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

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

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


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

Tom Finke’s story

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

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

Used cars

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

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

“It’s hard to escape law”

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

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

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

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

The early days of Axiom Chicago

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

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

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

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

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

Axiom’s evolving business model

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

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

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

An example: The Kraft/Mondelez spinoff

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

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

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

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

Where things are going

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

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

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

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

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

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

A changing talent market

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

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

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

An focus on technology

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

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

Diffusion theory takeaways

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

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

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

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

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

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

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

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

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

Below are two beliefs I carried with me for many years.

  1. In all human endeavors, incentives exert a powerful effect on behavior
  2. Within the legal industry, the billable hour is the primary impediment to innovation and efficiency

efficiencyengines2Belief 1 still stands. But belief 2, which I viewed as a corollary of 1, recently fell like an oak tree. This shift in worldview happened during my research for Efficiency Engines, a story on rise of legal managed services.  During visits to several managed service facilities, I witnessed quantum leaps in legal productivity for relatively sophisticated legal work.  And in each case, the work was priced and sold by the hour.

The biggest value of visiting an innovator is the possibility of learning something that disconfirms one’s own belief system.  A character in a John le Carre novel once quipped,  “A desk is a dangerous place from which to view the world.” That’s good advice for those seeking to understand today’s legal industry.

A better theory

After the fall of belief 2, I needed a theory on innovation and efficiency that incorporated my new learning. Here is what I came up with:

The billable hour can be harnessed as a powerful tool for innovation and efficiency.  This can be accomplished by: (a) selling work with a clearly stated budget, (b) paying your workforce by the hour, and mostly crucially (c) managing quality and the risk of cost overruns through world-class project management and process improvement.  A service provider who reaches scale and establishes a brand based on both quality and price can lock-in a profitable business with a long-term competitive advantage.

In a nutshell, this is the business logic of the legal managed service model.  The private equity/venture capital crowd have found it sufficiently compelling to fund it with hundreds of millions of dollars.

This post (010) situates the managed service model within a more fundamental theory of professional service firms.  It also explains how the managed service model is successfully pulling on the levers of diffusion theory, particularly compatibility, to accelerate its growth. Cf. Post 008 (adoption more likely if innovation is compatible with existing practices and norms). Post 010 then offers a few thoughts on the adoption of managed service methods, which is something separate from the managed service business model. Regardless of who wins and who loses, the methodology pioneered by managed service providers represents an innovation that is diffusing throughout the legal industry.

Balancing three goals inside two markets

The fundamentals of the professional service business model are explained in David Maister’s Managing the Professional Service Firm (1993) (chapter 1).  As shown in the diagram below, firms operate in two markets: clients and talent. For the owners of the firm, profitability is certainly the ultimate goal. Yet, this outcome is entirely derivative of (a) providing outstanding service to clients (market 1), and (b) offering high-quality career opportunities to a talented workforce (market 2).  Thus, under Maister’s theory, the professional services firm is always balancing three goals in the context of two markets.

maistermarkets2

Although this model looks simple, it’s easy to get wrong.  Firms that fail to understand their own cost structure are at risk of substituting revenues for profits.  As recently observed by Bruce MacEwen, this is why so many firms overpay for lateral partners.  See Opinion: It’s time to re-think the price war on talent.  Likewise, in the client marketplace, the growth of national and international businesses has reduced the importance of client relationships based on geography and increased the importance of best-in-class talent in specialized areas. On some level, law firms know this because they have jettisoned the “general service” descriptions that were so common 20 years ago.  However, there remains considerable internal resistance to closing down out-of-scope practice areas and offices. Cf. Henderson, “How to Take Market Share,” American Lawyer (Oct. 2015) (discussing ruthless focus needed to become market leader based on quality).

Perhaps its obvious that the client marketplace has become differentiated. Yet, differentiation is also occurring in the legal talent market — a point I did not fully grasp until the belief 2 oak tree fell.  Beyond preferences based on practice area, some lawyers are drawn to BigLaw for reasons of money and prestige.  But other lawyers — with the same level of intellect and pedigree — are looking for a different type of work environment.

In the course of writing Efficiency Engines, I asked Jane Allen, Founder and Board Member of Counsel on Call, how the company selected its talent.  Jane described a behavioral interview process that focused on a profile very different than a BigLaw rainmaker:

  • Loves the technical aspects of law
  • Wants to be part of a team
  • Does not need to be in charge
  • Is comfortable learning new technology
  • Places a high value on work-life balance

In a large law firm, a lawyer who fits the above profile would likely be diverted to an “off-track” position. Yet, in a managed service firm, these same lawyers are the core building blocks of the business.

Using the billable hour to balance the legal talent market

The managed service model is tapping into the large segment of the legal talent market that wants work conditions very different from BigLaw.  At the top of the list is work-life balance.  In addition to a professional wage, a collegial work environment, and freedom from business development pressures, lawyers in the managed service sector can refuse work outside the bounds of a 40-hour workweek (or, in some cases, pre-negotiated shorter weeks).  Further, if the managed service firm needs additional hours, the lawyers are paid for their time. These constraints force managed service providers to build remarkably tight systems for project management and process improvement.

In large law firms, the incentives run in the opposite direction.  Once the firm locks in its labor costs in the form of high guaranteed salaries to associates, it benefits financially from hours that are billed during nights and weekends. Work that is unplanned, unpredictable and urgent is often the most profitable.  It is any wonder that firms would be reluctant to invest in technology and systems that would make client work more transparent and thus more manageable?  Some legal work will always be unplanned, unpredictable and urgent. But not all legal work. Clients are slowly figuring this out.

In all three of the managed service facilities I visited (Counsel on Call, United Lex, and Axiom Law), I encountered the same thing: lawyers who enjoyed working in a team-based environment where efficiency and innovation were valued.  Indeed, being part of a continuous improvement process appeared to be a key component of their job satisfaction. They enjoyed the challenge of exceeding their clients’ expectations. In turn, their employers benefited through higher volume that included a built-in profit margin.  Note the careful balancing of Maister’s three goals.

Leveraging cultural compatibility

One of the reasons that the legal managed service market is growing at 15-20% per year is that most managed service providers have packaged their offerings in a way that is culturally compatible for legal department clients.  As noted in Legal Evolution’s foundational posts, particularly Post 008, compatibility is an important driver of innovation diffusion.  When an innovation is highly compatible with a social system’s existing practices and norms, adopters can obtain the benefits while staying within their comfort zone.

In the managed service model, there are two major touchstones of compatibility.  First, the work is still being done or supervised by lawyers with large firm experience and strong academic qualifications — lawyers just like the in-house buyer. Second, and perhaps most crucially, the work is sold in billable hour units, which is the only system of measurement that all lawyers understand.  Pricing by the hour invites a direct cost and quality comparison with law firm associates, which casts the managed service provider in a very favorable light.

It near impossible to overemphasize the importance of cultural compatibility.  I have witnessed other highly innovative legal services providers who have refused to share the amount of lawyer effort needed to produce their outstanding work product. Instead, they hold to a pricing model based on terabytes of data or overall scope of work.  Most in-house lawyers lack the time and interest to get into the weeds of a cost and quality comparison.  An easier sell is pedigreed lawyers working by the hour in a process-driven environment.  Cf. Post 008 (discussing crucial importance of relying on the buyer’s rather than the innovator’s perspective).

NewLaw is not as new as we think

Managed service companies like Counsel on Call, Axiom, UnitedLex, Pangea3, and Elevate are often put into the NewLaw bucket.  I don’t dispute the categorization, except to point out that it’s our awareness of alternative models that is new, not the companies themselves.  Axiom and Counsel on Call both launched in 2000. Pangea3 was founded in 2004 and sold to Thomson Reuters in 2010.  UnitedLex opened in 2006.  Although Elevate is a relative newcomer (opening in 2011), its CEO, Liam Brown, founded another NewLaw company, Integreon, in 2001. Further, he began in the NewLaw space nearly 20 years ago, starting Conscium in 1998, which pioneered virtual deal rooms for lawyers and investment bankers.

Sally_crab_labelWhy does “new” takes so long in law?  Like the Galapagos Islands at the time of Charles Darwin’s landing, the legal sector operates in peculiar and isolated ecosystem that bears only a distant resemblance to the economic mainland. Under the ethics rules, lawyers can’t co-venture with professionals from other disciplines. If you can’t co-venture, opportunities to share knowledge, know-how, and perspective are inadequate for the challenges being faced. As noted in Post 008, this dramatically slows the diffusion of innovations within the legal social system.

Yet, let’s not confuse slow change with no change.  Very few lawyers appreciate the amount of outside investor money that has arrayed itself to profit from the inefficiencies of law firms. These capitalists are waiting longer than usual for their desired return (7-10 years are the usual outer limits for PE and VC investors).

However, they are also learning more about the legal industry and normalizing their involvement in the legal supply chain.

I first interviewed Mark Harris, founder and then CEO of Axiom Law, back in 2013.  At the time, I had the mindset that Harris was running a legal start-up.  But by then, Harris was 13 years in.  Axiom was less a start-up than an ultramarathon. (In late 2016, Harris became Axiom’s Executive Chairman, handing over the CEO reigns to Elena Donio, formerly President of Concur, a $1 billion business software company.)

The long game

During that 2013 interview, Harris laid out the long game analysis — the same analysis he was then using to sell services to Fortune 500 general counsel.

On a whiteboard, Harris drew a set of diagrams that segmented legal work into three groups: extraordinary events, experienced demand, and efficiency demand. In the past, corporate clients viewed virtually all legal work as risky and complex. Thus, they outsourced virtually everything to law firms. Over time, as in-house lawyers took over the role of buying legal services, they began unbundling legal work and insourcing some of it to themselves. This fueled the rapid growth of corporate legal departments. See Post 003 (showing the 20-year grow trajectory of in-house legal departments). In its early stages, this was pure labor arbitrage. Yet, as in-house lawyers develop more sophisticated sourcing strategies, Harris explained, the extraordinary events and experienced demand segments will shrink while the efficiency demand grows.  See diagrams below.

harrismarketsegments

A huge part of moving work from the top of the pyramid to the bottom is introducing systems and process that can partially supplant the clients’ deeply held faith in elite brands and credentials. This challenge is truly an ultramarathon, and only a handful of managed service providers are running it.  If Harris and his investors are correct, and they play the long game correctly, they will be among a relatively small number of competitors who divide up a large portion of the green triangle above.

How does this end?

One scenario is that extraordinary events work consolidates with a small number of firms that attract brain surgery-type talent. Think the Wall Street elite plus Latham, Kirkland, Gibson Dunn and a few others.   A tranche of complex and strategic work remains in-house. See Post 003 (reporting that more than 105,000 lawyers work in-house).  And a large portion of the remaining pyramid goes to large managed service providers who specialize in high-volume process work. These companies could go public or be owned by the BigFour accounting firms. Think Accenture. (See Efficiency Engines for how this is possible under the existing ethics rules.)

Yet, there are alternative scenarios that are likely to co-exist with the ambitions of the managed service sector. For example, it is likely that some US and UK law firms will emerge as global “general contractor” firms. They will earn a premium for their supply chain expertise, from captive LPOs to AI-enabled automation to high-stakes court room practice. Think Allen & Overy, Herbert Smith Freehills, Baker McKenzie, Hogan Lovells, and a few others.

In the labor & employment space, Littler Mendelson and Ogletree Deakins have already incorporated many managed service methods into their businesses. They tend to get ignored by the legal press because their profits per partner are lower than the rest of BigLaw.  Yet, managed service methods are the equivalent of a moat around the franchise. Would you rather have $2 million this year, or $500,000 per year for 20?  This isn’t a lottery hypothetical. It’s a strategy choice made by lawyers with large L&E practices.

Likewise, many elite US law firms have relatively large alternative staffing operations that are deployed in massive M&A deals and Big Game litigation. To protect their brands, these firms seldom publicly tout these capabilities. Yet, within the confines of a client pitch, the existence of these capabilities helps protect work at the top of the pyramid. In this context, bundling is likely more valuable to the client than fine gradients of cost and quality.  Although currently run primarily as support units for high-end work (at least for now), many of these operations are quite profitable based on their own P&Ls. Thus, in some segments of the market, the rich are only getting richer.

How does this end?  Obviously, the work methods of managed service providers are innovations that are diffusing throughout the legal industry.  Large scale disruption of the legal industry by managed service companies seems less likely that successful co-existence with law firms who adopt similar work methods. The buyers, after all, are mostly lawyers working in legal departments.  That said, a lot of law firms are far behind on the methods front.  It’s a difficult slough for law firm leaders because the required investments don’t produce higher profits this year or next. Instead, the payoff is long-term relevance and survival, a topic many senior partners put in the same category as global warming.

At some point, legal education will begin to grasp the import of managed service methods in helping law grads obtain high quality employment.  But that is a topic for another day.

What’s next?  See Fast versus Slow Innovations (011)