The solution or the problem?

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Posted in: Clients, Innovation

Last week brought news of three innovations that, each in their own way, aim to increase access to justice. It’s noteworthy that none of them came from lawyers.

First is a report that for the first time in Canada, a third-party litigation funding company, BridgePoint Financial Services Inc.,  persuaded an Alberta trial judge to allow it to provide funding to the representative plaintiff in a class action,  Hobsbawn v. ATCO Gas and Pipelines Ltd. The judge’s reasons aren’t known because the ex parte order was sealed, and Alberta’s class actions costs regime is a little different than other Canadian provinces’, but this is still a potentially pivotal ruling. It could remove the chilling effect of brutal costs penalties for would-be plaintiffs, which nominally should increase access to justice. It also gives rise to substantial ethical concerns, and I’m on record as having serious misgivings about treating a civil action as an investment. But there’s no denying it’s innovative, and that it should make it easier for people to get to court.

Also making inroads in Canada is legal expense insurance, as the local arm of worldwide provider DAS inches closer to approval of its offering by the national superintendent of financial institutions. Already popular in Quebec, legal expense insurance could become widespread throughout the rest of the country if DAS is given the go-ahead. For an annual premium of $500, policyholders receive indemnification of up to $100,000 in legal costs for matters like wrongful dismissal disputes, tax problems and personal injury claims — but not, significantly, family law matters, the most common source of access problems. Legal expense insurance also raises the question of who makes the decisions about how a legal matter is conducted: the policyholder or the insurer? But again, it’s hard to argue that this offering leaves potential litigants worse off than they are under the current system.

And finally, shifting gears and hemispheres, comes word from Australia of what is so far a successful family law initiative called Family Relationship Centres. This excerpt from the story summarizes the project better than I could:

Everyone who walks through the door, or calls the toll-free line, is entitled to three free hours of help every two years, whether it be on-site counselling and mediation or off-site specialized services. After that, costs are based on ability to pay. Walk in the door of a Family Relationship Centre and you are greeted by a “parenting counsellor” rather than a wall of pamphlets. Their job is to get a sense of your personal situation and how it’s playing out for your family, and to assess what help you need to start moving ahead.

The centres are meant to act as triage units for ex-partners who may be hobbled by mental health issues and addictions, or children acting out because of prolonged family conflict. “They will not close that file until they are certain that person has got the help they need,” says Parkinson. Mediation is a mandatory first step, a move aimed at making the costly and adversarial court system a “mechanism of last resort.” The last of the centres opened last year, and already Australia has seen an 18 per cent drop in court filings.

These Centres are part of a massive and very expensive state overhaul of the family law system in Australia, and so far they seem to be working very well. But like the other two advances noted previously, this project apparently developed with little if any leadership from the legal profession.

We seem to be ceding the innovation ground in law to private companies, which by definition are primarily interested in turning a profit, and to government, which has a different set of priorities than either lawyers or their clients. Last month, the very first InnovAction Honourable Mention handed out by the College of Law Practice Management went to the Practical Law Company; last year, an InnovAction Award went to Novus Law LLC — both private companies. I doubt they’ll be the last winners from outside the practicing bar.

So why aren’t lawyers, law firms, or lawyer regulating bodies leading the way in developing innovative legal service delivery solutions? Part of the reason lies in the profession’s singular resistance to initiatives that involve risk or an entrepreneurial spirit. But part of the reason, it seems to me, is also the fact that the solutions these entities are providing are to problems the legal profession helped create.

In most cases where plaintiffs shy away from using the legal system, it’s because the cost of the trial is both disproportionate to the potential award and completely out of reach of the great majority of individuals. And the cost of a trial is largely within the control of lawyers, because lawyers’ fees are by far the single biggest component of litigation costs. Who else bears responsibility for how much we charge? Yes, there are other factors inflating trial costs — better funded courts could reduce backlogs and delays, and discovery can be difficult to predict and control. But if there’s a case to be made that someone or something other than the price of lawyers’ services bears the majority of responsibility for litigation costs, I’d like to hear it.

Most innovations in the law these days are devoted to making the legal services delivery process more streamlined, more efficient, and more affordable to more people. A good number of these solutions come from individual lawyers and law firms, which is extremely encouraging. But as a profession, we should be concerned about the extent to which other solutions are emerging from outside our walls — and the extent to which they’re aimed at solving legal cost problems for which I think lawyers bear primary responsibility.

The electric law firm

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Posted in: Innovation

“Electric” as an adjective has kind of a dated feel, harking back to the 1970s when it modified Horseman, Company, Mayhem and Light Orchestra. But electric cars still retain a 21st-century buzz, keeping the momentum they developed during the recent oil shock as a serious alternative to gasoline-powered vehicles. The Economist recently devoted a special section to what it calls the electrification of motoring, and it makes instructive reading for lawyers. The legal profession could take some lessons from how some key innovations are completely redefining  the basic assumptions of the automotive industry.

Battery-powered cars operate on a different set of rules than gas-powered cars, not just in a mechanical or engineering sense, but also in paradigmatic terms. What you use your car to do, how far you can drive it, how fast you can accelerate, where and how you acquire your fuel — all these considerations and more are very different with battery-driven vehicles. For example, one electric car manufacturer is looking to create “electricity stations” where drivers can trade spent batteries for new ones, something made possible by selling — or renting — the battery separately from the car itself.

Separating ownership of the battery from ownership of the car changes the economics of electric vehicles. If you rent the battery rather than buying it, that becomes a running cost (like petrol) and the sticker price of the car drops accordingly. … Better Place, indeed, plans to go further. It will charge for its services (battery and electricity) by the kilometre travelled. The cost per kilometre will be lower than for petrol vehicles, and if you sign up for enough kilometres a month, it will throw in the car for nothing.

This isn’t completely new, of course — cellphone providers have been practically giving away the devices themselves, making money instead off the service plans. It’s the basis of the Free economy that Chris Anderson writes about, launched by King Gillette’s realization that he could give away razors but sell the blades. More and more manufacturers now make products available at no cost while charging customers for the service that makes the product useable and/or valuable. But for all that, it’s still shocking to think about getting a car for free in exchange for renting the fuel.

Law firms obviously don’t sell shavers, cellphones or cars. But what they do have in common with many modern manufacturers is that their tangible work product is becoming more commoditized, less differentiated, and more susceptible to low-priced, non-lawyer competition. Forms, contracts, simple wills, divorce papers and other basic documents are now available from kiosks and websites operated by courts, non-profits, and the non-lawyer private sector. The difference in quality between a document drafted by a  lawyer and one drafted by one of these alternative services is rapidly narrowing, and with it will narrow the premium that lawyers can charge above what these rivals charge (which in some cases is $0).

So how might a law firm give away products while selling services? Jeff Carr has observed that lawyer work falls into four categories: content, process, judgment and advocacy. The first two are well on their way to commoditization; the latter two remain the high-value and near-irreplaceable purview of lawyers. The day might soon arrive when firms publish and automate their legal knowledge, document assembly and document review process free of charge, over the internet, to anyone who wants them — but will charge a monthly retainer fee for the personal judgment, advice and representation that animates those documents and processes and provides real value. Wilson Sonsini’s term sheet generator is a step in this direction, but so are child support calculators and PCT calculators. The tangible product is the giveaway; the value, and the profit, are in the service.

To take another example: putting a battery in a car means taking out the internal combustion engine and its associated plumbing and wiring. That, in turn, means you suddenly have not only a whole lot more space under the hood to work with, but also the opportunity to completely reconfigure the space itself.

[O]nce the engine block and the gearbox are gone, the game of car design changes.  …  A number of carmakers and component companies are, for example, looking at getting rid of drive trains, and fitting electric motors directly into cars’ wheels. With wheel-mounted motors that mix motive power, braking and active suspension, more of the things conventionally fitted to a car become unnecessary. Because a gearbox, clutch, transmission and differential unit are no longer needed, and springs and other suspension items will probably go, too, vehicles could assume all sorts of shapes and sizes.

In the law firm context, we’ve long assumed that some elements, like extensive law libraries, were permanent physical fixtures. But while I hardly recommend tossing away all your texts, the fact is that many firms have streamlined their expensive premises by downsizing and computerizing their knowledge resources. But the electric car example offers many other possibilities. What if most of your administrative and secretarial support were outsourced to lower-cost jurisdictions or different time zones? What if telecommuting and telepresence became so affordable (as they almost certainly will) that your lawyers didn’t need to congregate in one place five days a week? Then you suddenly have the opportunity to rethink  your physical plant altogether. If you don’t have law books or legal secretaries or law firms, what does your law firm look like? Does your physical premises become less important than your website? Good questions, and they’ll need answers.

The Economist has long boosted electric cars, but even the magazine acknowledges that internal-combustion engines will rule the roads for some time to come. In the same vein, traditional law firms will continue to be the norm for a while yet. But we have the opportunity now to realistically picture what comes next.

Think of all the longstanding features of a law firm we take for granted — up-or-out partnership tracks, hourly billings to clients, billable-hour-based compensation for lawyers, powerful rainmaking partners, annual partnership draws, exclusive lawyer ownership, and on and on. Then loosen or remove even one or two of them, and consider the multiplicity of variations that result — the possibilities just keep unfolding. Next time you’re trying to picture the future of law practice, give some thought to the electric car.

The apprenticeship marketplace

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Posted in: Innovation, Law School, New Lawyers

Critical mass, like the famous definition of obscenity, is one of those things you can’t necessarily define but that you know when you see. We’re approaching a critical mass of discourse on the necessity of change within the American law school system, and when we reach that point, the focus will switch overnight from necessity to inevitability. The latest step in that direction comes courtesy of a National Law Journal article with the suggestive title “Reality’s knocking.” It details efforts underway at numerous law schools — including Washington and Lee, Dayton, Northwestern, Indiana/Bloomington, UCLA, UC Irvine, and the latest entrant, Duke — to integrate market-readying client-focused training into their programs.

[A] growing number of law schools are emphasizing teamwork, leadership, professional judgment and the ability to view issues from the clients’ perspective. “I think we are at a moment of historical change across the landscape of legal education,” said Washington and Lee Dean Rodney A. Smolla. “When we look back at this period in five to 10 years, we will mark it as the time when the whole mission of law schools made a fundamental turn.”

The thrust of these changes — whether shortening the law degree by one year, supplementing traditional coursework with legal skills instruction, simulating law firm environments (complete with client relations and billing), or introducing professional values training in the first year — is to accelerate law graduates’ development into full-fledged lawyers. By doing so, these schools hope to improve relations with the private bar (an increasingly important source of funding), better compete with other school for the most promising pre-law candidates, and (one would like to think) better serve the long-term interests of their students. By and large, these are very welcome developments, and there’s no doubt in my mind we’ll see a lot more of them in the next few years.

What especially caught my interest in the NLJ story, however, was a nearly-throwaway paragraph illustrating the kinds of pressures schools are feeling from the private bar:

The legal labor market is saying that it’s no longer willing to pay top dollar to recent graduates who lack work experience. Law firms including Washington’s Howrey and Philadelphia’s Drinker Biddle & Reath recently announced apprenticeship programs wherein starting associates earn less and spend a significant amount of time training and shadowing partners.

I’ve written about these programs before — Frost Brown Todd, Strasberger and Price, and Ford Harrison have followed suit — and I hope to put together a much more detailed treatise on this subject down the road. Under these initiatives, the law firms pay their new associates much less than the market rate and require far fewer billable hours from them; associates spend most of their time in apprenticeship, training and shadow programs with experienced lawyers, with (unbilled) client contact and observation opportunities where possible. These firms have heard their clients complain about paying to train new lawyers unprepared by three years of law school, and either to mollify these clients, to stake a marketing advantage, or (one would like to think) to actually better serve both their clients’ and their lawyers’ interests, they’ve responded with this new approach.

But what’s most interesting is that these innovative new programs at the law firms don’t really differ in any substantial way from the innovative new programs at the law schools. Both are focused on providing new lawyers with the practical training, skills development, and professional awareness that a traditional law degree and most bar admissions processes fail to deliver. Both aim to reduce the steep learning curve that new lawyers have always had to climb, making them readier to serve clients and generate billable work than they otherwise would be.

What this means is that for the first time, law schools and law firms are providing the same service — apprenticeship training. And when two or more providers offer the same basic service, you’ve got yourself a marketplace. Very good things can happen in marketplaces — intense competition to improve offerings, constant pressure to innovate, a diversity of ideas and approaches, continual erosion of barriers to entry. All of these developments work to the ultimate benefit of that marketplace’s consumers — in this case, new lawyers and (ultimately) the clients whom they’ll serve. The more schools and the more firms that enter this marketplace, the better and faster the results will flow.

I can’t wait to see what a lawyer apprenticeship marketplace might produce over the next several years. But there’s a potentially major problem with this playing field: one of these providers charges its consumers an annual tuition to receive this service, while the other pays its consumers an annual salary. That’s no contest, and in the long run, it will mean that this is a service you can’t charge students to receive — or, more radically, one that new lawyers won’t earn a salary to obtain.

Why change is so hard

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Posted in: Innovation

Last week’s New Yorker column by James Surowiecki talked about health care reform in the United States, but it has something important to say about change in the legal profession too. Surowiecki noted the sudden remarkable rise in the number of Americans who say they’re satisfied with their current health coverage. Among other factors, he puts this down to people’s deep-set psychological aversion to give up what they’ve got in favour of something new:

Most of us, for instance, are prey to the so-called “endowment effect”: the mere fact that you own something leads you to overvalue it. A simple demonstration of this was an experiment in which some students in a class were given coffee mugs emblazoned with their school’s logo and asked how much they would demand to sell them, while others in the class were asked how much they would pay to buy them. Instead of valuing the mugs similarly, the new owners of the mugs demanded more than twice as much as the buyers were willing to pay….

What this suggests about health care is that, if people have insurance, most will value it highly, no matter how flawed the current system. And, in fact, more than seventy per cent of Americans say they’re satisfied with their current coverage. More strikingly, talk of changing the system may actually accentuate the endowment effect. Last year, a Rasmussen poll found that only twenty-nine percent of likely voters rated the U.S. health-care system good or excellent. Yet when Americans were asked the very same question last month, forty-eight per cent rated it that highly. The American health-care system didn’t suddenly improve over the past eleven months. People just feel it’s working better because they’re being asked to contemplate changing it.

Compounding the endowment effect is what economists dub the “status quo bias.” Myriad studies have shown that, even if you set ownership aside, most people are inclined to keep things as they are. … Some of this may be the result of simple inertia, but our hesitancy to change is also driven by our aversion to loss. Behavioral economists have established that we feel the pain of losses more than we enjoy the pleasure of gains. So when we think about change, we focus more on what we might lose, rather than on what we might get. Even people who aren’t all that happy with the current system, then, are still likely to feel anxious about whatever will replace it.

That sounds to me like a neat encapsulation of what’s happening to a legal profession facing unprecedented pressure to change. The outside forces attacking the industry’s status quo (technology, competition, client sophistication and generational shifts) grow stronger every year. In addition, there’s more dialogue than ever before within the profession about changing billing practices, law firm structure, talent management, technology usage, billable targets, client relationships, etc. And by most measures, a remarkable number of lawyers aren’t really that satisfied with their work or their careers. In theory, change should be rolling like a river through the profession right now.

But those of us in the change camp remain perplexed by the steady and growing levels of resistance we still encounter — not just among lawyers and law firms, but also among clients, law schools, and others. It seems like the harder we push, the more tightly lawyers grip the familiar features of their current system. And Suroweicki’s article presents a plausible explanation — the very act of advocating change increases lawyers’  resistance and their belief that the status quo is just fine, thanks.

So I’m coming to think we’ve been taking the wrong approach. Many of us, and I’m as guilty as anyone, tend to dismiss lawyers’ opposition to change — change that would make for a profoundly better legal system — as being grounded in selfishness, short-sightedness, and bloody-minded traditionalism. And I still think these factors do play some part.  But if we look at the situation through less jaundiced eyes, and take into account these natural and largely inescapable human tendencies towards preservation of the familiar, we can come to understand the resistance more clearly, and judge the resisters less harshly. The way things are, even if they’re not that great, still seem self-evidently good and preferable to the cost that change might exact.

So how can change be effected in an environment psychologically programmed to over-value the status quo? Here are three possible approaches:

1. Question the permanence of what people already have. Surowiecki suggests that Americans’ health coverage is far more tenuous than they think it is, and that therefore “the endowment that insured people want to hold on to is much shakier than it appears. … The message, in other words, should be: if we want to protect the status quo, we need to reform it.” Lawyers have been warned about the unsustainability of the current system and how much they stand to lose if wholesale reform from outside the profession sweeps away their privileges. But lawyers don’t frighten easily, and many have an unrealistic picture of their irreplacability in the greater scheme of things. This approach could yield more success as the upheaval inevitably gets rougher down the road, but probably not before.

2. Demonstrate the great advantages of change over the status quo. People may not want to sell that free mug for less than twice its value. But offer them a titanium thermos with built-in GPS and they’ll trade up in a hurry. Resistance to change springs largely from overestimating both the benefits of what you now have and the costs of what you would get, so headway may depend on showing that change is overwhelmingly positive: you will make more money, get more clients, have more free time, be happier, by taking a different approach. So we need to highlight (and reward) as many huge success stories of innovative lawyers as possible. We need more projects like Legal Rebels, showing off all the benefits to be derived from abandoning the status quo and embracing better ways of being a lawyer. It won’t convince everybody, but it will push us closer to a watershed.

3. Make the change as incremental as possible. People are usually more amenable to change if they don’t think of it as something wholesale and irreversible. So instead of advocating fixed fees across the board, maybe you isolate one or two small clients or practice  areas that could serve as laboratories. Rather than abandoning lockstep compensation altogether, maybe you start by adding some merit-based criteria to the existing salary structure. Once these small innovations take hold, you can press forward with more. Over the years, I’ve found that terms like “pilot project,” “test case,” “private launch” and so forth are remarkably effective in getting lawyers to lower their guard and try something different. Minimizing the risk and playing down the possibility of permanent change might undermine the overall case for innovation, but in practical terms it could deliver better results.

There’s at least one big difference between the US health-care debate and the upheaval in the legal profession. To a great extent, the health-care consumers themselves control the process of change through the electoral system, so if they decide they want things to stay the same, they will — at least until the system breaks down someday. Lawyers, by contrast, don’t control any of the factors that are causing or, like the recession, accelerating the change in the legal services marketplace. We can ignore the tsunami all we like, but the waves are still coming in regardless.

That makes it all the more important that resistance to change within the profession — natural and understandable as it is — be overcome. Most lawyers are either comfortable with their existence or don’t ask too much from their careers, so they automatically defend the current system without asking themselves: Is it really all that great for me? Couldn’t I do a lot better? What, exactly, am I fighting so hard to preserve? Getting lawyers to ask — and then answer — these questions will be more than half the battle.

The real impact of private equity

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Posted in: Finance, Innovation

It’s coming to the attention of many North American lawyers that our overseas colleagues are or soon will be selling equity interests in their law firms. Earlier this summer, American Lawyer profiled the progress of pioneering publicly traded law firm Slater & Gordon in Australia. More recently, Bloomberg News announced that at least three UK law firms are willing to accept private equity investment starting in 2011, when radical measures introduced by 2007’s Legal Services Act take effect. Neither of these developments will be news to regular readers here, but many other lawyers newly faced with these prospects are hitting the books to figure out how to respond.

Often, the first book they pull out is their code of professional conduct. Objections to outside investment in law firms tend to cluster around the twin assertions that shareholders would demand maximized return over professional and ethical considerations, and that outside investment would create too many opportunities for disqualifying conflicts of interest. On the second point, when you think about it, conflicts arising from external investors aren’t really qualitatively different from conflicts by current investors — i.e., the other partners in the firm. And in any event, not every conflict of interest is a disqualifying conflict that undermines the lawyer-client relationship. More complicated to manage? Quite possibly. Irreconcilably difficult? I’m much less sure of that.

On the first point, it seems to me that we’re confusing two different types of obligations. There’s a difference between a binding ethical obligation owed to a client — to do your best work to further the client’s interests, in complete confidence and loyalty — and the general corporate obligation to return a profit to a shareholder. The first should and will trump the second, always. And really, when you get down to it, these obligations dovetail more than they conflict. A good lawyer who acts ethically in his clients’ best interests is by definition maximizing the value of the firm and the return to the shareholder. It won’t serve an investor’s interests to encourage behaviour that would wreck the law firm’s reputation for trustworthiness and ethical conduct  — it would be a surefire way to ruin the value of the investment.

Now, the ethical waters around non-lawyer equity interests in law firms do run deep, and I’m not the captain to ply them. At the moment, I’m more interested in the defensiveness that talk of outside investment generates in many lawyers. Although I accept that many lawyers’ objections on ethical grounds are sincere, I suspect that many other lawyers object because of the threat non-lawyer influence presents to two foundational elements of lawyers’ lives: change and control.

When you look closely at the discussions around non-lawyer investment in law firms, it becomes clear that such investors actually have very little interest in the work lawyers do for their clients — they’re really not that into what we do. Their interests are entirely profit-based, and they view law firms through the single lens of revenue generation. From the Bloomberg article:

“Law firms are pretty attractive investments as they have stable cash flows, long track records of business operations and increasingly are much better run,” said John Llewellyn-Lloyd, executive director of Noble Group Ltd., a London-based investment bank. “You would expect them, like any professional services business, to provide a pretty good return.” Alan Hodgart, a law firm consultant at H-4 Partners in London, said investors are expecting “fairly high returns, in excess of 15 percent.”

So law firms are attractive because they’re a steady, reliable investment. Nothing new there — partners have been comfortably aware of that happy fact for years now. But there’s more to it than that. Your average law firm isn’t just a reliable investment — in many cases, it’s a vastly underperforming one. Investors look at the short-term, narrow-focus, seat-of-the-pants way most firms are operated, and they salivate at the thought of what even a basic injection of systemic discipline and workflow reform would do to already-fat profit margins. Again from Bloomberg:

Lyceum Capital, the London-based buyout firm, is interested in investing in the legal industry, with a “focus on new business delivery models, not traditional law firms,” Hand said in an e-mail. … Lyceum Capital wants to invest in ways to reduce legal costs and make some types of legal work cheaper and more efficient.

Further along these lines, consider what consultant Joel Henning predicts about the impact of outside investment on law firm management:

The result might be very different service delivery, billing and compensation systems, minimizing individual performance and maximizing team, practice and firm performance. Investors would bring to bear a more contemporary suite of tools and techniques for managing the delivery of legal services. They would be astounded by the enormous duplication of efforts at law firms.

If we allowed businesspeople to invest in and join the leadership of our law firms, I suspect that more and better smart systems and processes would be developed and refined on an accelerated basis, systems that would accomplish many legal tasks beyond drafting and researching, reaching even to some problem solving. If this were to happen, the billable hour and the lawyer compensation systems grounded upon it would largely become anachronisms. Savvy outside investors would find that too many smart lawyers and too few smart systems currently inhabit our law firms.

And here’s Altman Weil’s Tim Corcoran on what would happen in a law firm where business decisions aren’t left to lawyers alone:

Fundamentally altering the firm’s recruiting strategy?  Establishing true associate training and apprenticeship?  Re-designing compensation systems to drive collaborative behavior?  Which Biglaw partner wants to raise his hand and dive deeply into these issues?  …

If a PE firm purchases a significant stake in a large law firm, rest assured that the investor representative they install on the management committee, whether this is a COO, CFO or some derivation, will be able to do the math justifying why process improvement will lead to substantially better returns — for the investors, for the partners and, oh yes, for the clients.  This isn’t rocket science, and cost containment programs based on ROI, investments based on NPV and even formal business process improvement programs like Lean Six Sigma are really not much more than common sense ideas backed up by math and a governance structure which places the good of the firm above the desires of individuals.

Of course it will be hard.  But the PE investors who truly want to unlock the value embedded in Biglaw will understand the potential return on delving into the tough issues.

That, I think, is the key selling point for potential investors in modern law firms. They see the enormous value that’s hidden away under layers of wasteful processes, poor client communication, and amateurish management. They’d love to get their hands on and polish up these rough diamonds. Lawyers say they object on grounds of professionalism; I say there’s nothing unprofessional about running a business efficiently and effectively. In fact, experienced business management that does away with internal inefficiency will reduce costs, thereby making it possible to lower prices, which absolutely serves clients’ interests. Outside equity investment as a tool to improve access to justice? I think it’s more than just arguable.

Lawyers could continue to object that equity investors wouldn’t pass these cost savings on to clients — they’d simply pocket the difference as extra profit. I find that enormously funny, because how is that different from what many law firms already do now? If there’s any difference, it’s that outside investors — motivated to take a longer-term view than partners, whose vision usually extends only as far as this year’s draw — have an incentive to build the business for future success, which would encourage any measures that would make the business more appealing to clients and boost market share.

At the heart of it, I think this is what motivates a lot of opposition to outside equity investment in law firms — the knowledge that the new people would do things a whole lot differently. They’d change the way lawyers do their work, which for many practitioners is the most sacred cow of all. Non-lawyer shareholders wouldn’t tolerate some of the stuff law firms get away with now, and the lawyers know it. So it’s about change, and it’s about loss of control — two things lawyers really don’t like.

Equity investment in or outside ownership of law firms will be neither a panacea nor an unalloyed good — mistakes will be made, lines will be crossed, abuses might well take place. No innovation arrives perfectly safe and sound. But what such investment does offer is something the legal services marketplace has needed for too long: law firm management singularly driven to improve efficiency, effectiveness, and above all, client satisfaction, because it makes business sense to do so.

Just in case

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Posted in: Innovation, Outsourcing

“Stuff expands to fill the space available.” If you’ve ever owned a closet, basement or garage at some point in your life, you know how true that is. The corollary, of course, is that the less space you have, the less stuff you find you really need. I once moved six times in the space of 4 1/2 years, and by the last move the contents of my life could fit comfortably in the back of a small van. What it comes down to is that we’ll always make room for the essentials, and that we’ll cram any remaining room with as many non-essentials as we can get.

Two interesting posts about knowledge management by Mary Abraham and Greg Lambert got me thinking about this. Greg’s article described the futility of capturing all knowledge available to you —  you’ll end up with so much data that you’ll inevitably lose something important, or you won’t be able to find a key item as easily as you assumed you would. But because storage is so easy and so cheap — cheaper, in some cases, to store the data than to have it destroyed — we end up collecting far more knowledge than we’ll ever really need. “I’d wager that 90% of the emails, electronic documents, or paper documents we keep, we do because we are implementing the ‘CYA’ rule.” Mary expands upon Greg’s post by pointing out that “the first step to organizing stuff is — get rid of what you don’t need.”  She questions the longstanding lawyer habit of filing everything away in the event it’s needed down the road. Not even Google, she notes, indexes everything.

I think both Greg and Mary are right, and their points touch upon a larger issue within the law — that deadly combination of perfectionism and risk-aversion that has made lawyers afraid to overlook or throw away anything. I still recall, as an articling student, opening a client file deeper than it was long, rifling through copies of memos, faxes, pink phone-message sheets, document drafts, etc., and thinking: Is all this stuff really necessary? I spent a summer working as a library archivist and came away from it both with an appreciation of acid-free paper and plastic paper clips, but more importantly, with a sense of the needlessness of preserving the irrelevant. And that was in the antediluvian days before email. What percentage of emails archived the world over are simply replies with the one word “Thanks”?

So I think the rise of “good enough,” already well underway in the client realm, could and should be transposed to the law firm world as well.  We don’t need to search for, locate, bring back and keep everything, or even close to everything. Is it possible that an unturned stone or a discarded file could be the key to winning a case or defending a malpractice claim? Of course. It it even remotely probable? In most cases, no. There’s a cost-benefit analysis at play, and lawyers need to look seriously at the benefits of exhaustiveness before continung to incur its costs.

What concerns me, though, is that we’re actually headed in the opposite direction. And ironically, the source of the problem is in the very innovations that are introducing such efficiencies into the rest of the legal services industry. New developments like automated document assembly and offshore lawyers are lowering the costs of carrying out routine legal functions. And while that’s good for clients (and down the road, will be good for lawyers), one negative side effect is that these routine tasks are becoming more affordable by the day. And the cheaper something is, the easier it is to order up huge batches of it — just in case we need it.

Greg and Mary point out that the approaching-zero cost of storage means that there are almost no upfront cost penalties associated with filing something away. The same could start to apply to, say, due diligence and document review: in an increasingly frictionless cost environment, neither clients nor lawyers have much incentive to streamline, discern, or otherwise cut back on the types of things lawyers have traditionally done for clients. When costs are so low, benefits don’t have to be much higher to surpass them.

This is a significant issue for innovation in the law, because many existing innovations have come about in large part because the cost of doing things the old way was becoming prohibitive. If trials had remained concise and affordable, relative to what they are today, would the entire ADR system, which meets many more human needs than litigation, ever have developed?

We’re used to thinking that lower costs breed efficiencies, expand access, and generally serve as a force for good. And in many cases, they do. But they can also stall the natural process of reform by which all our legal institutions move forward. Near-infinite storage capacity has not made us wiser or happier — it’s only given us more stuff to keep track of. As the cost of routine legal work also continues to plummet, we could be in danger of a similar outcome for the law and lawyers: a legal system more cluttered, more complicated, and more weighed down by trivia than it needs to be.

The firms of the future

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Posted in: Big Firms, Innovation, Solo & Small Firm

“Does the future belong to virtual law firms?” That question was posed by an American Lawyer article earlier this week that focused on Virtual Law Partners, a growing firm nominally based in Silicon Valley but in fact operating, well, wherever its lawyers are. Virtual firms — two others, FSB Legal Counsel and Rimon Law Group, are also cited — consist of partners who operate independently, charging rates well below what they would require were they (still) at large firms and profiting by the huge savings in overhead and other costs.

The lawyers operate remotely, but they tap into a larger infrastructure with centralized billing, IT support, marketing, and recruiting efforts. They also share work frequently, communicating through video chat or e-mail as needed. Technology companies and startups were early converts, but the firms have added lawyers with varying expertise, including employment, real estate; FSB has even started a litigation practice.

Answering the article’s eponymous question in the negative was Patrick J. Lamb, who operates a bricks-and-mortar but nonetheless highly innovative firm at Valorem Law. He suggests that virtual firms suffer by comparison to boutiques thanks to one key difference.

The difference?  The ability to aggressively collaborate. Even with the best communication hardware, there is something lost when you can’t go next door and bounce ideas off someone who may have nothing to do with the case but who is vested in its outcome. I’ve experience firsthand the accelerated evolution of ideas from really good to extraordinary when several experienced minds combine their talent and judgment and work through a problem.

Speaking for myself, it’s not clear to me how a partner in a virtual law firm differs meaningfully from a well-connected high-tech sole practitioner. Both run their own practices in a highly personalized and streamlined environment, often rely on cloud-based infrastructure to manage their practices, set their own rules for client relationships, and operate with an unusual degree of autonomy. I think virtual firms aren’t cyberspace versions of traditional law firms so much as they’re loose aggregations of like-minded solos under a common banner that happens to be hung on the internet.

So I don’t think virtual firms are the future. But I do think they’re a future. More specifically, they’re one of a growing number of law firm models that will all be able to flourish in the next couple of decades. That’s because what we’re really seeing here is the demise of the traditional cookie-cutter law firm as the default setting for legal service enterprises.

One of the great things about the current upheaval in the legal marketplace is that the old expectations and parameters of law firms are losing their iron grip on the profession. Look, for example, at FutureFirm 1.0, a two-day competition this past April to take a tired traditional law firm called Marbury Madison LLP and overhaul it for the 21st century. Hosted by Prof. William Henderson at the University of Indiana Maurer Faculty of Law, FutureFirms attracted some of the most innovative minds in practice, the corporate world and academia. The event produced a blueprint for redefining large law firms that includes alternative fees, merit-based compensation and risk-sharing with clients — and they’ll do it again next year.

Or take a look at a forthcoming article in the CBA’s National magazine (which, full disclosure, I edit) titled “2020 Vision,” written by lawyer and Legal Post blogger Mitch Kowalski. It looks back from the year 2020 at the development of a very different (and hugely successful) law firm called BFC Law Professional Corporation that abandoned most of the trappings of the traditional firm. Of particular note for our purposes is the future firm’s “hub-and-spoke” approach to its physical premises:

The Hub
We maintain meeting room space downtown (the Hub), equipped with staff, computers and the like. This space also contains hoteling niches where lawyers have workspace and telephone/internet access. Remember, all our systems are cloud-based, so lawyers and staff can work anywhere. Office management handles all boardroom and hoteling niche bookings.

The Spoke
BFC’s day-to-day legal work is done at a public transit-accessible location outside the downtown core (the Spoke). Not only is rent much cheaper there, our staff and lawyers find the Spoke to be closer to their homes,  which reduces their travel time and increases their quality of life. In the Spoke, we have moved away from separate offices for lawyers,  which allows for the efficient use of smaller rentable space with better HVAC flow (further reducing costs). Small meeting rooms throughout the Spoke accommodate privacy as needed.

What the virtual law firm, Marbury Madison, and BFC Law all have in common is that they’re different and quite realistic visions of how lawyers can come together to offer legal services to the marketplace. They reject, or at least test severely, the standing assumptions about how a law firm should be constructed, both physically in terms of its premises and organizationally in terms of its clients and employees. In doing so, they reflect our evolving understanding within the profession of just what a law firm is supposed to look like.

We have this funny little idea in the law that the nature of your work and the quality of your practice are heavily influenced by the physical environment in which you operate. Are you on the 40th floor of a steel and glass tower in an urban center? You must be doing intricate, high-end, bespoke work for multinational clients. Are you in a nice but inconspicuous brick building with a wooden front door and creaky floorboards in an exurban community? You must be doing basic, commoditized work for unsophisticated clients. Lawyers love to judge people, and the people we love judging the most are each other, using criteria that reveal more about our own assumptions and biases than anything else. What the rise of the virtual law firm really signifies is that those assumptions, at least in terms of law firm structure, should soon be fading away.

In fact, if the form that a law firm takes will be influenced by anyone, it’s going to be clients, not lawyers. Both clients and lawyers — but especially lawyers — are very used to the idea that “they” come to see “us” in a place and at a time of our choosing. That simple unconscious assumption sets the tone for all relations that follow between the two parties. Lawyers have always had home-field advantage over clients, and we like it that way.

Now, the gravitational pull is starting to run the other way. As clients’ influence grows, so too will their ability to draw us to them, rather than vice versa. That doesn’t have to mean house calls — although it might — but it does mean that law firms will feel more obliged to arrange their physical availability in ways that increase convenience to clients. “Lawyers on demand,” a little like time-shifted TV shows? It’s not a preposterous result, and even thinking about it prepares us to better adjust to future client relationships where we don’t get to set all the ground rules from the start.

Yesterday’s law firm selection was a boxed lunch packed by lawyers; tomorrow’s is going to be a lavish buffet with clients standing in line next to you while you choose. For all that we still need to work on diversity within law firms, it’s going to be nice to have a little diversity of law firms as well.

Three hotspots for change

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Posted in: Innovation

I thought I’d bring your attention to three upcoming conferences that crystallize the enormous changes taking place in the legal services marketplace these days. I aim to attend all three, but if you can get to even one of them, you’ll be exposed to some tremendous insights into what’s happening in the legal profession right now.

The first stop will be Denver, Colorado, from September 25-26, 2009. That’s where the College of Law Practice Management will be hosting its inaugural Futures Conference, as leaders and visionaries of the legal profession lay out their vision of the future course of this industry. Keynote presentations will be made by Ward Bower of Altman Weil, Bruce MacEwen of Adam Smith Esq., and Harry Trueheart, Chairman of Nixon Peabody LLP, with interactive discussions provided by the Fellows themselves. I wrote about this event in more detail here, and I continue to highly recommend it for anyone interested in where the profession is heading.

Next up is Toronto, Ontario, from November 16-17, 2009. The Canadian Bar Association will present its fifth annual Law Firm Leadership Conference, with a focus on change management. There’s an amazing international lineup for this event: Richard Susskind, Bruce MacEwen again, Legal OnRamp’s Paul Lippe, Cravath, Swaine & Moore’s Evan Chesler, Valorem Law Group’s Patrick J. Lamb, top GCs like David Allgood and Gord Currie, and the managing partners of Torys, Fasken Martineau, and other firms. More information and registration details are available at the CBA website.

The third and final leg of the tour is in Washington, D.C., from March 22-23, 2010. The Center for the Study of the Legal Profession at Georgetown University Law Center will host a symposium titled “Law Firm Evolution: Brave New World or Business As Usual?” The call for papers has gone out, and there’s still time to submit your abstract: September 15, 2009, is the deadline for proposals. The Center’s previous symposium, on the future of the global law firm, attracted a stellar cast of managing partners,  leading academics, and professional thought leaders. This year’s symposium figures to be no less insightful and significant.

So there you go: three North American hotspots for talking about and advancing the cause of innovation on legal services delivery. If you plan on attending one or more, please let me know.

Free and the GP

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Posted in: Competition, Innovation, Solo & Small Firm

Like Thomas Friedman and Malcolm Gladwell before him, Chris Anderson is becoming known for books that identify and name an evolving trend that connects business and society. You’ve probably read or head about his newest book Free: the Future of a Radical Price. It’s generating a tremendous amount of heat around the idea that the cost of many things is heading towards zero and the price of those things is following. Reviews from established providers have ranged from mixed (The New York Times and The Economist, to name two) to devastating (Gladwell himself in The New Yorker), while reaction from the blogosphere and Twitterati has, not surprisingly, been far more positive.

I try not to talk about books I haven’t read, and Free is still on my to-get list. But I did read the lengthy excerpt published in Anderson’s magazine Wired last February, and it seems to capture the book’s arguments nicely (and for free, no less). The gist is that technological advances have made the cost of creating one more copy of many products (the marginal cost) and the cost of distributing those products so small that they are effectively zero. Content that can be rendered digitally (almost all of it) is accordingly “too cheap to meter,” which in any kind of open marketplace means that competition will cut the price of those products to virtually nothing.

Of course, not everything falls into this category: products like shoes and TVs aren’t heading towards free. And even for products whose marginal costs are nearly nothing, that’s not the end of the story, as the Times review notes:

More precisely, the marginal cost of digital products, or the cost of delivering one additional copy, is approaching zero. The fixed cost of producing the first copy, however, may be as high as ever. All those servers and transmission lines, as cheap as they may be per gigabyte, require large initial investments. The articles still have to be written, the songs recorded, the movies made. The crucial business question, then, is how you cover those fixed costs. As many an airline bankruptcy demonstrates, it can be extremely hard to survive in a business with high fixed costs, low marginal costs and relatively easy entry. As long as serving one new customer costs next to nothing, the competition to attract as many customers as possible will drive prices toward zero. And zero doesn’t pay the bills.

Interesting as all this is, what does it have to do with the legal profession? Potentially, a great deal, as some legal bloggers have noted. Carolyn Elefant and Doug Cornelius both point to innovative new offerings from two well-known US law firms: Wilson Sonsini has set up an online term sheet generator, while Orrick has created a start-up forms library on its website. Both of these products (or are they services?) are entirely free, to anyone (client, non-client, other lawyer) who wants to use them. They’re also products from which these firms and others have traditionally made money. “But there’s a method to Orrick’s apparent madness,” Carolyn writes:

Orrick’s freebies help it capture a segment of the market which either couldn’t afford to hire Orrick or if they could, would not have  been worth Orrick’s time.  Consider the example of a small business — typically the type of client outside of biglaw’s demographic.   The business might download and fill in Orrick’s incorporation form and then say to itself “I’ve already filled out the data.  How much could it cost to pay an Orrick attorney to look this over?”  Likewise, Orrick could charge far less to eyeball a completed form which it prepared itself than if the firm were to begin the incorporation from scratch (in which case, it would have to invite the client to the office, interview the client, gather the data and prepare the incorporation papers).

Meanwhile, Doug points out that many law firms have already adopted the philosophy of Free, in their own law firm newsletters and “client alerts”:

When you had to mail these alerts, there was a dollar cost associated with that distribution. To better phrase that, there was a stamp cost associated with distribution. Now distribution are costs are minimal. The costs are the same whether you email it to 500 people or 50,000 people. The same is true with viewing it on the law firm’s website. … Lawyers and their firms are giving away this valuable legal insight in the hopes that you will hire them to represent you in a matter related to the information in their publication. They use the publications to showcase their expertise, but in the process give away some of their substantive knowledge.

Giving away something for free or ultra-cheap in hopes you’ll entice users to buy your other services is not a new phenomenon, even in law: smaller firms have been using items like wills as “loss leaders” for years. What’s significant here is what’s being given away.

Legal forms aren’t matchbooks or Bic pens — or at least, they didn’t use to be: they were once important elements of the lawyer’s inventory that required a lawyer’s skills. The fact that they’re now customizable and downloadable on the Net tells us that the skill to produce them is now available widely. That implies a lack of scarcity and a consequent inability to charge much of a price. Legal knowledge, as Doug points out, is already being given away free by law firms; now, it appears that legal processes like document creation are following suit.

But it’s not law firms like Wilson and Orrick leading the charge and blazing this trial; it’s non-lawyer entities. Companies like LegalZoom sell forms for low prices; start-ups like WhichDraft give them away for free; most tellingly of all, services like JD Supra encourage lawyers to donate them to the profession at large as, among other things, a marketing tool. “Lawyers need to recognize,” Carolyn notes, “that we are fast reaching a point where the kinds of forms that companies like LegalZoom offer – such as contracts, leases, incorporations and wills – may be available online to all for free.”

Lawyers’ marginal cost of document preparation has always been low, but in the absence of other alternatives for clients, document-focused products could be sold at a profit. Now, thanks to the Free effect, the marketplace value of these sorts of products — their price, in other words — reflects their marginal cost. That’s great for clients; it’s bad for a lot of lawyers. Specifically, it’s terrible news for lawyers whose practices depend on the creation and sale of documents, contracts, agreements and anything else that can be digitized, templated and algorithmed. In other words, for many general practitioners.

Think of the services your typical general practitioner provides: wills, incorporations, divorce papers, leases, standard contracts and so on. If all these things aren’t yet available for little or for nothing on the web, they soon will be. How will the lawyers who rely on this kind of work survive? If they can offer more in-depth services in a given area, they could give away the documents in hopes of attracting that higher-end paying work. Jay Flesichman explains:

Would you prepare the divorce paperwork if you could make the money in another fashion? Say, on a new estate plan for the client? Would you draft bankruptcy petitions at no cost if it would cause the client to pay you for post-petition services and give you the chance to handle all of the lucrative fee-shifting adversary proceedings that come out of the bankruptcy case? … [In bankruptcy,] the consultation is often free as a way to get the prospect in the door.  Maybe the credit report is free.  Perhaps credit counseling is built into the price, making it free.  But not much else.

The thing of it is, though, if you could provide these in-depth services, by definition you wouldn’t be a general practitioner. That’s why the future for GPs looks incredibly grim: there’s just no profit to be had in providing a wide range of basic legal services. And I’m not talking just or even exclusively about solos: urban office towers are filled with lawyers whose working days are spent creating and reviewing corporate forms and documents. They might be exquisitely complicated forms. They might involve huge sums of money. But they’re still forms and documents, and if the wave of this kind of work heading to India wasn’t a big enough clue as to its marketplace value, the people at Wilson Sonsini and Orrick are making it crystal clear.

Inevitably, the term “commoditization” is going to enter this conversation, and Jay Parkhill makes the connection from Free to Richard Susskind. In The End of Lawyers?, Richard is careful to mark five stops on the route from bespoke to commoditized work, including standardized, systematized and packaged work. For legal tasks, he wrote, a commodity is “an IT-based offering that is undifferentiated in the marketplace (undifferentiated in the minds of the recipients and not the providers of the service). For any given commodity, there may be very similar competitor products, or the product is so commonplace that it is distributed at low or no cost.” We seem to have reached the point where legal document work is becoming entrenched in the packaged and commoditized areas.

What this all comes down to is this: if your main source of value is your ability to craft a legal document — if you rely heavily on products with a very low marginal cost — you could be in serious trouble. And it may only have begun: recall the NYT review of Free that noted: it can be extremely hard to survive in a business with high fixed costs, low marginal costs and relatively easy entry.

Law firms have traditionally had high fixed costs — expensive lawyers and prime real estate, principally. Many practice areas have low marginal costs — once you’ve drawn up a prospectus for one client, you’re 70% of the way to drawing one up for the next one. What’s missing from the equation is the relatively easy entry: lawyers still decide who can offer legal services, and we prosecute for the unauthorized practice of law those whom we decide can’t. If that barrier ever falls, look out.

2009 InnovAction Award winners

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Posted in: Innovation

After serving two stints on the judging panel for the College of Law Practice Management’s InnovAction Awards, I spent this past year as Chair of the Awards. One of the great parts of that job is that I get to contact the winners, which I had the pleasure of doing last week. Now that the College has announced the winners publicly, I can do the same. Here’s the announcement post from the College’s blog — my sincere thanks to the judging panel (Merrilyn Astin Tarlton (Chair), Maggie Callicrate, Thomas S. Clay, Greg Siskind, and Tony Williams) and to everyone who submitted a nomination for this year’s Awards!

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Israeli legal organization New Family is the 2009 recipient of the coveted InnovAction Awards from the College of Law Practice Management, while New York-based legal services provider Practical Law Company, Inc. received the first-ever InnovAction Honorable Mention Award.

For the fifth year, the InnovAction Awards have recognized outstanding innovation in the delivery of legal services, demonstrating to the legal community what can happen when passionate professionals, with big ideas and strong convictions, resolve to create effective change.

Meet our 2009 InnovAction winner!

New Family Organization
Family, Justice and Law initiative

Irit Rosenblum broke fresh ground defending a universal right to family as intrinsic to the practice of law. Rosenblum pioneered a new sphere of legal rights surrounding the family based on the conviction that the rights to marry, divorce, have children, bequeath and inherit assets, and conduct family life are human rights and must be attainable to all regardless of faith, nationality, sexual orientation or status. She founded New Family to fill a critical gap in the practice of law in Israel: to attain the right of every individual to establish a family and to exercise equal rights within it. For the two million people in Israel who are subject to discrimination due to family status, New Family’s achievements have been invaluable.

In addition, for the first time, the InnovAction Awards offered Honorable Mentions to entries that have taken an existing innovation in the practice of law, transformed it in a unique and valuable way, and made it better than before.

Here is our very first InnovAction Honorable Mention:

Practical Law Company, Inc.
Creating efficiency for business lawyers

Practical Law Company (PLC) is changing the way business lawyers work. It employ attorneys with significant experience practicing with the world’s leading law firms and legal departments (e.g. Davis Polk, Skadden, Pfizer, Sullivan & Cromwell) to provide practical, up-to-date resources that help business lawyers practice more efficiently and provide greater value to clients. PLC provides the practical, generic level of information needed by all business lawyers that allows them to get up to speed quickly, stop reinventing the wheel and focus on client and firm specific work. It launched its first US services in December 2008 to wide market acceptance. PLC began in the UK in 1990.

The 2009 InnovAction Awards will be presented on Saturday, September 26, 2009 at a special session during the 2009 Futures Conference held in conjunction with the Annual Meeting of the College of Law Practice Management in Denver, CO.