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

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

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

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

1. What problem is IFLP trying to solve?

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

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

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

2. How will IFLP be successful?

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

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

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

3. Where did IFLP come from?

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

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

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

4. How can industry stakeholders become involved?

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

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

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

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

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

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

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

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


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


Crossing the Chasm

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

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

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

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

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

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

Corporate legal departments as a target niche market

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

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

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

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

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

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

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

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

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

Compared to what?

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

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

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

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

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

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

Root cause

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

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

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

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

What problem is Onit trying to solve?

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

Not very intuitive, right?

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

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

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

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

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

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

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

“Bring the work to the people”

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

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

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

Nudges and the Onit backend

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

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

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

Diffusion theory wrap-up

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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

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

Problem statement from within the law firm

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

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

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

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

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

Problem statement from the client side

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

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

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

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

The graphic below depicts the market transformation.

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

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


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


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

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

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

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

Kubicki: Intrapreneurship inside a law firm

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

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

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

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

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

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

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

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

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

Eric Wood: making partner as a technology innovator

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

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

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

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

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

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

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

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

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

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

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

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

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

Beckett’s business mindset

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

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

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

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

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

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

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

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

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

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


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

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


Mark Chandler:

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

I offer you three questions for our discussion today.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The growing scope of knowledge availability will endanger this system.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you for your attention today.


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

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


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

Quality is fragile, and quality is King

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

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

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

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

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

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

Incentives matter

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

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

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

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

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

Why can’t we control quality?

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

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

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

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

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

Can relationships help? Yes, but no unconditional love

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

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

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

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

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

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

Communication

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

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

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

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

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

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

So – what’s the final recipe?

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

How it starts . . .

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

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

What’s the problem?

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

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

The procurement solution

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

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

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

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

(1) concentration of purchasing power

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

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

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

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

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

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

(2) bias toward higher RPL firms

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

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

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

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

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

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

Louis Vuitton, esq.

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

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

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

Others Reasons for Convergence

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

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

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

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

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

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

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

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

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

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

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

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

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

I hope you enjoy these posts. WDH.

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

Earlier this week came some unexpected good news for the legal ecosystem.  Dan Linna of Michigan State Law unveiled the Legal Services Innovation Index, which provides some very interesting and compelling measures of innovation by: (1) country, (2) practice area, (3) type of innovation, (4) firm size / global segmentation, and (5) individual law firm.

The Legal Services Innovation Index is a project of MSU Law’s LegalRnD, which is a mission-based research center focused on innovation in legal services.  The Director of LegalRnD is Dan Linna, a legal education doer with a multi-faceted background.  Prior to joining MSU in 2014, Linna was an equity partner at Honigman (a Michigan-based AmLaw 200 firm); and before law school, he worked for several years as an IT manager and consultant.  Over the last few years, Linna has been instrumental in organizing legaltech meet-ups in both Michigan and Chicago.

What I admire most about Linna, however, is his ability to mentor young people so they have the confidence and focus to build great legal careers.  See, e.g., LegalRnD’s application of Lean principles to student employment outcomes. The Legal Services Innovation Index is justifiably going to get a lot of attention from the entire global legal services industry — and remarkably, it was substantially built by law students working under Dan’s direction.

Zero to One

In the project Overview, Linna goes to great pains to explain that the Legal Services Innovation Index is a “Phase I, Version 1.0” release that should be viewed as preliminary.  Linna writes:

I’m releasing Phase 1, Version 1.0 of this index to add to and improve legal-industry discussions about legal innovation and technology. My inner perfectionist–a voice empowered during my journey to equity partner in an Am Law 200 law firm–would prefer that I conduct far more research and complete Phase 2 and Phase 3 before releasing anything. But this type of perfectionist thinking is itself a barrier to legal-services innovation. Instead, I will follow the Lean Startup innovation process [example online here] … striving to continuously improve our legal industry discussions about innovation and technology.

Linna notes that the project was inspired by LSC President Jim Sandman’s speech at the 2016 CodeX FutureLaw Conference. Sandman argued that if law firms were ranked and assessed by their use of technology rather than just revenues and profits, we’d find ourselves in a virtuous competition that could potentially redound to the benefit of those who lack access to legal services. (Even if the connection between BigLaw tech and PeopleLaw access is attenuated at best in the year 2017, it’s nonetheless a better vision than pure financial metrics.) When Sandman repeated this call at the 2017 CodeX conference — thus revealing that nothing happened over the past year — Linna committed himself and his Center to the Index project.

Tactically, it’s wise for Linna to be cautious about what the Index data mean — he describes Phase I, Version 1.0 as a “minimum viable product” that will improve with user feedback. Regardless, for the rest of us, it is hard to overstate the importance of this first iteration. Basically, Linna and his students have moved the state of the art from zero to one.  On Monday, conversations about legal innovation took place in a data vacuum.  On Tuesday, we had a system of measurement and classification and corresponding innovation data on 263 of the world’s biggest law firms (that is how many unique firms are in the Am Law 200, Canadian Top 30, and the Global 100).

To their credit, Linna and his crew are trying to frame the conversation as “How can we make this better?”  Regardless, even in its current form, the Index is bound to be extremely influential. Seeing where your firm stands relative to other firms is going to change both conversation and behavior. This is the psychological phenomenon of reactivity, which can be profoundly powerful. See Espeland & Sauder, “Rankings and Reactivity: How Public Measures Recreate Social Worlds,” 113 Am J of Sociology 1 (2007) (discussing law school rankings as an example of reactivity with far-reaching social and institutional effects).

What is the Innovation Index?

The Index in its current form is really two systems of quantification: The Innovation Catalog and The Law Firm Index.

(1) Innovation Catalog

The Innovation Catalog captures legal-service delivery innovations that are currently being implemented by law firms in the AmLaw 200 (US-headquartered firms based on gross revenues), the Canadian Top 30 (based on attorney headcount), and the Global 100 (122 firms on two lists ranked by revenues and headcount).  Innovations are grouped into three categories — products, services, and consulting. The results are presented using Tableau, a popular data visualization tool.

Below is the graphic showing the number of innovation offerings based on the law firms’ home jurisdiction:

Why is the UK in the leader’s position?  Some would argue it is because the UK’s domestic market became saturated 20 years ahead of the US market, forcing deeper strategic thinking on how to adapt and grow.  Another factor might be the residue of lockstep compensation, which tends to create and incentivize a longer time horizon.  Note that these figures have not been “normalized” — i.e., adjusted for the size of the home market.  Because the UK market is much smaller, it makes the UK’s leader position all the more interesting.  Although elite U.S. law firms appear to be running away with the most lucrative financial services work, see Simon & Bruch, “The Strange Tale of How Elite US Firms Surpassed Their UK Counterparts,” Law.com (Aug. 2017) (three-part series), the chart above likely reflects the larger and more contested market for operational legal work.

Below is another Index chart that breaks out innovations by tool or discipline.  The range and diversity of innovations is striking — this is not a market where nothing is happening.

Where the rubber meets the road, however, is a table that breaks down all the data at the granular law firm and innovation level.  See Catalog by Law Firm (last tab). To date, only three firms have one or more innovations in each of the products, services, and consulting categories: Allen & Overy (UK), DLA Piper (US), and DWF LLP (UK).  US-based firms with several innovations include: Duane Morris (7), DLA Piper (7), Fenwick (6), Ogletree Deakins (6), Norton Rose (5), Littler Mendelson (5), Bryan Cave (4), Hogan Lovells (4), and Seyfarth Shaw (4).

One of the most interesting features of the firm-specific table is the inclusion of strategic partners.  These companies are necessary to solve difficult technical problems or resource gaps:

  • Intapp (with Ashhurst (UK))
  • Deloitte (with Allen & Overy) [related to contract management and compliance]
  • Elevate (with Corrs Chambers (AU))
  • HighQ (Corrs Chambers (AU), Norton Rose)
  • Kira (with Clifford Chance and DLA Piper)
  • Neota Logic (with Clifford Chance, Foley & Lardner, Hall & Wilcox (AU), Hive Legal (AU), Husch Blackwell, Littler Mendelson)
  • Thomson Reuters (with Ackerman, Clifford Chance, DWF LLP, Nixon Peabody) [mostly managed service research support]

(2) The Law Firm Index

The Law Firm Index is based on Google Advanced searches for indicators of innovation on law firm websites. The methodology section gives the precise search terms for each category. There’s likely a bias favoring large firms, as they have more lawyer biographies and practice group pages to tout the same innovations.  That said, there are many relatively small firms posting relatively large innovation numbers; and many large firms that are posting relatively small numbers. And for those of us fairly close to this space, there are few if any surprises. To me, they appear face valid.

Here is the breakdown of the average hits per firm website by area of innovation:

This is a very interesting breakdown because the largest category, Blockchain, bears on changes affecting the core business of corporate clients. In some respects, this innovation borders on changes in substantive law and how contracts get formed and enforced. Because this is closer to lawyers’ natural wheelhouse, perhaps it’s unsurprising that lawyers are ready and willing to innovate.  Yet, on service delivery innovations that are directed at reducing billable hours and overall cost, such as automation and process, we see a lot less activity.

The analysis based on country and firm grouping is also interesting and informative:

The big takeaway here is that size + geographic reach appears to be strongly correlated with at least the seedlings of innovation. Cf. Innovation in Organizations, Part III (017) (discussing complexity and size as correlates of organizational innovativeness and explaining why this is likely true in law). Although really large firms have significant challenges with management and communication overhead, there’s no substitute for a critical mass of resources to build new service offerings.

Finally, the Law Firm Index has two breakdowns by individual firm (the last two Tableau tabs) — one based on total Google Advanced website hits and a second based on percentiles.

The Index website repeatedly communicates that these firm-level charts are not a ranking. That said, the differentials among firms are massive, moving from less than 10 mentions of innovations to nearly 15,000.  This raises a very real question for partners — “is it worth trying to get my firm to innovate, or should I take my clients to a market leader firm?”  Cf. Henderson & Zorn, “The Most Prized Lateral of 2015 Wasn’t a Partner,” American Lawyer, Feb. 1, 2016 (discussing media attention given to movement of 4-person process improvement team from a UK Silver Circle firm to a Global 100 UK-Australian firm and predicting that this type of sophisticated capability will eventually attract lateral partners trying to hang onto clients). The failure to invest in innovation may prove to be extremely expensive for late majority and laggard law firms.

Conclusion

Kudos to Dan Linna and his team at MSU Law’s LegalRnD.  For the foreseeable future, your Legal Services Innovation Index is going to be the measuring stick for law firm innovation.  You have given lawyers, law students, and law faculty a useful, tractable, and relatively comprehensive window into the changing legal services market, at least in the large law firm segment.  Going forward, we can be spared the blanket generalization that lawyers and law firms can’t innovate. That by itself is a tremendous public service.  We all look forward to improvements in the months and years ahead.

What’s next? See Inside the Client’s Head: 2017 CLOC Institute Programming (022)