at Microsoft.
Even with Barnwell’s unique talent, perspective and credibility backed by the clout of Microsoft, the ambitious goals of the Strategic Partner Program — 90% AFAs by 2020; continuous improvement from all partner firms — are far from guaranteed. This is because of the difficulty of the underlying problem, which is a legal culture that resists learning. To be clear, this is my assessment, not Barnwell’s or Microsoft’s. More on the legal culture problem in Section 3 below. First, let’s look at the innovation that Barnwell is trying to get law firms to adopt and how it fares in Rogers rate of adoption model.
Drawing upon the ideas of Casey Flaherty, Barnwell is building the SPP to include a “structured dialogue” process that emphasizes continuous improvement for the benefit of Microsoft. The theory is very simple. Smart people from the buy and sell side come together on an annual or bi-annual basis to discuss what is working well and what could be improved. Based on that conversation, goals are set with very simple metrics for ascertaining progress. If the structured dialogue is faithfully followed, the participants are put onto the path of high-value innovations. This is the Flaherty-Barnwell thesis, which I strongly endorse.
Since Barnwell is at the beginning of this process, the Sept. 20th past and future innovation presentations are grist for structured dialogue. Further, all the Trusted Advisor organizations got to see each others’ presentations. Lawyers are highly competitive. Thus, independent of any dialogue between the Trusted Advisors and Barnwell and his team, participating organizations are going to up their game. Of course, that is the key to all of this — multiple iterations that build on one another.
Regarding the quality of ideas and evidence of demonstrable improvement, critiques of specific firms would be completely counter to Barnwell’s laudable and wholly correct mandate of psychological safety. Suffice it to say, presentations in this first Iteration fit onto a bell curve with only two to three in the A range. Here are my takeaways.
Expect next year’s presentations to have a lot more A’s.
Let’s assume that to be successful in Microsoft’s goal of continuous improvement, Barnwell needs Trusted Advisor organizations and some key Microsoft in-house lawyers to “adopt” his iterative structured dialogue process. Rogers rate of adoption model from Post 008 provides the key criteria, with “Perceived Attributes of Innovation” accounting for most the variance.
Applying these criteria to the innovation, the first two are strong negatives; the second three are all strong positives.
Relative Advantage (-). The larger the relative advantage, the faster the rate of adoption. In this case, if Microsoft is your client and asks you participate in a Trusted Advisor Forum, you are very likely to accept. However, what’s the value? In the short- to medium-term, it’s preserving the relationship with Microsoft; I doubt any relationship partner sold participation to firm management by promising a significant volume of additional work. Part of the legal culture problem is an inability to see the long-term, which includes Microsoft as an institutional client of the firm that reduces dependence on partners with portable clients. The relative advantage is negative to neutral in the early stages but positive for those focused on the long run.
Compatibility (-). The more compatible an innovation is with the social system’s existing cultural norms, the faster the rate of adoption. Granted, this sounds ludicrous, but a large number of lawyers are extraordinarily resistant to candid conversations about performance. They are (1) afraid of the emotional blowback of giving it; and (2) terrified at the prospect of receiving feedback that is not in the “A” range. The pervasiveness of this problem within elite professional services was the impetus for Professor Chris Agryis’s article, “Teaching Smart People How to Learn,” Harv. Bus. Rev. (May-June 1991), which is now an HBR classic. Agryis discusses the “brittle” personalities of elite professionals who have never experienced failure. The result is an intellectual defensiveness and a propensity to blame others. Of course, none of this unpleasantness is necessary if the hard conversations can be avoided in the first place. Compatibility is a strong negative that Barnwell is countering with a precommitment strategy. It also explains Barnwell’s emphasis on psychological safety.
Complexity (+). The simpler and less technical an innovation, the faster the rate of adoption. A structured dialogue process is drop-dead simple even if there is emotional resistance to participation. {Lack of] Complexity is a strong positive here.
Trialability (+). Innovations that can be tested through trials are more likely to be adopted. As noted in the explainer, the Innovation Forum is “an experiment” and that Barnwell wants to “see how it goes.” Iterative approach = trialability. It’s also a “little bets” approach. See Peter Sims, Little Bets: How Breakthrough Ideas Emerge from Small Discoveries (2011). Another strong positive.
Observability (+). The more observable an innovation by other members of social system, the more likely adoption. For example, taller and better corn in Rogers’ original research made the benefits of hybrid seeds highly observable to other farmers. See Post 008. Likewise, the Forum format dramatically increases observability (and also reshapes culture, albeit slowly) — all positive.
The combination of low relative advantage and low compatibility is what I refer to as the legal culture problem. And it affects all firms in the AmLaw 200 on a continuum that ranges from “challenging” to “extremely severe.” But for the SPP’s multiple iteration/repeat player design that will, hopefully, extend for a period for years, I would be writing off this whole initiative. The legal culture problem runs that deep.
For the purposes of this last section, I’m going to refer to the multiple iteration/repeat player design as the “Microsoft system.” This is useful for two reasons. First, if Barnwell and his team are permitted to stay the course, the SPP/Trusted Advisor Forums will evolve into a system. Second, the emphasis on “systems” is appropriate because virtually all elite U.S. lawyers now operate in the late stages of the Cravath system, though few appreciate what that means.
The Cravath system was developed in response to an acute shortage of sophisticated business lawyers during the rapid growth of financial and industrial enterprises in the early 20th century. See Henderson, “Three Generations of U.S. Lawyers: Generalists, Specialists, Project Managers,” 70 Maryland L. Rev. 373 (2011). The core of the system was a partner-associate training model that aligned incentives so that young lawyers got excellent training, clients got excellent service, and partners enjoyed security, profits, and prestige. Further, it was scalable, meaning that it could keep pace with the relentless increase in client demand without compromising quality. Indeed, the purpose of the system was to build “a better lawyer faster.” All of the system’s key moving parts are laid out in remarkable detail in the first 12 pages of the second volume of the Cravath Swaine & Moore firm history. See Robert T. Swaine, The Cravath Firm and Its Predecessors, 1819-1948 Vol. II (1948).
The results of the Cravath system were so powerful that its principles were adopted by every major U.S. law firm. Yet, how may BigLaw partners today know what those principles are? The legal culture problem is, in essence, the problem of ahistorical partners. Each successive group of lawyers has paid less and less heed to the system’s operating principles until little more then an emphasis on elite credentials remains. Yet, because of the system’s tremendous forward momentum, decades later partners are still collecting its late-stage financial rewards. This is very powerful operant conditioning, re-enforcing some very misguided ideas about how value is created.
Because so many in-house lawyers also came of age at late-stage Cravath system firms, they too fail to appreciate the value of systems-level thinking. Casey Flaherty’s “Lawyer Theory of Value” describes the absurd result — just clear the room and let a few well-credentialed lawyers do what they think is best. See Post 040 (laughing and crying with Casey). Thus, as an industry, we are at a place where lawyers–both in-house and in law firms–have to rediscover the power of systems thinking so we can, once again, as we first did over 100 years ago, coordinate our behavior in service of what the client truly needs. If we do it right, as a second-order effect, lawyers who follow the resulting system will enjoy another several decades of financial prosperity.
The Microsoft system has the potential to make this happen because the multiple iteration/repeat player design can slowly change the culture and reorient incentives and payoffs (i.e., relative advantage) toward the long-term. If it’s not long-term, then it’s not a system. Further, Microsoft’s odds of success are made higher because (a) David Howard, the original architect of the SPP and a person who controls a huge external legal budget, saw the wisdom of promising a stream of high-value work to partner firms who operated in good faith; and (b) Barnwell and his team are fostering a “psychological safe” environment — to break down resistance, the many lawyers involved need assurances they won’t lose what they have, which is primarily a sense professional accomplishment and status.
Microsoft’s biggest execution risk is an underestimation by senior leadership regarding the nature of the resistance they will eventually encounter. The SPP/Trusted Advisor Forums, and the Microsoft system it will create, is at best a “slow” innovation. See Post 011 (slow versus fast innovations). In the short- to medium-term, the only reward for participating (and investing time and firm resources) is to keep the Microsoft work you already have. This puts relationship partners in a vulnerable position vis-a-vis the short-term financial goals of their own firms.
Think I am being too cynical? It is noteworthy that Microsoft asked 13 Strategic Partners to participate in the Forum on Innovation. Nine accepted, four declined. Thus, Barnwell and his team filled the four open spots with service providers who “saw value” in the exercise. That is how CMS, Eversheds, Reed Smith, and EY got into the mix. And this is just the beginning. Eventually, as real change begins, there will be whisper campaigns of naysayers (both line lawyers at Microsoft and partners at law firms) who are going to complain that the SPP’s implementation is “impractical” and should not apply to their workstream. This is what “non-adoption” of the SPP looks like.
Here is my message (of encouragement) to Microsoft’s leadership: When things get hard, don’t mistake the hardships for a flaw in the underlying strategy. This is what the naysayers want you to believe. They lack your long-term perspective; they would be most comfortable being left alone. Success requires that you face them down rather than grant their exceptions. Cf. Post 047 (discussing failure of major in-house change effort at Fortune 100 company because leadership lacked resolve). As Jae Um has correctly pointed out many, many times, see, e.g., Posts 051, 052, 062, 063, 066, and with due credit to her former boss, Josh Kubicki, innovation in the legal vertical is just lots of hard work over a very long period of time. Your multiple iteration/repeat player design is the right way to conquer this problem; but it won’t make it easy or comfortable. Thus, stay the course until the end. Pay the price. The resulting Microsoft system will be worth it.
Many lawyers and law firms claim to serve the middle market, often describing how they deal directly with owners and executives rather than in-house counsel. Although these clients aren’t the Fortune 500, the lawyers and law firm leaders take enormous pride in this type of practice and discuss it in ways that suggest it’s a stable and permanent market niche. I’m not sure that’s right.
Above is a treemap chart of U.S. businesses grouped by annual revenue. The key takeaway is that $100M+ companies comprise the vast majority of U.S. business activity (71.6%). Remarkably, all this purple is generated by 22,400 businesses, a mere 0.4% of the 5.7 million businesses in operation in the U.S. in 2012 (the most recent year that contains total receipts).
Companies in purple tend to have legal departments as do a meaningful number of companies in orange (>$25M-$100M). We can deduce this from a number of sources. For example, according to the Legal Executive Institute, companies with less than $1 billion in revenue were classified as “small.” See 2018 State of Corporate Law Departments at 10. Yet, these companies had, on average, nine in-house lawyers, or one attorney per $65M in revenue. Likewise, a 2016 report by Barker Gilmore, a national recruiting firm, classified companies into four groups: >$10B, $1B-10B, $100M-$1B, <$100M. Yet, even in the smallest category (<$100M), there were sufficient data to calculate separate salary, bonus and equity averages for three different in-house roles: general counsel, managing counsel, and senior counsel. See 2016 In-House Counsel Compensation Report at 14-22.
Defining “middle market” turns out to be surprisingly difficult — is it somewhere in the purple? The orange? The gold? The managing partner of a successful firm near the bottom of the AmLaw 200 recently told me that all his partners agreed that the firm served the middle market. Yet, that consensus broke down during a strategic planning process when partners were asked to define middle market using specific criteria. Finally they gave up. The firm was still middle market, but each partner was free to follow his or her own definition.
Although consensus on the middle market is bound to elude us, not everything is so ambiguous. This Post addresses two interrelated topics regarding the future of law:
Every day the global economy becomes a little more interconnected and complex. In contrast, our mental models for the practice of law are very sticky. This is because we need common, coherent and tractable mental models to coordinate organizational goals and effort. Thus, we only change our mental models when they become a source of competitive disadvantage, essentially pitting the pain of building new models against the pain of imminent failure.
The middle-market law firm discussed above is in that uncomfortable in-between state where the need for new mental models is building but the organizational benefits of such a change remain out of focus. This likely describes most lawyers and law firms.
Below are charts regarding the more rapid grow of large businesses. Yet, these data are supported by our own intuition if we take a moment to reflect on the enormous advantages that accrue to very large companies. These include:
If you’re wondering how important large companies are to the overall economy, review your credit card statement or the bills you pay online each month, such as your mortgage, car payment or student loans.
The graphic below shows how the mix of U.S. employment is steadily shifting to companies with large employee headcounts.
Companies with 500+ employees (purple bars) comprise the largest category in the SUSB data. This is the only group growing in proportionate size, increasing from 45.4% of total US employment in 1988 to 52.5% in 2015. If the change looks quite subtle, that’s also it’s experienced — so gradual it’s barely noticed. This makes it more difficult to keep our mental models up to date.
The magnitude of the change is easier to observe through a trendline analysis that starts with 1988 as baseline:
The absolute numbers underneath the purple trendline are striking. Between 1988 and 2015, the total number of companies with 500+ employees increased from 12,800 to 19,500. The total number of employees in the 500+ company category increased from 39.9 million to 65.1 million. Further, total payroll for these companies increased from $958 billion (51.4% of total US payroll) to $3.7 trillion (59.2%). Purple companies, by dint of their sheer size and scale, generate substantial and ongoing legal work for lawyers. Thus, they are very desirable clients for law firms.
Finally, the trend toward bigness is compounded by the growing portion of purple, orange and gold companies that are partially or wholly owned by private equity. Below is graphic showing an annual count of U.S. companies in private equity-backed portfolios.
In our journey to Big, more and more successful businesses with regional roots are becoming assets in multi-billion dollar private equity funds. According to a recent McKinsey report, even the largest funds ($5B+) are growing faster than the rest of the PE market, increasing from 5% market share in 2010 to 25% in 2017. See “The rise and rise of private markets,” McKinsey Global Private Markets Review 2018 at 14 & Exhibit 9.
What makes all of these trends so powerful is (a) they are all moving to Big and (b) the pattern is near certain to continue. Alas, this is the path of globalization.
Once we accept that the legal industry is on a journey to Big, several predictable consequences come into focus. In this post, I’ll discuss three.
Our journey to Big produces legal departments that are comparable to AmLaw 200 law firms or specialized boutiques. Yet, legal department “firms” have several features that favor efficiency and innovation.
To illustrate this point, consider the statistics below from a recent CLOC survey of 156 member legal departments.
|
Large Companies ($10B+) |
Mid-Size Companies ($1B-$9.9B) | Small Companies (< $1B) | |
| Avg. attorney headcount | 188 | 41 | 9 |
| Avg. legal ops headcount | 21 | 6 | 1 |
| Avg. attorney to revenue ratio | 1 / $585M | 1 / $195M | 1 / $65M |
| Avg. internal spend per legal dept FTE* | $225K / FTE | $236K / FTE | $175K / FTE |
| * Legal Dept. FTEs include attorneys, paralegals, legal ops professionals, administrators, and all other members of the department. | |||
Although the per-FTE cost of staffing a legal department appears to be higher in large and mid-size departments ($225-$236K vs. $175K), it hardly matters because the overall cost structure of legal departments gets significantly lower with size, moving from one attorney per $65M (small company) to one attorney per $585M (large company).
Part of the declining cost structure is economies of scale that apply equally to in-house and outside counsel. For example, the legal work for a loan or other type of financing is not ten times more labor-intensive because the monies raised are ten times larger. Yet, another part is surely greater operational efficiency. The larger and more mature a company, the more it must rely upon lower per-unit costs to meet its financial targets. We see this in the CLOC survey above. When asked to identify their department’s top priorities, the top response was “Controlling outside counsel costs” (76%) followed by “Using technology to simplify workflow and manual processes” (41%). See 2018 State of Corporate Law Departments at 8-9.
Although law firms and legal departments may be doing very similar work, their internal incentives run in opposite directions. Most law firm partners are strongly incentivized to maximize the revenue, either through originations or working receipts. Likewise, high-billing partners can stifle innovation and efficiency measures by threatening to leave the firm. In contrast, when a general counsel commits to similar initiatives, in-house lawyers have limited leverage to push back.
A recent American Lawyer article by Hugh Simons and Gina Passarella modeled the financial cut point for bringing work in-house. See “The Rise (and Fall?) of In-House Counsel,” Corp. Counsel, Feb. 25, 2018. According to their analysis, roughly 45% of the AmLaw 100 were performing the type of work that could generate a 2x financial return if brought in-house. In asking how far insourcing might go, the authors offered a startling benchmark: “70 percent of accountants and auditors work in-house.”
Cost, however, is not the sole reason to insource. In-house lawyers have an enormous advantage in acquiring essential knowledge regarding client goals and needs. This physical and organizational proximity reduces communication overhead and creates conditions where legal work can be better defined, scoped and managed. As a result, some of the insourced legal work will eventually be outsourced again, but this time to lower-cost NewLaw service providers.
Although the journey to Big leads to in-house “law firms” that become very good at process and efficiency, there remains a significant class of work that, for reasons of cost or quality, will continue to go to law firms. What are the criteria for these decisions?
Below is a graphic that Mark Chandler, the GC of Cisco, showed during the final plenary session of the 2018 CLOC Institute:
The top-right quadrant consumes 65% of the department’s internal resources. The high percentage is warranted because (a) these are mission-critical activities that (b) bear on the competitive advantage of Cisco, a $48 billion technology company that manufactures and sells networking hardware, telecommunications equipment and other high-technology services and products.
The second biggest area of internal resource allocation (20%) is the bottom-right quadrant, which enables business units to more efficiently conduct their activities in a legally appropriate way. Note, however, that “Tools/Processes” are in every quadrant, not just in the self-service green. That is the result of Cisco’s very advanced legal ops function led by Steve Harmon.
Law firms are mostly likely to get work from the left side of the matrix. The work in the top-left pays the most because it is mission critical and Cisco’s in-house staff lacks contextual knowledge to perform the work at the necessary level of quality. Nonetheless, 15% of the department’s resources are dedicated to managing out-tasked work. This is to ensure that the department achieves its cost and quality objectives. The goal in the bottom-left is to lock-in a combination of quality-cost-reliability for low-stakes matters. The best outcome is one that require little to no department oversight.
Under this type of decision matrix, traditional law firms have two clear paths for winning work:
Some law firm partners might dismiss Cisco’s resource allocation matrix as this year’s gimmick. That’s wrong for at least two reasons. First, Cisco has been using this system for 12+ dozen years. I first saw Chandler present a 1.0 version of this model at a 2010 Georgetown Law conference. That slide was dated 2006. Second, this type of resource allocation matrix was featured in a 2018 CLOC Institute session taught by Nancy Jessen (SVP of Legal Business Solutions at UnitedLex) and Elizabeth Lugones (Dir. of Legal Operations, DXC.technology). See DCX-UnitedLex allocation matrix. This session was attended by roughly 300 people. The presenters, however, are innovators or early adopters. See Post 007 (discussing adopter types). The success they were sharing is what other professionals in the social system will to try to replicate. This is how innovation diffusion works. See Post 004 (innovation diffuses through social systems).
Because the journey to Big is a very gradual process, it’s easy to confuse slow change with no change. Further, there is a generational effect, with both buyers and sellers of legal services sticking with what they know until external events force them to change. It’s certainly true that a no-change approach will work many lawyers in the last decade or so of their careers.
I have never met a law firm partner who told me that he or she planned to ride out the clock rather than adapt to changing times. Instead, I hear a lot of lawyers 50+ years of age tell me their “middle market” clients just want excellent service at a cost-effective price. These lawyers continue to stay busy, or busy enough, because there is demand for what they offer: (1) a personal relationship with a knowledgeable, responsive lawyer who makes difficult legal business issues go away (2) at rates that do not carry the expense and overhead of AmLaw 50 or Global 100 law firms.
Many lawyers like this type of practice because it puts them in control, giving them autonomy and security within their firms. They don’t have to collaborate with anyone if they don’t want to. Arguably, when the business world was itself more middle market and less influenced by private equity, this described the bulk of private law practice. Less so now. And less so in the future as economic activity is increasingly driven by larger, more complex organizations that have the resources to build out their own sophisticated legal departments.
Strategy and the Fat Smoker (2008) was the last book David Maister, the preeminent law firm consultant, wrote before he retired. Maister starts Chapter 17, titled “The Trouble with Lawyers,” by conceding the point that lawyers are, in fact, different. “The combination of a desire for autonomy and high levels of skepticism,” wrote Maister, “makes most law firms low-trust environments” (p. 231). Thus, according to Maister, firms struggle to execute on strategies that require collaboration and sharing of risk.
If this is true, why do most firms do so well financially? Maister opines that it’s because lawyers “compete only with other lawyers. If everyone else does things equally poorly, and clients and recruits find little variation between firms, even the most egregious behavior will not lead to a competitive disadvantage” (p. 239).
This passage invariably garners a good laugh among lawyers, but less so in the future. Law firms inside large legal departments increasingly rely on systems and process. Likewise, to capture a tranche of the legal work that is sourced using a resource allocation model, some law firms are executing on a strategy that requires collaboration and risk sharing. Although most firms struggle with this approach, a firm only has to do marginally better to win. This is because the most able mid-career lawyers will eventually lateral out of firms unable to offer anything beyond a pledge of great service.
As discussed in Innovation in Organizations, Part I-III (015, 016, 017), firm size is correlated with innovation, not because of size per se, but because size brings with it specialized expertise, financial resources, and better access to a diverse stream of clients. Cf. Post 062 (Jae Um discussing how innovation require high-quality access to buyers and users). Further, the service offerings of marginally more innovative firms are destined to create value that is controlled by the firm, reducing the tyranny of partners with portable books of business. As portions of this legal work get productized, middle market lawyers will have very little left to sell. Thus, as it turns out, the middle market is but a waystation on the journey to Big.
Coda. The journey to Big has significant consequences for entry-level law graduates and thus legal education. But that is a topic for another day.
Several years ago, a good friend threw me to the lions, though that was not his intent.
My friend, who works in legaltech, asked me to show up at the headquarters of a Fortune 100 company to present some prototypes I had developed on giving feedback to law firms. Cost pressures were rolling downhill to the legal department. Thus, in an effort to better manage costs, the senior leadership winnowed their outside law firms to a panel of preferred providers. In theory, the firms were supposed to work cooperatively with each other to deliver world-class quality within a large predefined budget.
From a distance, this all sounded innovative. But up close, implementation was a challenge. The only management tool was an annual rating system that measured law firms on a 1 to 5 scale (1 = poor, 5 = excellent). Because performance was aggregated across dozens of lawyers and dozens of matters, the narrative comments were too general and lacking in context to be helpful. Further, all the quantitative scores were clustered in the 4.8 to 4.9 range, making them useless for making merit-based adjustments. Indeed, if in-house lawyers gave scores any lower, they’d be tacitly admitting a problem with their own oversight.
I had approximately 90 minutes to present my prototype to a room full of BigLaw relationship partners. Basically, my proposal was to have in-house counsel complete a monthly survey tool for each significant matter they were managing (a 10 to 30-minute commitment per lawyer who managed outside counsel). In turn, the results would roll up to a centralized knowledge management system that would generate practice group, firm, and legal department-level reports.
Although the proposed prototype required the in-house lawyers to do all the work to generate the feedback, the law firm partners disliked everything they heard, arguing that the work to review the feedback would be burdensome and counterproductive. One especially vociferous partner remarked, “If there’s a problem, I’d rather have a phone call.” He would not concede that there was any value to timely bucketing specific examples of good and bad behaviors, nor that the resulting data could provide a roadmap to help the client and create a factual basis for higher fees.
As I was getting pummeled by the BigLaw partners, the in-house lawyers looked on in silence. And in hindsight, I really don’t blame them. They, like me, were learning the depth of the opposition to systematic measurement of performance. It would have been a different dynamic if the general counsel, who operated at a level above these lawyers and was not supervising this initiative, had communicated that the company was going to use a feedback system to better manage millions in legal spend and that the purpose of this meeting was not to question the premise, but collaborate on implementation.
At this juncture in my career, I had not witnessed many examples of strong and decisive leadership among lawyers and thus did not appreciate how essential it was to organizational progress. Over the next several years, however, I began to see the pattern.
A few years later, in December of 2014, I spent the afternoon with two law firm insiders who were in charge of strategic initiatives at their respective firms. Both believed in the importance of client feedback to not only enhance the quality of service but also deepen relationships with clients and build a path to more meaningful and sustainable growth. Yet, they expressed frustration at its limited value to drive firm-wide or industry-level change.
Here’s why. Imagine a large corporate client that uses 20 outside law firms. In most cases, that means that there are nearly 20 different ways that the client provides feedback. One firm sends the managing partner for an annual dinner with the general counsel. Another sends the relationship partner. A third sends the Chief Value Officer. A fourth has an annual client survey system, albeit only 30% of the in-house lawyers reply. Several other firms use a third-party service, such as Acritas, Wicker Park Group, BTI, or PP&C Consulting. And a surprising number of firms are content with feedback in the form of paid bills and continued work.
Virtually all of these feedback mechanisms are fragmented and lacking in context, making it easy for lawyers to rationalize away negative information. Under the best case scenario, only 20-30% of the total feedback time will result in significantly better performance. That means that 70-80% of feedback has zero ROI. That’s an enormous amount of waste.
Yet, what if clients took control of the feedback process? As my colleagues pointed out, if clients rigorously evaluated their outside counsel, the information would be too direct and specific to be ignored. Then we laughed at our Panglossian idea, “This is never going to happen.”
One of my law firm friends in the December 2014 meeting was John Fernandez, who was at the time was the US Chief Innovation Officer at Dentons (now Global Chief Innovation Officer). One of John’s projects was the launching of NextLaw Ventures and NextLaw Labs, which identified promising new legal technologies for investment and piloting within the firm.
In June of 2015, John fielded an inquiry from a corporate GC who had, over the course of eight years and two different companies, developed a feedback system for managing his outside law firms. The general counsel, Mark Smolik of DHL Supply Chain Americas, was looking for guidance on whether this idea had commercial application. John asked if I wanted to join a meeting with Mark to help vet the opportunity for NextLaw. I said “sure.”
That meeting was very fateful because (a) John and I had already identified that this was a problem worth solving, and (b) Mark Smolik had years worth of data showing that his system worked. Miscommunication and derailments were going down, value per dollar spent was going up, and Mark had more bandwidth to focus on other company priorities.
I think readers will benefit from understanding the origins of Smolik’s system, as it reveals the power of simple ideas and insights.
The first insight occurred to Mark over a decade ago when he was general counsel of Safelite Auto Glass, a national company doing on-site windshield repair. In addition to running the legal function, Mark was also in charge of HR. One day, Mark became a Safelite customer when the windshield on his wife’s car got damaged. While at work, Mark took a call from his wife, who told him that a somewhat frightening looking guy claiming to be with Safelite showed up at the house to repair the damage “I have no idea who this person is. Why should I open the door?” Wanting to reassure his wife, Mark contacted the Columbus service center and asked them to send their best technician to perform the work. “Please tell me his name and at least what he looks like.”
That incident gave Mark an opportunity to experience Safelite through the eyes of the customer. Shortly thereafter, Safelite developed a standard practice of sending a technician profile email to all its mobile customers that included name, photo and credentials of the auto glass technician. Safelite also implemented a client feedback tool to track the quality of each service call. By the time Smolik left Safelite in 2009 (two years after its successful sale to Belron), Safelite was planning a national ad campaign that would make the quality and friendliness of their glass technicians the centerpiece of the company’s branding.
The systematic tracking of the customer-facing personnel at Safelite created a desire in Mark to apply the same logic to the many law firms that he was managing. “If the company is going to spend a few hours each year reviewing the performance of each of its employees, then why aren’t we devoting at least that much attention to the large sums we spend on law firms?”
Thus, Mark applied basic HR principles to his outside counsel, developing performance criteria, applying it to firms, sharing results, and collaborating on a plan for improvement. Mark used this methodology to winnow and consolidate the number of firms he worked with. This reduced his overall communication overhead while increasing the value of each dollar Safelite spent on legal.
By the spring of 2016, Mark Smolik’s outside counsel scorecarding system became the basis for Qualmet, one of the first companies in NextLaw Ventures investment portfolio.
Along with John Fernandez, the other law firm insider at my December 2014 meeting was Jim Beckett, who at the time was Chief Business Development Officer at Frost Brown Todd.
Beckett started his legal career as a Frost Brown Todd associate before going in-house at RJ Reynolds. A few years later, he moved to the business side, running an RJ Reynolds operating unit in Puerto Rico. Jim came back to the firm partially because it enabled him to raise his family in his hometown of Louisville. But having spent eight years inside a large company, he felt he had a roadmap in his head for how a law firm could grow market share. Jim and the firm’s chairman, John Crockett, had worked together when Jim was an associate and John was a young partner. John wanted to give Jim’s ideas a try.
Jim’s business development strategy was very simple. Spend time with your clients and listen to what’s on their mind. Then make their problems your problems, using all your creative energies to identify, anticipate, and solve what’s happening in their world. This may sound obvious, but many lawyers struggle to get out of their comfort zone and then blame the lack of immediate returns on client resistance.
At his core, Jim is an impatient person who wants to change the industry. Thus, in December of 2014, when we discussed the possibility of the client owning the feedback process, Jim couldn’t get it out of his head. By the time Fernandez and I met with Smolik, Jim was sketching out a business plan. Thus, during the June 2015 meeting, I told Mark, “There is a guy, Jim Beckett, who you’ll want to talk to. He has been on both the buy and sell side and is already fixated on this idea.” John nodded in agreement, “I can’t think of a better guy to run with this.” After several months of additional vetting, Qualmet was formed and Jim was named CEO.
CEO in legaltech may sound glamorous, but in reality it’s just more stress, a pay cut, a chaotic mix of product, marketing, and sales, 6 am flights, bad airport food, and guilt over how your career decision is affecting your family. But if you think this is your big opportunity to make a difference, you’re willing to pay that price.
Disclosure: Through NextLaw Lab, I gave input to Qualmet during its formation, including sitting on its Board. Qualmet also became a client of Lawyer Metrics, where I served as Chief Strategy Officer. When I left Lawyer Metrics in late 2016, and before I started Legal Evolution, I resigned from Qualmet’s Board, as I viewed fiduciary obligations to any legal industry business as incompatible with my role as editor. In addition, I have no financial or investment interest in Qualmet or any legal industry company.
Leadership and management are not part of the legal education canon. Yet, that is bound to change as more lawyers stumble forward into these disciplines to cope with the relentless growth in complexity we face on a daily basis. In the meantime, however, we are at risk for misinterpreting the tides of change.
For example, many lawyers and law firms (and initially this professor) are quick to conclude that the goal of scorecards is to save money. Yet, in most cases, the motivation is scarcity of internal bandwidth. An important task done well and efficiently frees up time and mental energy to tackle other strategic priorities. Saving money, or getting more value per dollar spent, is a by-product of a more disciplined approach to one’s job as lawyer-manager.
The first step in this more disciplined approach is formulating the evaluation criteria. Initially at Safelite and DHL, Mark Smolik focused on seven criteria: (1) understands our objectives / expectations, (2) expertise, (3) responsiveness / communications, (4) efficiency / process management, (5) cost / budgeting skill, (6) results delivered / execution, and (7) compatibility with company values. Each criteria, in turn, is defined by a set of specific behaviors.
For ideas like scorecards, lawyers need examples rather than abstract descriptions. In 2016, I ran some focus groups for what would later become Qualmet. Below are some of the graphics from those sessions (credit: Evan Parker from LawyerMetrix).
These data reflect the performance of actual law firms, including the AmLaw 200 firm of Conroy & Alexander (a pseudonym). The scores for each criterion are averages of in-house lawyers who used the firm. Obviously, between 2011 and 2015, things moved in the right direction. Conroy & Alexander now exceeds expectations on six of seven criteria and has a clear priority on where it needs to improve.
Below is the trendline of Conroy & Alexander’s average annual performance. This is the ROI that flows back to the in-house lawyers who are providing the feedback — they’re expending less time and attention to get better results.
Below is a picture of how the top seven firms are doing. Conroy & Alexander is firm E.
One takeaway is that expertise — which lawyers routinely fall back on to sell themselves, are table stakes. Another takeaway is that no firm really stands out on efficiency / process management. Thus, perhaps this is an area where a firm could seek to differentiate itself over the next one to two years. A third takeaway is that firm F is in trouble. During our focus groups, several leaders of AmLaw 200 firms said they would like this data as a management tool for partners who are all-too-ready to blame the client.
These scorecard graphics above are basic management tools applied to the work of lawyers.
As a profession, have we accepted the premise that working within a well-designed management system would make our work more valuable to clients?
Few of us would debate the general premise, particularly in front of our clients. Yet, we struggle to accept it because, in our own little zones, we fear losing control. As a profession, we need a handful of lawyers in positions of authority who will make the decision for us. They will be subject to a lot of blowback and pleas for special treatments. However, in the long-run they will win our trust and respect. We will view them as leaders.
I came to this conclusion in December of 2017 during a design workshop in Chicago. After more than a year in business, the Qualmet team is coming to grips with a common innovator mistake: they had confused why they loved their product with why a client might buy it. Cf. Post 008 (“[The innovator is] often deeply immersed in the technical workings of the project … [and thus] at grave risk of falling in love with features that are of little practical value to the target end user.”). Fortunately, the Qualmet team includes professionals with expertise in marketing and design thinking. I secured them meeting space at Northwestern Law. In exchange, I got to observe the workshop.
The key goal of the daylong session was to work backwards from the daily lives of legal department professionals. A wide variety of legal professionals–not just general counsel–were invited in for 60- to 90-minute conversations. The Qualmet team wanted to know how they spent their time, their biggest frustrations, what they wanted most out of their jobs, etc. Yet, very rarely were these questions asked directly. Instead, they were asked for their reactions to a series of crude prototypes (the vast majority that had nothing to do with outside counsel scorecards).
For me, the most surprising revelation was that in legal departments with several lawyers, the general counsel spends less than half of his or her time managing the department. Instead, they are focused on being a fully contributing member of a C-suite management team. One GC of a publicly traded company put the percentage at 70%, with less than 15% that touched on anything related to outside counsel. Among the department professionals, the common theme was lack of time and budget to operate at a strategic level.
Indeed, I did not realize it until later, but Qualmet was running the design work shop to test their thesis that scorecards were a tool to put the general counsel into alignment with the CEO, as the performance data could be used to show how decisions regarding outside counsel were being made. The use of quantified performance puts the GC in more of a business place than a “legal place.”
One question to a general counsel that I especially enjoyed was, “Do you want to be a CEO some day?” Reply, “yes.”
Follow-up, “What about your general counsel friends — do they want to be get promoted?” Reply, “Probably. Otherwise, why do this job? Once you become a general counsel, you are more a manager and leader than a practicing lawyer. Thus, you have to develop those skills to excel at your job. Why not embrace the career path?”
Leadership in legal departments is different than leadership in law firms. Unlike a law firm leader, a general counsel can make an unpopular but necessary decision and not worry about losing revenue and triggering a proverbial run on the bank. This reality is what is driving the consolidation of law firms into global giants. The hope is that global reach and the support services that a large firm can afford — technology, project management, process improvement, data analytics, etc — will wed the client to the firm.
I would like to see more general counsel collaborate with law firm leaders. Scorecards are just the start. The goal should be to bring out the best in the lawyers and legal professionals they lead and manage.
What’s next? See Confusing conversations about clients (048)
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)
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 024–026 (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.
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.
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.
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).
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.
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:
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.
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.
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.
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:
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):
| 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:
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:
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.”
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:
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.
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:
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.
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)
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.
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,
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 shared. One-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.
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?
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.
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.
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.
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.
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.
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):
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:
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:
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?
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:
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:
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)