So what happens next?

by with 4 Comments

Posted in: Innovation

As the year winds down and alternative fee arrangements become more widespread among lawyers, I’m finding myself doing something curious: I’m being nice to the billable hour. Not defending it, exactly — others are happy to do that — but being more nuanced in my criticism and even citing examples of billing relationships where it makes sense to price by time. This from someone who, in his days as a magazine editor, once published a cover story titled “Time’s up: counting down the billable hour.” There’s a lot more evidence of hourly billing’s demise today than there was five years ago when I ran that story, yet apparently I’m now the soul of caution.

And I’m not the only one: at a time when those of us who champion innovation in law practice management should be leaping and shouting that the long-expected day of liberation is at hand, I’m getting a palpable sense out there that, you know, maybe this isn’t the actual revolution quite yet. Part of this might be the fear we experience (felt as hope by many inside the profession) that the tsunami of change we’ve been announcing for the last 12 to 18 months is, in fact, simply a rogue wave or two. Part of it might be that quiet terror experienced by anyone at the threshold of a long-awaited goal that something is going to jump out of nowhere and take away all the gains you’ve made. And who knows, part of it might be that realization, just as you’re about to vanquish a longstanding but suddenly diminished enemy, that your foe really wasn’t as terrible as you thought it was.

But there’s a further possibility, one that occurred to me after reading an article by Jonah Lehrer in a recent New Yorker titled “The truth wears off” (subscription required; summary here). The article documents a baffling and disturbing recent trend in science: scientific results decline over time, both in magnitude and frequency, in everything from drug trials to particle physics. Many explanations were advanced in the article, but one of the most persuasive is the pernicious effect of publishing. Everyone wants to see their hypothesis proved and thereby receive a career-making publication in a respected scientific journal, so researchers (even honest ones) allow their judgment to be clouded and “see” results that aren’t there or aren’t as strong as they’d like to believe. It’s not that “the truth wears off” — it’s that the “truth” was never as true as it was first believed to be.

I wonder whether we’re not a little guilty of this ourselves in the legal innovation community. 2010 was the year that the mainstream legal media and even the wider business press caught up to what the blawgosphere had been saying (especially since the financial crisis): the watershed event that we’d long anticipated has finally happened, and nothing will ever be the same in this marketplace again. But the truth behind the shift was always more complicated than just “the recession” — the emergence of LPOs, the advance of technology, the rise of sophisticated pricing options, the continuing decline of lawyers’ aura of expertise, and the effect of generational evolution among both lawyers and clients figured into the mix too. And the last time I checked, the AmLaw 200 had not been reduced to piles of rubble in downtown cores — and anyway, the AmLaw 200 and its equivalents elsewhere in the common-law world represent a tiny fraction of a legal marketplace that is still far more consumer- than corporate-focused.

The buying and selling of legal services has always been a vastly complicated marketplace that only appeared simple from inside the protective shell of the legal profession. If there’s one thing we can say with certainty about what happened in 201o, it’s that that shell has cracked. Lawyers in law firms are no longer the sole option for legal service purchasers and they never will be again. But that is almost the only thing we can say with certainty. The legal marketplace is in immense flux, and it would be foolish to make table-pounding predictions about what will happen next: there are too many variables, too many players, too many elements in motion. Law firm lawyers could storm a comeback and assert themselves as the dominant providers in a new, fragmented, online-delivery market; they could also disappear beneath the waves.

What I want to remind everyone in this market — what I want to remind myself — is that we’re at the start of this voyage, not the end of it, and nobody owns a reliable map. I know where I think we’re headed: multiple service providers, including law firms, virtual lawyer networks, LPOs, and automated systems; a few gigantic global firms and legions of smaller, streamlined, regional niche firms; the long-term resurgence of the sole practitioner; the end of lawyer regulation of the legal services market; variable quality of and lower prices for those services; and lower incomes for all but a handful of lawyers. I have good reason to think all these things, which I’ll happily expound upon for you over a drink or at a lectern. But things changed fast this year, and I’m betting they’ll change even faster through this second decade of the 21st century.

This time last year, I wrote: “Years from now, we’ll look back on 2009 as the year the legal market began to change; but we’ll look back on 2010 as the year lawyers began to respond.” By and large, I’d say lawyers did a pretty decent job responding, from AFAs to outsourcing to rethinking legal talent; but the marketplace’s rate of change accelerated, leaving us relatively farther behind. I think we’ll look back on 2011 as the year the profession’s walls really came tumbling down and new competitors began to assert themselves, aggressively, in multiple sectors at once. But I emphasize again: these are still very early days, and there are developments coming that no one can foresee. Amazon buying Lexis-Nexis? Google buying LegalZoom? Goldman Sachs buying equity in a global law firm? You can’t dismiss any black swan scenario anymore.

No matter how you feel about change in the profession — whether you hope for it or fear it — watch what’s going on, listen to other points of view, accept information that might not fit your hypothesis, and be ready to adapt your beliefs and your approach. And above all, be ready to move on very short notice. If you think the last few years have been crazy, I really think you ain’t see nothing yet.

Solving the wrong problem

by with 7 Comments

Posted in: Access, Finance

The New York Times caused quite a stir last week when it published an article that looked at a third-party litigation funding company focused on the family law market. Balance Point Divorce Funding covers the cost of a party’s divorce proceeding in exchange for a share of what it calls the “winnings.” The article describes the litigation financing industry as one that:

“invests in other people’s lawsuits, arming plaintiffs with money to help them win more money from defendants. Banks, hedge funds and boutique firms like Balance Point now have a total of $1 billion invested in lawsuits at any given time, industry participants estimate. Lawsuit lenders initially focused on personal injury cases, but over time they have sought new frontiers, including securities fraud cases brought by disgruntled investors, whistleblower claims against corporations and property development disputes.”

The business case for these companies is similar to that employed by contingency fee lawyers: take on risk at the outset with no upfront or ongoing financial reward, in exchange for the prospect of a substantial payout at the successful conclusion of the proceedings. The moral case for these companies also borrows from the contingency world: plaintiffs who have a legitimate case but cannot compete with the defendant’s resources have no hope of succeeding in the justice system unless someone supports them at the start in return for a payday at the end. It’s worth noting that contingency arrangements in the law emerged from the personal injury and class action spheres — a long way from property development disputes and divorces. It’s also worth noting that Balance Point doesn’t take cases where the marital assets are less than $2 million.

I’ve written about third-party litigation funding a couple of times before, and it should be clear from those entries that I’m not a big fan. But it’s difficult on its face to argue with the legitimate plight in which Balance Point’s clients, mostly women, find themselves:

Her customers fall into a pattern. They are women. They generally do not have jobs. They often are raising small children. And their husbands run their own businesses, making it tough to obtain financial information. A stay-at-home mother with three children spent 16 months trying to compel her husband to produce current financial statements for his solo law practice. She was running out of money when Balance Point agreed in August to provide financing.

You’d have to be pretty stone-hearted to say that these plaintiffs should be deprived of any form of assistance they can find, and I’m not advocating that these sorts of programs be outlawed. But I do contend two points. The first is that third-party litigation funding, especially in family law, is based on a fundamental misunderstanding of what a lawsuit actually is, a misunderstanding that has dire implications. And the second is that third-party litigation funding is the wrong solution to a very real problem, and if lawyers don’t fix that problem, someone else will fix it for us.

Third-party litigation funders refer to their clients’ lawsuits as “investments.” That is an accurate description only in the narrowest sense of the word: sending my children to school is an investment too, but it’s not one I’m counting out dollars and cents to quantify. The problem with treating lawsuits as financial investments is that it treats a lawsuit as a means to an end, not an end in itself: the lawsuit’s value is stripped of its human component and reduced to a competition, a calculated wager that one side will do better than the other. This, as Immanuel Kant and his Categorical Imperative would tell you, is actually profoundly immoral.

A lawsuit is the operational expression of a serious interpersonal conflict, usually marked (especially in family law) by great physical or emotional misery for the people involved. Ripping that lawsuit from its human moorings and treating it purely as a financial vehicle is literally a dehumanizing act, one that disregards the law’s primary function of facilitating the resolution of personal conflict by peaceful and orderly means. We’ve always been worried about the monetization of court proceedings by disinterested third parties; it’s why we came up with the rules on champerty and maintenance, and we carved out a very clear exception to those rules to make contingency fees possible. And even then, as we know, there are some lawyers whose ethical failings draw them to contingency arrangements that abuse the system and the parties. Bringing a stranger into a lawsuit is an extremely risky enterprise, and I don’t think we’ve sufficiently considered and answered those risks in the case of third-party litigation funding.

Now, you may agree or disagree with my thinking on this issue, and I’d welcome comments in the section below. But I won’t leave this topic without addressing the second point that these companies prove: access to the justice system is broken, and lawyers must accept most of the blame for that.

The fact that third-party litigation funding is flourishing, bumping up against the basic principles of the justice system, should be a grave embarrassment to the legal profession. These companies are emerging because the price of bringing a problem to and through the court system for a solution exceeds what 80% of the population can afford, and 80% of the reason those costs are so high is because of us: not just the fees we charge for our work, but also the labyrinthine, process-drenched, time-devouring system of justice we’ve created and currently oversee. The justice system works for judges and lawyers, because we made it and we run it and we work in it every day; it demonstrably does not work for anyone else.

Don’t take my word for it: ask Lance Finch, Chief Justice of the British Columbia Court of Appeal, who delivered a speech to the B.C. branch of the Canadian Bar Association in Arizona last month. I wasn’t there, but reading the transcript of his remarks, I can imagine that his audience became increasingly uncomfortable as the address went on:

About 15 percent of all appeals heard in the British Columbia Court of Appeal have no lawyer on one side or the other, sometimes both. Some of these cases are without any apparent merit. But we believe there is a significant number of appeals where there is a meritorious argument to be advanced, that cannot be made or made adequately without a lawyer. And we also believe that at least some of these litigants are unrepresented because they cannot afford the cost of a lawyer, and do not qualify for legal aid or pro bono services. In short, the high cost of legal services appears to be one of the obstacles to access to justice. …

In the access to justice debate, much is said about the cost of litigation, but little is said about reducing legal fees. No matter how much we may all wish to avoid the subject, high legal fees are an issue that must be addressed. I respectfully suggest it is time for the bar to address this question openly. It touches on the legal profession’s ability to remain independent and self-governing, and it concerns the public interest in access to justice. …

Lawyers, as a profession, specifically members of the Law Society of British Columbia, have a monopoly on the practice of law. Section 1 of the Legal Profession Act defines the practice of law and s. 15 prohibits those other than practicing lawyers from the practice of law. The apparent purpose of this prohibition is protection of the public. However, the monopoly enjoyed by the legal profession also has the effect of constricting the supply of legal services. …

I suggest the high cost of legal services is a result, at least in part, of limited supply. It is not related solely to the inherent cost or overhead of providing legal services. … [I]t must be apparent that regardless of the purpose identified for maintaining a monopoly, the effect of the monopoly itself can only be to restrict supply and increase cost. …

The restricted supply of lawyers enables individual lawyers and law firms to choose the best paying (and indeed most interesting) work. Poor paying, or uninteresting, work is left unserved. I do not criticize individual lawyers or their firms for acting in their own self-interest. I practiced law for 20 years in a private law firm. I and my partners and associates wanted to make the best living possible that we could. I am sure that remains the case today, and justifiably so. …

The restricted supply of lawyers in British Columbia is neither the fault nor the responsibility of individual lawyers or law firms. The restricted supply is a systemic failure on the part of the legal profession’s governing body to ensure that legal services are available to all who need them. That is what the public interest demands. And I suggest that is what the profession must deliver.

I commend the entire speech to you; the chief justice makes a series of excellent points. I don’t necessarily agree with everything he says, and I don’t believe that the “supply of lawyers” is the whole story. But without any hesitation, I embrace the notion that our profession restricts the provision of legal services to lawyers, to be delivered on lawyers’ terms, in a system crafted to lawyers’ preferences, and that in doing so we have effectively restricted access to justice. We are the stewards of the justice system, and at least in terms of accessibility to that system, we have not done ourselves proud. Chief Justice Finch is not being alarmist when he wonders aloud whether the day will come when society decides that someone else should be given the steward’s job.

Third-party litigation funding is, at best, a very flawed solution to the problem of access to justice. Aside from its philosophical drawbacks, it’s solving the wrong problem: it assumes that the best way to beat the system is to even the odds, to give everyone enough money to duke it out with expensive lawyers in front of expensive judges in expensive courts. That is not the way to fix the problem. The way to fix the problem is to make the system less bloody expensive in the first place. And if lawyers can’t figure out how to do that, and soon, then I submit that third-party litigation funders will be the least of our concerns.

The new battlefield: convenience

by with 4 Comments

Posted in: Clients, Competition, Innovation

Whatever happened to Napster? Depending on your age, you might remember it either as a piracy-enabling nuisance, a groundbreaking music-swapping service, or the dusty antecedent of iTunes. Time magazine caught up with Napster’s founder, Shawn Fanning, and three other pioneering hackers in a recent article that describes them as “The Men Who Changed The World.” Between 1997 and 2001, Fanning, Bram Cohen, Justin Frankel and Jon Lech Johansen invented Napster, BitTorrent, Gnutella, and a range of DVD encryption-cracking software. If you’re not familiar with all these programs, suffice to say that they effectively ended vendors’ longstanding control over the distribution of their content.

The title of the piece is meant to be a little ironic, because not only were these four not “pirates” in any persuasive definition of the term (they’re all now associated with legitimate enterprises), but they also failed to usher in an era of universal free content exchange — and they deny that that was ever their intent. What they really wanted, the article suggests, was for content to be “free” in the sense of “freedom” — that the purchasers of content should be able to do what they liked with that content once they’ve purchased it.

But the article also suggests that these four men laid the groundwork for what has become the first successful — spectacularly successful — application of online content distribution: iTunes. Steve Jobs’ masterstroke succeeds where the likes of Napster and LimeWire and Gnutella failed for a host of reasons, including Apple’s steely negotiating skills and marketplace leverage gained through the success of the iPod. But a major factor in Apple’s success lay in the simple, accessible, appealing design of its products: as I’ve written elsewhere, ease of use and pleasing design is the hallmark of all Apple products, and is what I think will propel Apple to the top spot in the future world of online applications. The article’s writer expresses that sentiment with a thought so simple and powerful that it merits its own paragraph:

It turns out that there is something that can compete with free: easy.

That should be a jarring thought for the legal profession, because the same thing is happening to us. No, we’re not being threatened by a Legal Napster that will allow clients to swap legal products they’ve already purchased (not yet, anyway). The threat we’re facing is convenience: the ability of a client to access legal services in an easy, frictionless, and user-friendly manner. Law firms are not convenient vehicles for the development and sale of legal services — well, they’re convenient for lawyers, but not for clients. Law firms of all sizes, from solos to globals, are set up to render legal services in as time-consuming, remote and painstaking a way as possible, partly because it’s profitable, and partly because we’ve never cared all that much about the legal consumer experience.

Well, now it’s game on, because convenience is the battleground where our innovative competitors are massing their troops. These competitors don’t have expensive partners and premises and marketing budgets, and they can’t bring the resources to bear on the market that lawyers can. So they’ve taken different approaches, and one of those is to offer services that are much easier and more convenient for clients. And it turns out that ease and convenience are incredibly important for consumers who are stressed for time, overloaded with options, and in dire need of accessible, personalized attention to help them make their law-related choices.

Convenience is a major part of what LegalZoom sells — check out the pricing structure for many of their products, and you’ll notice that they charge a premium for overnight drafting and delivery of documents. Convenience is a key aspect of contract-assembly services like WhichDraft and Kenneth Adams’ brand-new entry, Koncision. Convenience lies behind the appeal of Allen & Overy’s just-unveiled online tool to track banking compensation laws worldwide. Convenience for the client — making the process of accessing legal services as easy and painless as possible — is the new killer app for this marketplace.

This development is the latest example of a longstanding rule of business finally infiltrating the legal world. It’s called the Buying Hierarchy, and it was first developed by Windermere Associates as a way of explaining the process consumers go through when making their market choices. It’s widely known from its citation in The Innovator’s Dilemma and is summed up nicely here:

Most customers follow a four-phase buying pattern, with only the last phase being based on price. These phases are as follows:

Functionality: Where a product or service meets a certain need or does a certain thing that cannot be accomplished in any other manner.

Reliability: When two or more competitors offer similar products that have the same functionality, consumers turn to the competitor whose product offers the better reliability.

Convenience: When competitors have products or services that offer the same functionality and the same relative reliability, consumers turn to convenience – those products that are the most convenient to use and the companies that are the most convenient to work with.

Price: When competitors all have similar products or services that offer all the attributes above in very similar manners, then the product or service essentially becomes a commodity and at that point must compete on price (following the schools of thought outlined above).

The legal marketplace long ago passed through the first two stages: functionality is widespread (you can find more than one lawyer or law firm in almost any jurisdiction that can carry out a given legal task) and so is reliability (you can also find more than one lawyer or firm that can be trusted to do excellent, reliable work on your legal task). But for decades, our marketplace has been stuck at convenience, and the reason for that is the one David Maister identified years ago: lawyers don’t need to innovate on practice management or client service because lawyers only have to compete with other lawyers.

Why bother adding all sorts of bells and whistles to make life easier for clients when you know full well that no other firm will force you to do so? Why bother investing in online service delivery, or training your lawyers to be fully responsive to client input, or creating systems that allow clients to access their ongoing legal purchases at a time and in a place and in a manner that suits their needs, not the firm’s? Why bother with convenience, when inconvenience is part of both the mystique and the profitability of the profession?

The answer, of course, is that we’re no longer competing just with each other. We’re competing with a host of providers — human and technological, local and foreign, lawyers and everyone else — who don’t make the same assumptions we do and who aren’t all working from the same decades-old playbook. If your firm hasn’t yet grasped the significance of the world’s largest legal information company buying the world’s largest legal process outsourcing company, grasp it now.

The ground rules have changed, and the Buying Hierarchy is coming to the legal marketplace. Convenience matters. Accessibility matters. Making things easy for the client matters. That’s the real New Normal we’re facing, and I suggest we respond to it with a little more urgency than we’ve shown so far. Because once convenience falls, as the Hierarchy demonstrates, the next and final stop on the road is price.