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Law Departments Shouldn’t Overhire to Fire

Posted in Leadership, Strategy

OverhireWhat might be cause for cheers today is really another warning shot across the bow. The growth in law department hiring will be followed by a dark period as law departments shrink. General counsel can avoid some troubled times ahead if they don’t overhire and modernize their practices now.

Most lawyers believe they are mostly immune to developments in the automation of legal tasks and artificial intelligence. They think what they do requires human abilities computers can’t match. On the analytical side, these abilities include legal argumentation and abstract thinking. On the personal side, they include empathy and collaboration. Despite what some futurists tell us, lawyers hold steadfast to the belief that no black box will replace them.

Lawyers aren’t alone as they defend this ground. A recent McKinsey report says that certain types of jobs, including those done by lawyers, are among the least likely to be replaced by computers anytime soon. Apparently many general counsel believe “anytime soon” is far enough in the future that they should build headcount today rather than improve the efficiency and expand the use of computers in their departments.

Don’t Confuse AI Hype With the Value Computers Can Add

We should ask two questions when considering whether a computer can do a lawyer’s job. First, have we reached the point where we can program a computer to do the tasks lawyers do? Despite the abundant hype and stream of articles saying AI is about to do it all, the answer clearly is and will remain for a long time (decades) no. More on this in a bit.

Second, even if a computer can do a task, do we want it to do the task? The answer here is a bit more complicated. If the task is routine, boring, and not very complicated, some lawyers are willing to cede the ground. Not many lawyers cried when computers took over large volume document review. But humans do not seem excited about computers replacing lawyers for tasks like serving as a judge, even when the computer will be more consistent. In some roles, people want people.

So the world is split, with most lawyers falling on the side of tradition: it takes a person to practice law. Reinforcing that view, general counsel seem to be placing large bets on people over computers. The Association of Corporate Counsel’s Chief Legal Officer’s 2016 Survey shows strength in law department hiring:

Few CLOs made any cuts to their in-house lawyer staff last year. In fact, 37 percent added in-house staff and 14 percent made significant increases (greater than 10 percent) among in-house lawyer positions last year. CLOs in Europe, the Middle East, and Africa (EMEA), and the Latin American/Caribbean region outpaced other regions in adding in-house lawyers last year. Following compliance, law departments were focused on creating positions in the practice areas of contracts, general legal advice, and regulatory/ government affairs.

After years of slow growth in law departments, general counsel got the go-ahead a few years ago to bring in bodies and since then the trend has been up, up, and away. Good news for lawyers and law schools!

Things aren’t all rosy for in-house lawyers, however. It seems general counsel can hire but the hiring quid comes with a budget decrease quo. The money to pay for those hires must come from somewhere and that somewhere is the pockets of Big Law. When in-house hiring picked up outside spending dropped. According to the ACC’s Survey, general counsel are hiring to bring work in-house and decrease outside spending.

Budget cuts can be a predictor for staffing trends. Forty-one percent of CLOs who expect their outside budget to decrease by more than 10 percent also anticipate the work outsourced to decrease. Eighteen percent who anticipate a reduction in outside sourcing to law firms or legal service providers intend to increase the number of in-house lawyers in their department.

The good news for lawyers really turns out to be good news for those lawyers who can get in-house jobs. The profession is transferring work from outside to inside.

Computers Will Displace Many Lawyer Tasks

Let’s go back to what computers can do and compare that to what general counsel their new lawyers to do. According to the survey, general counsel want these lawyers to handle compliance and “contracts, general legal advice, and regulatory/ government affairs.”

Contracts is an obvious choice. Corporations swim in contracts and the pool gets deeper each year. We don’t know what impact the current nationalist trend in many countries will have on global business. But aside from that trend, as countries have increased their regulatory and compliance activities, companies have had to do more contracting.

Recognizing the contract trend, lawtech has made contract automation software one of the hottest development areas. . It seems like every other startup has a tool to help with contract drafting and management. Those tools have focused on automation, but there are some tendrils out there touching the edges of AI. Combine what computers already offer with some process efficiency, and you can significantly reduce the time it takes a lawyer to do a contract.

Before we see much in real AI, blockchains and smart contracts will come into play. Fintech is growing and banks know the disruptors have them squarely in their sites. Blockchain may not be everything, but it also may be a way to dis-intermediate or de-centralize some lucrative portions of banking, and smart contracts will play a role. With finch pushing blockchains, lawtech is catching up. Expect to see contracts migrating to code.

Outside the banking industry, we have the Internet of Things. More than a trillion devices will inter-connect by 2020. You will ask your watch to tell your phone to start your car, which will drive you to work and start the coffee maker just as you get there. Welcome to George Jetson’s life.

As all these things talk to each other, they will need some rules—some way of negotiating who pays for what and what to do if things don’t go as planned. More smart contracts.

As the number of smart contracts grows, it doesn’t take much imagination to see the technology  of smart contracting migrating into commercial contracting. Lawyers like to massage documents. But, it is hard to argue convincingly that we need thousands of boilerplate language versions and thousands of tweaked basic agreements.

How many ways and times do we need to say “if there is a fight, we will duke it out in New York” or “your payment is due on the last business day of each month”? Overall, general counsel could offset much of the growth in contract work by embracing existing ways to improve efficiency and augmenting what lawyers do with some computers.

What about the other areas where general counsel are placing these new hires? General legal advice. This is a mushy area that often means: we get so many questions each day we need lawyers on the phones and in meetings to answer those questions. Talk to many in-house lawyers and you find that those requests for advice can be sorted into two broad categories: the questions they get over and over again and the truly unique questions. The first category sounds suspiciously like what expert systems can handle. The second sounds like the field where lawyers think computers will have a tough time playing.

Finally, general counsel need more lawyers on regulatory/government affairs. This category keeps general counsel up at night. More countries, passing more laws, and more corporations doing more business in those countries. Weaving business through those laws isn’t easy and the complexity constantly grows. Having more lawyers helps. Having more lawyers operating inefficiently just increases the coming labor crash.

Lawyers Repeat Sins of the Past

Overall, this leads us to a bit of a mess. It reminds me of what happened decades ago in the IT and human resources departments (both service areas within companies). The growing complexity of their fields and the greater demands placed on the departments led to increased hiring in those departments. IT and HR departments grew to handle new responsibilities. And then judgment day came.

CEOs started asking fundamental questions. Were their corporations in the business of running IT and HR departments, or were those ancillary to the core activities of the corporation? If ancillary, and if there were others who handled IT and HR as their core businesses, wasn’t it better to shed what wasn’t core and let others do it? And what about cost? Could a corporation decrease cost by having outside experts, who did the same thing for 50, 100, or 1,000 corporations, handle the tasks instead of trying to do everything within each corporation?

Today, at large corporations, IT and HR focus on the value-add activities they can do in-house and let outside providers do everything else. Why build non-core operations in each corporation when outside providers already have created what is needed? By outsourcing, a department head can reduce headcount, get the expertise of someone who does the task each day 100 times, and focus the people in her organization on what makes it unique.

Build Abilities Instead of Headcount

Let’s do a mashup. Computer automations is creeping into law practices. The startup disruptors will continue their push, computers will become more powerful, and what today is mostly automation and a little AI will become a movement to do more and more within law. A computer won’t take over 100% of a lawyer’s job, but if it takes over 50%, then you need only one lawyer, not two. Do the math, and the law department should shrink by 50%.

We have seen the beginnings of outsourcing in the legal industry. Managed service providers grew out of legal process outsource providers. They  have strong incentives to use technology more effectively. If they can show better quality, lower cost, and faster response times, these providers have an edge over humans. We are early in the disruption cycle, but the signs are clear that these and other businesses entering the legal industry can take more work away (a lot more work away) from lawyers.

The mashup comes when these businesses bump up against law departments, and the CEO does some management by wandering the halls. Even the CEO who is the most ardent law department supporter will eventually ask: “why do we have so many lawyers and not enough X”? That X can be engineers, designers, or any other job classification directly tied to the revenue stream. Directors and shareholders don’t ask CEOs to build large internal service organizations, they ask them to cut costs, grow revenues, and increase profits.

When the CEO makes that walk, the general counsel who grew headcount will have some difficult questions to answer. We already have the methodologies and technology to offload a tremendous amount of what lawyers do onto computers. This isn’t wishful thinking, this is simple blocking and tackling. We have software that has been around for decades that we know works. We have businesses and consultants who know how to use the software and have lots of experience with it in the legal industry.

We also have lots of experience studying processes, simplifying them, and rebuilding them to be less costly, higher in quality, and faster than labor-intensive systems. We have corporations and consultants experienced with these methodologies.

Put it all together, and you have proven ways to reduce the burden on law departments without building a headcount overhang that will come back to haunt everyone. We don’t need to repeat what IT and HR did to learn the same lessons they learned. History teaches us how to do better, but we must listen to the lesson.

Hiring serves an immediate need, but it isn’t strategic planning or running a department for the long term. Lawyers learn managing by headcount in law firms, but it also reflects much of modern corporate thinking. Hire today because headcount can be reduced tomorrow. The long-term bond between employee and corporation does not exist any more.

The strategic alternative to piling labor on labor is building a law department that can flex with the business and the times. To do so, general counsel should get to the roots of how their departments operate, start with a proven technology backbone, and then add lawyer services. In other words, general counsel should build a sustainable practice not just a large labor pool.

They should build the 21st century law department from the ground up, not from the law department out. We have moved past the law department being an in-house version of a law firm, and have moved past the general counsel managing like a former law firm partner.

The new generation of law department and general counsel are professionals running complex internal service organizations. The trend towards hiring “chief of staff” to help manage those organizations is another step in the right direction. Law departments deserve individuals with the analytic and management skills prevalent in other departments. All of these skills go to waste, however, if law departments don’t move past replicating past mistakes.

Ten to fifteen years from now, if the current law department hiring binge doesn’t stop, we will see law departments go through some traumatic changes. Building efficiency and integrating computers will help law departments avoid the trauma. There are many reasons for law departments to embrace a new business model today. Avoiding the long term consequences of this hiring binge is another one.

Blast the Meteor

Posted in Change, Leadership

MeteorYou must have seen the movies. Even if you haven’t, you know the plot. Computers (typically, but not always, in human form which makes them more threatening and/or more likable) have intelligence surpassing that of humans. Things go bad, but at least one human is on top of it. In the end, humans win and computers lose.

This story now plays out in the minds of lawyers, but without the happy ending as they read article after article telling them computers (artificial intelligence or robots, the language varies) are one transistor away from taking over their jobs. Startups are signing deals with law firms and from what we read, the day of the pleasant voiced iEsquire robot taking over an associate’s job is virtually here.

Before you start cruising the Internet for your next career (sustainable farmer looks good, you always did like vegetables), pack up your office and head for the elevator, I suggest you read a bit further.

A Stimulating Un-conference

I had the privilege of spending much of last week at the SubTech 2016 conference hosted by the University of Richmond School of Law. SubTech (which stands for substantial technology) has been held every other year since 1990 (Richard Susskind was one of the early attendees). The conference had about 40 participants and, unlike most conferences I attend, had a somewhat academic bent. In fact, the focus of the conference is substantive technology in education, not just in law schools but also in law firms and legal services for consumers.

The conference planners expanded the group attending this year to include a few more from outside traditional academia. We had individuals from publishing, tech startups, consulting, hybrids (that would be me), and a few other fields. And, of course, a heavy sample of those from traditional academic environments (law professors and law librarians).

The conference is, and has been for a long time, an “un-conference.” We are all used to going to conferences where an individual spends 30 or 60 minutes talking about topic A or a panel spends an hour discussing topic B. The audience spends half the time listening and the other time reading email, tweeting, or catching up on the latest story to come through on their newsfeed (cute cat videos are saved for the break). We learn some things at these conferences, make a few hasty connections as we grab another cup of coffee, and hopefully have some interesting conversations at the receptions.

An un-conference focuses on sharing information. We start with very informal presentations on a topic by one or few individuals. Knowledge of the topic is assumed, and the presenters focus on updates, tweaks, nuances, or interesting personal experiences. Most of the time is saved for discussion in small groups where we talk about areas of shared interest. In those groups we focus on, among other things, developing ideas that we can take outside the conference and continue developing.

WIIIFM

We started the session by going around the room and introducing ourselves, and then touching on two questions: 1) what is the promise of substantive technology, and 2) what is the peril? I’ll address those questions in a bit, but before I do let me give you some examples of typical conversations from the law conferences I attend:

Idea Person: If you look into this idea, I think you will find that it helps with your practice.

Lawyer: Sounds great, what’s in it for me?

IP: Well, as I said, it will help with your practice by [fill in the blank: reducing workload, making you efficient, automating repetitive tasks, etc.]

L: Sounds great, but what I really want to know is what’s in it for me?

IP: What more can I tell you?

L: Will it make clients give me more work? Will it really increase my billable hours? Will it allow me to charge more per hour? You know, what’s in it for me?

IP: Well, it will make your clients more satisfied and less concerned about your bills, which could mean they will send their work to you instead of someone else.

L: Yeah, I suppose, but what’s in … sorry, I have to take this call because I can bill for it. If it ends before the break is over I’ll grab you because I really am interested in hearing what’s in it for me …

Okay, that was a bit tongue-in-cheek, but it also was disappointingly accurate. I have had consultants and trainers who do not regularly work with lawyers express their shock after meeting with lawyers. They say the same thing—as a group lawyers lack the curiosity and drive to do better they see in others. Lawyers replace those characteristics with a “what’s in it for me” attitude.

The Promise and the Peril

Back to SubTech 2016. On the promise question, the group was optimistic to a person. This was impressive because some of the people in the room have been tilting at windmills for 40 years (on the other hand, as some said, you can’t tilt at windmills for 40 years unless you are optimistic). Everyone believed that technology is making more in-roads in legal education and law practices, and everyone expected continued progress.

That brings us to the peril. On this question, our answers varied. At the risk of over-generalizing, I’ll highlight some categories:

  1. Hype. Each day we see a new article promising that AI will take over law tomorrow, robots will replace lawyers, and we are one-step away from a dystopian universe where computers rule the legal industry (and the world). Hype outdistances reality and not by a small amount. Don’t fret, computers will not take over the legal industry. If you don’t believe us, check out this McKinsey Report which just came out. It concludes that professional occupations, including lawyers, are one of the groups least likely to be replaced by AI or robots anytime soon. (Teachers rank least likely, which means as a lawyer teaching, I’ve got it made!)
  2. Chokepoints. In academia, the curriculum committee and the academic dean hold considerable power over what courses are available for law students. If you have one or both on your side, you can get courses approved and if not your course will not see the light of day. We have some very forward-thinking individuals in these roles, but the majority aren’t with us yet.
  3. Fear. The more successful we become with technology, the more fearful many become. This is a bit different than the first point. Even modest advancements in technology raise the threat that knowledge workers will be displaced to some degree by computers. As much as lawyers may hate some manual tasks, they still prefer them to unemployment.
  4. Meteors/Dinosaurs/Segways. This one requires a big hat tip to John Mayer. He arrived wearing a T-shirt showing a dinosaur riding a Segway while a meteor screams toward the dinosaur. It was a nice metaphor for lawyers (the dinosaur) using outmoded tech (the Segway) just as we are about to be blindsided by the future (the meteor).
Working Together

After 2 1/2 days and 3 nights of listening, sharing, and learning, it is hard to summarize the event in a few words. The biggest outcome was building greater bonds (and we have things in the works to build more) between academia and the greater legal community. Unlike other disciplines within universities, law has remained a field of silos. Very few law professors know what practitioners do, much less work with them. Startups tend to work apart from universities and practitioners. Practitioners do their best to ignore startups and academia. This all must stop.

Some work done in universities should be theoretical, just as it is in physics, chemistry, and so on. But, we need more work that ties into what happens in the real world. We saw signs that is happening, but there is much more that we can do. Startups are, in a few cases, blazing new ground (though all agreed that much of what we see in startups is work aimed at making better mousetraps). Still, it is disappointing when a startup publishes work tackling a problem that scholars attacked (and sometimes solved) years ago. Startups can leverage work academics did that was before its time, and academics can blaze ground that startups can use.

Of course, I saved practitioners for last. WIIIFM defines practitioners’ lives. What is in it for me, they constantly ask? This focus on the next billable hour and next rate increase seems to drown out paying attention to almost anything else.

The Lawyer as Frog

I enjoyed the SubTech 2016 conference, more than other conferences I attend. In part, that was because it was intellectually stimulating and other conferences are heavily focused on money not the mind. It was stimulating, partly because of the diversity of interests attendees brought to the conference.

As we talked, complacency emerged as another conference theme. Clearly, those in attendance have been and still are fighting complacency. There is an old metaphor about frogs and hot water. The metaphor (which, for those who don’t know, is absolutely wrong) says that if you put a frog in a pot of boiling water, the frog will jump out. But, if you put a frog in a pot of room temperature water and slowly increase the heat, the frog will stay put until it dies.

The frog metaphor may be wrong, but the lawyer and technology metaphor will prove to be true if we don’t change things. Most lawyers seem content to sit around while technology heats up around them. Law students aren’t just uneducated when it comes to technology, many won’t dive in when given the chance. Law firms are willing to continue doing tasks by hand which computers could handle many years ago, as long as clients are willing to pay for efficiency. Corporate clients seem willing to pay for inefficiency. Individual clients simply go without legal services (and not always by choice).

Despite the attendees’ optimism, lurking in the background and a few times stated out loud was the thought that if we don’t move away from complacency, we will end up in obsolescence. By simply staying still, lawyers will allow (already are allowing?) the world to move past them. One morning we will wake up and the world will have moved on. There will be few things left for lawyers to do because others will have absorbed them and develop new ways to do them.

Get Out Your Blasters

Lawyers are intelligent and have the ability to adapt. Like all organisms that have the ability to adapt, they will adapt given the right conditions and enough time. For lawyers, the key condition is motivation—what will it take to drive us to change. As to time, the question is whether we will have waited too long to change.

So far, at the corporate end of the legal services scale, we have placed our bet on clients forcing change. That isn’t working, because clients just are not that interested in change. At the client-as-individual end, we have placed our bet on shame forcing change. Lawyers will see themselves as professionals letting down society and will force themselves to do more, through pro bono or other charitable acts. That also isn’t working.

Because lawyers are focused on WIIIFM, perhaps the simpler tack is to focus on self-preservation. Within humans, the urge to survive is very strong. Lawyers will not disappear overnight (the meteor striking the dinosaur on the Segway). In fact, lawyers may never disappear (we will morph, like the few dinosaurs that survived). Lawyers can defeat the meteor by adapting and embracing new things—technology and new business models, at least. New lawyers in particular have strong incentives to see themselves and the profession adapt.

Law students should seek out opportunities to learn about the changes, through classes, workshops, and attending conferences focused on new ways to practice law. Newly licensed lawyers should do the same, and should force themselves to incorporate these new ideas into their practices (even lawyers in large firms can do that). Students and lawyers can become active in those parts of associations that focus on change and the new, instead of reinforcing the old. They can seek out mentors who are at the forefront of change and become part of the push for change.

Like any social movement, changing the legal profession will be a grass roots thing not a top down thing. If lawyers start pushing harder now, we have the time and tools to adapt. Instead of watching for the meteor, let’s figure out how to blast the thing out of the sky.

First Year Lawyer Salary Increases Are Good for All—Clients Too

Posted in Change, Leadership

SalaryIncreaseWhen starting salaries at many of the “elite” law firms jumped to $180,000 several weeks ago, Twitter lit up, the blogs started pumping out posts, and in-house counsel were deluged with requests to comment (criticize) what had happened. Now that things have slowed a bit, I thought I would chime in with what some may find a surprising viewpoint: the increase was a good thing for all of us. Now, in this essay I talk about “elite” law firms, by which I mean the 20 or so firms that have put themselves at the head of the profit pack in the AmLaw 100 list. Many use the term “elite” to describe them, which is why I’m using it. Don’t read anything else into it.

Start with the Bad

Before we get to the good, let’s dispense with the bad. First, there is no free lunch. Associates going to firms willing to pay $180,000 a year (and I’m ignoring bonuses), should go in with their eyes open. Firms expect those associates to work for that money. Each time the starting salary ratchets up, the expectations for associates ratchet up.

Firms probably will not say anything as crass as “we are paying you more, so work harder” (some partners might get there, but not the firms). But, the pressure will be on. Associates already at the firms probably thought there wasn’t much room for working harder, but the pressure will still be there, even if implicit. Hint to associates: if you got a job at an elite firm, you can get a job elsewhere.

Second, to state the point causing everyone to fuss, the money to pay the increased salaries must come from somewhere. Since a firm’s revenue stream comes from clients, the presumption is that clients will pay for the increases. That is an excellent presumption (where else would the money come from?). It isn’t clear whether the firms will cover the raises by increased rates, billing more hours, reducing future payouts to partners, or some combination. The expectation is that partners will bear little of the burden and the brunt will fall on clients through increases. Bad for clients (who, of course, can use other firms, but I digress).

Third, there is the “this is bad for the profession” argument. Clients and the public already show low confidence in lawyers (about 21% of the public trusts lawyers, down from around 34% over a decade ago). In part, the public perceives lawyers as driven by money. Increasing the starting salary adds to that perception. For lawyers at the elite firms, this might be called truth in advertising.

Fourth, we hear about the trickle-down effect. The elite firms will match the salary price leader. The next tier may will not match elite firms, but will move up incrementally, and so on down the ladder. Again, since revenue comes from clients, the overall effect is to increase costs to clients at a time when they already think costs are too high. Most commentators stop here. Higher salaries are bad. But with a little creativity, we can look at this another way and find good in it for all of us.

Ask Why

Having surveyed key reasons for not increasing salaries, the commentators then ask “why did the firms do it”? The working presumption is that elite firms are ignorant (or impervious) to the concerns of clients. Starting salaries have been stable for many years. So, elite firms did this without thinking it through and to serve some mysterious, narrow purpose.

The explanation offered most often is “the market made them do it”. The pool of applicants to law schools has shrunk dramatically since the 2008 recession. In fact, it has reached levels last seen in the 1970s. In addition to the pool shrinking, the perceived quality of the applicants has dropped (measured across the pool). For example, median LSAT scores have dropped. Since LSAT scores seem to track with bar passage rates, the score drop raises concerns. And we have seen first time bar passage rates drop.

The change in the applicant pool has flowed through to graduating students and newly licensed lawyers. When applications were high and demand for law school slots was strong, elite law firms felt comfortable hiring deep from within graduating classes. As the pool has shrunk, elite law firms are not comfortable going deep into classes.

Of course, elite law firms are hiring fewer lawyers, so not going deep has been offset to some degree by hiring fewer associates. But, there are other market pressures. Elite law firms, once an attractive place to work (or at least not as unattractive), have lost much of their luster. Students struggle to understand, apart from the money, why they should spend time working in environments known for all sorts of horrible things. They are looking for alternatives and there are many.

To get what they think are the best of the best, elite firms had little to offer beyond money. The partnership track moved from a highway (single lane), to a gravel road, to a path hidden in the forest. Odds of getting on that path are slim and not going to change. When your business model is based on hard labor, it is difficult to talk about a balanced work-life experience. As organizations outside the legal industry look for candidates with characteristics beyond the ability to grind away for long hours each day, even the resume-burnishing aspect of working at an elite law firm is tarnished.

Money addresses the problem. Some portion of the best of the best will use money as the deciding factor when choosing an employer. Going to a startup may look very attractive, but it has a high risk profile. The pay isn’t great (lawyers are not data scientists) and most startups fail. Startups have many other desirable elements, but if you have loans to pay the security of a large salary can make the difference. Money is one way elite law firms can nullify what competing environments may offer.

Then Ask How It Helps Us

We have heard the arguments about why the increase is bad, so now let’s look at the alternative arguments. This increase could really help us.

First, while the impact may be small, some of the new lawyers who go to elite firms will use the salary increase to pay off their student loans faster. In a world where the typical debt held by a student graduating from a private law school is around $120,000, and where those students probably also have debt from their undergraduate days, more money to pay off loans helps. The faster students pay off loans, the better for all of us—less risk of default, the sooner those lawyers can go on to other careers, and the sooner they can participate in other aspects of the economy (buy cars, homes, etc.).

Second, the salary increase may push clients closer to the tipping point. Think about the scene in the old spaghetti westerns. The outlaw starts pushing the good guy in the chest. The good guy stumbles backwards and warns the outlaw not to do it again. This happens three or four times until the good guy snaps—he punches the outlaw who hits the ground. The crowd murmurs appreciatively.

Elite law firms feel comfortable. Clients need them for large, risky things. Cross-border mergers and acquisitions, bet-the-company litigation, complicated financing packages, and other sophisticated legal transactions demand the skills of elite firm lawyers, the elite firms argue. Clients who purchase their services tend to be price-insensitive (yes, we saved money on the lawyers, but of course we lost the lawsuit and the company). Elite law firms probably feel the risk from the increase is outweighed by the benefits.

But we could view this as the outlaw (elite law firms) pushing the good guy (clients). Each push to the chest increases the likelihood clients will reach the tipping point. A few more clients may get there and, instead of taking a swing at the elite law firms, vote with their wallets. “Are these elite law firms really worth the higher price,” they ask? If not, they move to less expensive service providers. Law firms that offer more attractive value propositions should cheer as should the clients who get pushed too far.

This last point is key. Clients pay elite law firms. As long as clients are willing to pay, elite law firms will keep pushing. If clients don’t like getting pushed, they can simply walk away. If they don’t walk away, we learn something. Economists and antitrust lawyers know this situation well. The question involves the market and clients not leaving tells us that they do not believe there is an adequate substitute for elite law firms.

Take the Lesson and Run

Imagine you sell ice cream. Your store has competitors. One is two miles away, another three miles away, and a third eight miles away. Like everyone else, your costs go up each year. You decide to raise your prices to cover those costs (and maybe make a bit more profit). You decide to test the market.

You increase your prices by 2%. You lose a few customers to the store two miles away, but the price increase more then compensates you for the lost customers. So you raise your prices another 2%. Again, you lose a few customers to the store two miles away and you also lose some to the store three miles away, but the price increase more than covers the lost revenue.

Finally, you increase your price another 2%, so that your prices are now 6% above where you started. Suddenly, business at your store drops precipitously. Your former customers stream to the store two miles away, many go to the one three miles away, and some even travel to the one eight miles away. At a 6% price increase, you found that your customers view these other ice cream stores as substitutes for your store. If you want to stay in business, you better drop your prices or find another way to entice customers back.

So far, we have not seen clients streaming to the stores three and eight miles away. Certainly some have left for the store two miles away. The salary increase will probably drive away a few more clients. But the real question is whether they will stream to the lower cost legal service providers. My guess is that they won’t.

Why? I think elite law firms are right. At the high end of the market, they have not reached the point where most clients will see substitutes for their services even with a price increase. The danger comes to law firms below the elite level.

For those firms not in the elite crowd, raising prices (salaries and rates) comes with greater risk. The deeper you dive below elite firms, the more likely clients will find substitutes for what the firms offer. Those substitutes include small firms with lower overhead (and lower prices), alternative service models (e.g., fixed fee firms) and alternative service providers (e.g., software as an alternative for labor). The firms below the elite level will have to be careful that they don’t exceed the market price threshold encouraging their clients to switch.

Be True to Thyself

Richard Burcher, one of the leaders in the field of legal service pricing, argues that legal service pricing will get a lot more complicated in coming years. I agree. As the supply chain gets more complicated, the pricing possibilities will multiply. Law firms will need to assess where they fit in the supply chain, what value they provide, and what the market will pay for that value. The idea that there are no substitutes will slowly dissipate.

For those firms who can play the elite law firm game, I say go for it. Your clients are doing the same thing in their businesses. For those firms that can’t play the game, be careful about pricing above your weight class. The stratification of the legal industry, with a growing gap between the elite and the rest, means you must get comfortable competing at a different level. Those non-elite levels necessitate doing things elite firms can skip.

This is where many firms trip. Some percentage of lawyers at each large law firm believes they are among the elite, maybe not as a firm but within their practice area. The firm then wants to present many faces to its clients: elite when competing for high-end business, efficient when competing for mid-level business, and so on. Maintaining balance in this world of competing value propositions is very hard and leads to fractures, and the firms spend time fighting within instead of competing externally.

I think the salary increase will move the industry closer to the tipping point. Elite firms will still be there. Some non-elite firms will mistake their place in the market and make bad decisions. They will get weaker. Some (fewer) will take advantage of the increase and differentiate themselves in a good way. They can become stronger mid-market players. For the New Law world, this is a great opportunity to showcase the substitutes for elite firms. For clients, this is another opportunity to move work to places where the price better matches the value (and to the general counsel who complain but don’t move work, look at your own company’s pricing model).

Finally, for those who like to talk about another misstep in the legal industry, the increase gives you something else to write about. See? The increase really is good for all of us.

There’s Gold in Them Servers

Posted in Analytics, Technology

GoldRushOn January 24, 1848, John Wilson Marshall was building a water-powered sawmill for John Sutter. The mill was close to Coloma, California, near the base of the Sierra Nevada mountains. Marshall was a carpenter who had emigrated from New Jersey. Although Marshall wasn’t looking for gold, he later claimed that he knew immediately upon seeing the flakes what he had found.

At the time Marshall found the flakes, Mexico and the United States were still at war over the California territory. The population of the territory was mostly Native Americans (around 150,000) with some 6,500 Californos (people of Mexican or Spanish descent) and about 700 others (mostly from the United States).  A few days after the discovery (and not because of it) the United States and Mexico signed the Treaty of Guadalupe Hidalgo which ended the Mexican-American War and left California to the United States.

Sutter and Marshall tried to keep the discovery confidential, but obviously did not succeed. Within two months a newspaper was reporting on the discovery. By mid-June, three-quarters of the male population of San Francisco had left to goldmine, and by August the number of miners in the Sutter Mill area had reached 4,000.

The next year was written into U.S. History as The Gold Rush of ’49. The non-native population of California grew from 700 before the discovery to 100,000 at the end of 1849. By September 1850, California had become a state. The Rush peaked in 1852 when approximately $81 million (in 1852 dollars) of gold was pulled from the ground. By 1857, the annual production had dropped to around $45 million where it stayed for many years. The Rush was one of the most important events in re-shaping the face of the United States.

The 19th century in the U.S. was known for gold, but the 20th century was marked by hydrocarbons. While some believe the 21st century’s gold, especially later in the century, may be water, the current rush focuses on data.

The Strange Stories of Law

You have heard the statistic: each day more data is generated and stored than the amount of data that existed in all of history prior to the computer age. Large companies that entered the world as retailers, search engines, or social media companies found the real value of their businesses was in data. In Silicon Valley, it almost became irrelevant what your business could do, the focus was on the data set it could build.

And then we come to the legal industry. We can tell two versions of the legal industry story. The first story goes like this:

Recognizing the threat cybersecurity breaches present to their clients, law firms decide to thwart the attackers using an unusual approach. They accepted the futility of keeping hackers out of their systems. Instead of following the norm of keeping information as accessible data, which can be indexed, accessed, and manipulated, law firms keep their information somewhat like teenage boys keep their rooms. As one law firm leader said, “We decided that if our data was a mess and even we, who know it best, have difficulty finding and doing anything with it, hackers would have more trouble and simply give up.”

A team of red hat associates was tasked with hacking the system to find a group of documents to use as templates when drafting for a client. The blue hat defense team’s strategy was simple. “We pretended we were partners and randomly withheld helpful information from the red hat team.” The red hat team gave up after many hours and decided to draft from scratch.

The second story goes like this:

While clients and the world around them screamed about data, lawyers continued their quest to be oblivious. Lawyers in firms, corporations, and other service organizations knew that if they hadn’t enjoyed knowledge management, they would enjoy data management even less. Again adopting the “to do nothing is to do something” approach, lawyers have ignored pleas to treat their documents as data gold.

When asked about this strategy, a lawyer responded “The world around us has been changing for decades and yet here we sit today, almost unchanged. To respond to this ‘data fad’ by doing something would go against our strongly held belief that all tasks should be done by lawyers and not other service providers, even computers. Indeed, we are considering asking bar associations to file actions against all computer companies for the unauthorized practice of law.”

Choose which version you prefer, but the reality is that lawyers in firms, departments, and other legal service provider organizations are in the same boat. Legal data is not created and stored as the precious commodity it is.

The Stories Data Could Tell

The work that lawyers do tells stories of risks and responses. What gave rise to the lawsuits? What did the parties do? What steps were taken in the ligation? How long did they take? What were the responses? We can explore similar questions in any area of law, and it is those questions and responses which are embedded in what law firms store on their servers.

The challenge with most data sets, unlike those in law, is not getting to them. Finding data sets can be easy. The challenge is getting them in shape to use. Data scientists call this step data wrangling or data munging and it eats up 80% of their time.

Think about a data set in your firm that you actually keep as a data set: your customer information. Your firm or law department has a system for keeping track of customer (in the case of law departments, law firm) information. If you check the system, you will find out of date entries, missing information, duplicate entries, and incorrect entries. Imagine how long it would take if you froze the system today and had someone focus on cleaning up the database. Of course, as soon as they finished and you resumed using the database, you would find it out of date.

Now apply those problems to your real data. All of the documents sitting on your servers form your database. You may have a knowledge management system, and still your data is not ready for use. At best, you have a collection of documents with some perfunctory information filled in by field. Your knowledge management system uses a not-too-sophisticated search process to locate documents responsive to your request. When you find them, you can’t do much with them except copy and use them as templates. Definitely not state-of-the-art.

When I talk about data, I mean the ability to access specific information from those files, combine it with other data, and produce information that will help solve client problems. For example, what if you could combine data from all the employment lawsuits you have handled with data from government and court data sets. Could you construct a model that gives specific information about each type of employment lawsuit?

You may think of this as fantasy, but it isn’t. Today, startups have breached the barrier and are applying this type of analytics and more as they find and use data sets. One small but growing area is computational linguistics. Put very simply, CL applies statistical tools to text. Through machine learning, computers can use the CL tools to understand text far beyond “supreme w/5 court.” Tools using CL in law are in the early stages, but they all face the same challenge: getting access to clean data sets.

This is where lawyers enter the picture. By recognizing today that the information built into the data sets is the gold that will help law firms and law departments protect clients, lawyers take the first step. The second, is to start transforming what already is in the sets into data, and the third is to store whatever new items are created as data.

If You Make It The Bad Guys Will Come

At this point, a good question to ask is what about the cybersecurity threat? As they say, there are two types of companies: those that have been hacked and those that don’t think they have been hacked. The experts with whom I have talked agree that law firms are and will continue being hacked. The firms just do not have the sophistication to prevent the hacks. That is not a slam against law firms. It is hard to find any organization, and so far no one has named one, that is immune to hacks.

So if the hacks will happen, why should lawyers turn what they have into data? My first scenario above was written in jest, but lawyers do ask if it isn’t better to have the hackers find the messy teenager’s room than a nice, neat library?

The response to hacking isn’t to abandon the quest for data, just like the response to computers isn’t to become a modern-day luddite. All firms and corporations should take reasonable steps (and today more are going well past reasonable) to protect against hacks. Assume there will be hacks and focus on the data. Just because a hacker can get into a system doesn’t mean the hacker can get access to, un-encrypt, and assemble all the data in a way that will help them. You have a security alarm on your house, but you don’t leave all of your valuables lying on the kitchen counter. Thieves still take gold, but we still mine it. Cybersecurity is a challenge, not a bar, to keeping and accessing data.

Data Is Becoming Essential

Data is going to be more than a way to use and manipulate what you create and store. It will become an essential part of the modern law practice. Let’s look at one last example: blockchains. I won’t go into a detailed description of blockchains, I’ll keep it simple. A blockchain is a database that is distributed, not centralized. Each record in the chain may hold data, a program, or both. The records are hardened against tampering through strong encryption and distribution. Blockchains reduce and sometimes eliminate the need for intermediaries.

The terms of a smart contract are built into the code embedded in the blockchain. If condition X happens, then Y occurs. No ambiguity, no equity (at least that is the theory). Once the contract is formed and built into the blockchain, no on can alter the blockchain (more precisely, an altered blockchain becomes an instantly visible anomaly rejected by blockchain holders).

Lawyers who do not understand blockchain, code, computers, or how the system should work will be at a severe disadvantage. Yet big banks and other large players are actively looking into using blockchain or similar technologies as part of their systems. Since the contract is in the code, we can treat the contract as data and start combining and manipulating it.

Mine the Data Now

Lawyers have believed for centuries that they need to study the law, but they can pick up everything else quickly so that they can apply the law to it. Litigators are famous for believing they can litigate an employment case in the pharmaceutical industry this week and an antitrust case in the retail industry next week. Large firms have moved beyond this by making everyone specialize (and sub-specialize), but the feeling still exists. So, lawyers wait and watch. When they think something has become so well established that the world can’t possible go back, lawyers make their move.

While lawyers may believe they can wait until everyone is deep into data and then put their toes in the water, it doesn’t work that way. I mentioned at the outset competitors in the retail, search engine, and social media industries. They have built data sets so large and deep that it is unlikely anyone can catch them. In fact, recognizing that the prize is data and not tools, Silicon Valley has embraced a new trend. These companies are posting on the Internet for anyone to use many of the most sophisticated tools they have developed.

Why would they open source the tools? Because these companies know that the tools are useful and by open sourcing them they may get interesting insights from others who use them. Making the tools available allows the scientists who developed them to showcase their work, an important part of attracting and keeping talent. But these companies also know that without their incredible data sets, others will not be able to use the tools to replicate what these companies do. The tools help, but the data sets are essential.

Law firms and law departments have yet to realize that tools are becoming widely available. The firms and departments will need help, from academia, consultants, and others, to understand and employ the tools. But, the tools will not be the chokepoint. The real value is in the data. Each firm and each department has value in its proprietary data. To realize that value, they must start treating it as gold and not as dirt. Welcome to the 21st century.

The Low Cost of Lean (Part 4)

Posted in Efficiency

LeanCostThe first week, we started down the path of evaluating the cost of process improvement for a law department. The second week, we finished that analysis and started to look at process improvement from the law firm’s perspective. The third week, we continued our look at the value of process improvement from the law firm’s perspective. In this final part of the series, we will look at it when we bring technology into the picture and close out the post.

The Technology ROI Analysis

Mention replacing labor with computers in most law firms and law departments, and you get certain responses. First, you can see the dollar signs floating in the air. Law departments have restricted budgets and are cost centers. The idea of adding more cost to a cost center generally does not excite general counsel. Law firms, now in a competitive environment, do not relish taking money from the partners to pay for computer systems that many partners will refuse to use.

Second, you can see the discomfort on the faces of the lawyers. Lawyers are, as a general rule, not tech savvy. The thought of loading up on more technology creates more stress for a group who do not like being involved with anything they do not understand.

The fundamental question most lawyers ask is the same one their business counterparts ask—will the cost, time commitment, and other resource commitment of using the technology be justified by the return they get from using it. We are back to the ROI question.

From Complex to Simple

I will divide technology into two categories. The first is complex technology. Complex is not synonymous with expensive. In our case it means implementing the technology falls at the end of the continuum where the time, commitment, and resources are high for the environment (what is complex for a one-person department may be simple for a 100-person team). An enterprise level contract management system could be complex for a large law department and a matter management system could be complex for a small law firm. The second category is simple technology. This technology falls at the low end of the continuum. It typically includes single purpose software that is user-friendly to implement. Many contract automation tools fit into this category.

Calculating the ROI on technology often is complicated, but not impossible. The approach is straightforward. First, determine the current process for doing the work. A process mapping exercise will help. Then, create the new process if the technology is implemented. Compare the cost of the old process to the new process (plus the implementation cost) using the ROI calculation. If the new process including the implementation cost yields a positive ROI, then you should consider the technology. If not, skip the technology.

The more the technology affects processes within and outside your domain, for example in areas outside the law department or in areas controlled by clients, the more difficulty you will have mapping the process and tracking costs and benefits. Rather than coming up with “an answer,” think about coming up with a range of answers and probabilities (we call this the Bayesian approach). Also, recognize that the costs and benefits are unique to your environment. A vendor can help with a template and some ideas about where to look for those costs and benefits, but a generalized ROI will not reflect your unique situation.

Beyond looking at the ROI, there are some other factors you should consider. Assume you installed some software (e.g., contract management software) before doing anything to improve the five hour process your attorney uses. You integrate what the attorney does with the software package. You have now done what we call institutionalizing waste. The wasteful process is built into your systems in ways that are deeper and more difficult and expensive than before.

To change the process, you need to re-work the workflow outside the computer system, probably re-work the workflow within the system, and re-train everyone on the new workflows. All of that costs money. And, you get to spend money to change the computer system and re-train each time you do a process improvement event. You have increased your costs and institutionalized waste, a toxic combination.

Institutionalizing waste is quite common. In fact, except in companies that have a strong process improvement culture, it is the norm. I have seen instances where companies introduce computer systems, do not get the improvement they want or eventually see improvements stall, bring in process improvement experts, and end up ripping out the computer system.

Does this mean you should forego the benefits of computers? Of course not. First, analyze, standardize, and remove waste from processes as much as you can before moving to software. Second, when you do move to software, be skeptical of the “one package does it all” solutions. These packages typically do many things okay, but seldom do many things well. In some situations, your process study may show that outcome is fine. If the many things the software does okay are all peripheral to your service and your requirements are simple, the software may be a good choice. If many of the things you want the software to do are important to your service offering, you may want to look elsewhere.

As an alternative to one-package software, consider single solution packages. For example, there are packages that only do document automation, logic trees, or customer relationship management. If you want to excel in these service areas, then a single solution package may be better for you.

Single solution packages take the place of certain steps in your processes, they do not replace processes. Today, someone may open a template and fill in each blank by copying and pasting from another document are typing the entry. The document automation software fills in the blanks by doing these steps for you. They save labor and avoid typos. Whether it makes sense to use the software is something you will learn from your process improvement event and ROI calculations. But, it is much easier to change a process with single solution packages than with a package that tries to do everything in the contract process.

Think of a process as a string of beads. Each bead is an operation in the process. As you use process improvement events to improve those operations, you will come to points where replacing a human bead with a computer bead makes sense. We do not handwrite documents, because typing them on a computer makes sense. No matter how much process improvement we do, creating the document on a computer will go faster and be more legible than hand printing it. Over time, we may even replace the entire string with a computer. But, we do not simply jump from human to computer.

Teaching Lawyers to Fish

I hope I have convinced you of a few things. First, using an ROI analysis, you can determine whether a process improvement event has the potential to generate a positive return on your investment by calculating what level of improvement you need from a team. Second, at the early stages of implementing process improvement, it is very easy to generate positive ROI events. Third, moving to process improvement opens up other possibilities that can benefit both the lawyer and her client (whether that means outside lawyer and company, or inside lawyer and businessperson). Time is valuable. Fourth, technology can be a benefit, but the benefits increase when you use process improvement to take out waste first and selectively add technology, versus replacing processes with “do it all” technology. If it sounds too good to be true …

Sometimes, the payback on a process improvement event just is not there. Often, if you look at the event, focus the project a bit more and reorganize the team, a negative ROI event turns into a positive ROI event. Remember that events build on each other and through that stacking you compound returns. Take small steps.

Usually I tell stories to show lawyers that process improvement works. In this series of posts, I have given you the primary tool to prove to yourself that process improvement works. When lawyers ask “what’s in it for me” the answer lies in doing the analyses I have laid out in these posts. In harsh terms, a positive ROI means there is money in it for you.

The challenge to using process improvement in law does not lie in the methodology, the field, the intellectual nature of what we do, or any other imagined barrier. The challenge lies in the extraordinary resistance to change lawyers present to themselves and the world. As one general counsel put it to me, “When you get right down to it, even lawyers can learn what others have been able to pick up with a few hours training. The challenge is not in this process improvement stuff, the challenge is in getting lawyers to realize that when it comes to law they own the knowledge, but when it comes to delivering services, they do worse than retail clerks and factory workers.”

Some Final Thoughts

I have taken a book-length topic and condensed it to 8,000 words. Obviously, I simplified some things and did not cover others. My point was not to oversimplify to win you to my viewpoint. Rather, it is to educate you about the evolving view of efficiency in law. I call the new combination of human and computer the “augmented lawyer.” This lawyer must understand the law, of course. But understanding the law and advising the client have now become table stakes for most lawyers.

The new lawyer must be able to combine human skills plus computer skills. To do that, the lawyer must understand processes, how to improve them, and when to add technology. That does not mean the lawyer must become a process improvement expert, project manager, or a technologist. In our complex world, no person has the ability to do it all—even a lawyer.

It does mean that a lawyer must become conversant in the tools of the trade. He must understand processes and process improvement. He must know how and when to use project management. He must understand value versus time and deliver more of the former while using less of the latter. He must know where data resides and how to leverage it for his client.

This last point is important for it underlies what I have discussed in these posts. To do ROI calculations, you need data. Data has become to the 21st century what hydrocarbons were to the 20th century. That is a great line, but it is not mine. It belongs to Virginia Rometty, CEO of IBM, who said it in her commencement speech at Northwestern University in 2015.

Pedro Domingos, a computer scientist at the University of Washington, put it this way in his book The Master Algorithm:

Think of big data as an extension of your senses and learning algorithms as an extension of your brain. The best chess players these days are so-called centaurs, half-man and half-program. The same is true in many other occupations, from stock analyst to baseball scout. It’s not man versus machine; it’s man with machine versus man without. Data and intuition are like horse and rider, and you don’t try to outrun a horse; you ride it.

Process improvement is a tool that helps you understand when and how to use the horse effectively. ROI is a tool that helps you understand when and how to use process improvement effectively. You can choose not to use the tools. But in every other area of human endeavor, those who ignore tools find themselves at a disadvantage compared to those who do use them. Choose wisely.

The Low Cost of Lean (Part 3)

Posted in Efficiency

LeanCostThe first week, we started down the path of evaluating the cost of process improvement for a law department. The second week, we finished that analysis and started to looked at process improvement from the law firm’s perspective. This week, we continue our look at the value of process improvement from the law firm’s perspective.

When we did the ROI calculation for the law firm’s process improvement event, we got an ROI of -$35,927. As I noted, however, that is how it looks at first blush. We should dig deeper.

It turns out that what seems to be a disastrous event from the law firm’s perspective really is an opportunity. Ask lawyers, and they say the opportunity is to use the “saved” time to do more work for the same client or do work for a different or even new client. In other words, if a lawyer bills 40 hours per week she sees the time saved from the process improvement event as an opportunity to keep billing 40 hours per week, just with a different mix of clients and matters. That is an opportunity, but not the one I see and not one that would drive a rational investor to use the process improvement event.

Rethinking Law Firm Pricing

The opportunity I focus on offers much more to the lawyer and her client. It starts with the value model. Process improvement supports the lawyer moving from the billable hour to an alternative fee structure which can be more profitable for the law firm while costing the client less. We used the assumption that the lawyer bills at $500 per hour, so the lawyer was charging $2,500 for five hours work. After the first process improvement event, it takes the lawyer three hours to do the work, so everyone assumes the price will drop from $2,500 to $1,000. That is a bad assumption.

The value the client received has not changed. The only thing that changed was the input volume to produce that value. The lawyer could switch from charging by the hour to charging a fixed fee based on the value. On a fixed fee model, the lawyer can choose one of several paths including charge the original price, reduce the price a little, reduce the price a lot, or keep the price the same but offer additional services. The demand for the lawyer’s services will play an important role in the decision. The value of the services is determined by what clients will pay, not by the time it takes to provide the service. For example, even though it only took five hours to perform the service, clients may have been willing to pay $5,000. Of, while it still takes two hours to perform the service, clients may be willing to pay only $250.

Lawyers often think about revenue, but not about profit margin. Firms compensate lawyers based on revenue and often pay little attention to profit margin. Lawyers focus on revenue over profit because they are rewarded for doing so. Most large firms still have some partners generating millions of dollars of revenue on which the firms lose money. For example, the firm may have decided to support a practice area as part of the firm’s mix of services even though that practice area does not make moneyIf that is a conscious decision. In that case, the firm has made a rational decision.

Unfortunately, firms often maintain these money-losing practices for the wrong reasons. They may not want to have the firm’s overall revenue drop, the partner who owns the book of business could b politically powerful in the firm, or the firm simply does not know what it makes or loses on the business.

I am going to assume you want every revenue stream to generate a positive profit margin. Firm-wide profit margins vary at large firms, so I will pick 50% for this example to keep the numbers simple (large firm profit margins more typically range from the low 30s to the 40s, though individual practices can go much lower and higher). Our lawyer was billing (and we will assume collecting) $2,500 for five hours work. At a 50% profit margin, the firm made 0.50 x $2,500 = $1,250. What can the firm do when it takes only three hours to do the work under the various options I listed above:

1. Keep price the same. Profit margin increases to 70% ($2,500 – $750 cost = $1,750 profit, $1,750 / $2,500 = 70% profit margin).

2. Reduce the price a little. Our lawyer charges $2,000, and the profit margin still increases to 62.5% ($2,000-$750 cost = $1,250 profit, $1,250 / $2,000 = 62.5% profit margin).

3. Reduce the price a lot. Our lawyer charges $1,500, and the profit margin stays at 50% ($1,500 – $750 = $750 profit, $750 / $1,500 = 50% profit margin).

4. Keep the price the same but offer additional services. The profit margin will be somewhere between 50% and 70%, depending on the services the firm provides and assuming those services are not too costly so they push the profit margin below 50%.

The price our lawyer uses as the fixed fee will depend on many factors. They include the relationship with the client, the competitive market generally, competition for this particular matter, and the firm’s pricing philosophy.

But, one additional factor the lawyer should consider is the ROI on the investment to reduce the time on the matter from five to three hours. Ignoring the investment means the law firm will not recoup the investment, which is just bad business. There is an exception. If market prices are dropping drastically, then investing in process improvement may be a way to reduce costs while keeping pace with the drop in market prices. In that event, the law firm’s profit margin could get squeezed (from 50% to, say, 35%). Practitioners serving individuals and small businesses may be experiencing some of that with technology-driven competitors entering the market.

Improving the Law Firm ROI

Looking back at our law department example, we recall that the in-house lawyer repeated the process once a month. Over five years, the lawyer would iterate the process 60 times. That may sound like a lot of iterations, but when you break down what lawyers do, it is easy to find tasks that lawyers do hundreds of times each year. Time adds up across those tasks, which makes it easy to find ways to generate large ROIs on process improvement events.

We can translate the effect of repetition to the law firm setting. Again, to keep our example simple, we will assume our lawyer in the firm also does the five hour task once a month, though she performs the task for various clients (one month for Client A, the next for Client B, and so on). The initial cost to do the process improvement event stays the same at $15,000. Now we will look at the ROI for the law firm under a few scenarios.

First, we will assume that our lawyer decides to reduce the price for the matter from $2,500 to $2,000. In the first year, the firm will spend $15,000 during the first month. In the second month, the firm will spend $750 (versus $1,250 before improvement) to do the work, but it will collect $2,000 (versus $2,500 before the price drop). In other words, it will spend $500 less but it will collect $500 less, so the net change in cash flow (before the event to after) is $0. It will remain the same throughout the five years for an ROI of -$13,636.

If the firm spent $15,000 and saved $0 why is the ROI only -$13,636? The firm will have spent $15,000 to get no change in net cash flow, but a profit margin increase from 50% to 62.5% (plus whatever benefits they get from reducing the price to clients). The basic ROI formula assumes the $15,000 is spent at the end of the year, not the beginning. It discounts the amount to the present, which is why the ROI is less than $15,000. For those who want to be very precise, you can tweak the formula to address the timing issue.

The ROI went to -$13,636 from -$35,927, which is good, but we still don’t have a compelling argument for process improvement. Before we abandon this process improvement event, we should ask again whether we have considered in our calculations all of the benefits the firm will get from the event.

The answer is no. In our calculation, we assume no value to the two hours per iteration that were picked up from the event. In the first year, the firm picked up 11 x 2 = 22 hours and in years 2 through 5 it picked up 24 hours per year, for a total over five years of 118 hours. If the firm cannot do anything with those hours (they have 0 value to the firm), then our calculation was correct. But, if the firm can use those hours (do work and charge clients for the work), they have value.

Currently, each hour has $250 of value to the firm ($500 billed rate – $250 cost). If we add that value to our ROI calculation, we get a new ROI of $6,154. If the firm can use those hours at the 62.5% profit margin (for example, do the same task for more clients using only three hours and charging $2,000), the ROI increases to $11,101.

We can do a quick summary of process improvement from the firm’s perspective:

1. If a firm does a process improvement event and it sticks with the billable hour for its pricing model, it will be hard to justify doing process improvement. Firms that are comfortable billing by the hour and who have sufficient clients willing to pay by the hour may not benefit by becoming more efficient (at least not using this simple ROI analysis).

2. If a firm does a process improvement event and changes to an alternative fee pricing model, it is easy to justify doing process improvement, provided the firm sees value in the time saved by becoming more efficient. I showed one value—using the time saved to do work for other clients on an alternative fee schedule. There are other measures of value that could be used, such as lower employee turnover, higher client attraction and retention rates, and higher employee satisfaction from doing less wasteful work. Always remember time is the one thing we cannot replace, so saving time has value.

3. Process improvement events have value beyond the obvious. We did not talk about the value to the client of reducing the work time from five to three hours. The client may value getting the work product more quickly. That value may express itself as client satisfaction. Some clients may be willing to pay more for a faster resolution.

We have seen how process improvement events can generate positive ROIs within a law department and a law firm. But process improvement does not live alone today, like it did back when companies first started using it. In the 1970s when Toyota put more structure around its corporate process improvement program, and in the 1980s and 1990s when U.S. companies adopted process improvement, the question was often binary—do process improvement or stick with the current method. Today, another alternative frequently pops up, and that is technology and more specifically computer systems.

It makes sense for us to look at process improvement and ask whether the ROI method of valuing an event has anything to offer when we consider using computers as an alternative to labor. Next week, in the final installment of this four-part post, I will look at technology, the ROI analysis, and add some closing thoughts.

The Low Cost of Lean (Part 2)

Posted in Uncategorized

LeanCost

The first week, we started down the path of evaluating the cost of process improvement for a law department. This week, we finish that analysis and start to look at process improvement from the law firm’s perspective.

We ended last week on a cliffhanger: how to solve the following equation:

ROI Formula

This should not be a scary equation. Finance departments often use this equation (or a very similar one) to help them decide whether to approve a project. Law departments can use this equation to decide whether to invest in software, a process improvement project, or any other undertaking that requires an investment. Law firms should (and presumably some do) use this approach as well. For example, will a new office be worth the investment? New software? You could use it to evaluate a new partner or practice group. ROI is a powerful tool if used correctly.

So how do you use it? Let’s define the variables in the above equation:

t = A counter. In a five-year analysis, t goes from 1 to 5. In a three year analysis, it goes from 1 to 3.

r = The discount value. As I said last week, we typically use the corporate cost of capital. For our example, we will use 10% (0.10).

CF = Cash Flow. When calculating savings, it is the amount saved each period minus the amount spent each period. For example, if you spend $15,000 in year but you only saved $10,000, your cash flow would be $10,000 – $15,000 = -$5,000 (negative cash flow). If you saved more than you spent, you would have positive cash flow.

Terminal Value = This is the expected cash flow value beyond our measurement horizon (five years or three years). Think of it this way, at the end of five years if you are still using the process, then you still save from the initial process improvement project (assuming you didn’t eliminate the steps where you got the savings). To be intellectually honest, we should include those savings when calculating whether the process improvement effort has a positive ROI. Five years is a long time. So, we can make a very conservative assumption. We assume that the process only lasts five years—that is, we assume we do not get any savings after five years. If the calculation yields a positive ROI with 0 as the terminal value, then we should do it even if we do not get any savings after five years. If it yields a negative ROI, adding a terminal value may save it, but we would want to be very sure the process will survive more than five years. For our calculation, we assume 0 as the terminal value.

Now we can write out our formula with specific numbers and do the calculation. First, I will do a pseudo formula. I will use words and write the formula informally, putting in numbers for the variables. Then, I will write the formal formula and do the calculation.

Pseudo Formula

In year 1, we spend $15,000 and get a savings of 11 months times $500 per month.

In years 2 – 5, we spend $0 and get a savings of 12 months times $500 per month for each of four years.

Actual Formula

CF Calc

Do the math, as they say, and you get an ROI of $8,654. From a rational investor’s viewpoint, it is worth spending the time to do the process improvement, because you will save money over five years. From the lawyers’ viewpoint, it still may be a tough sell. Given all the other benefits and that this was a training exercise, it still makes sense to do it (at only one hour savings per iteration, the ROI is -$2,719 so the other reasons would have to be more compelling).

The next step shows how you start to realize the true power of process improvement. The team can do additional process improvement events and they can tackle any process they want. For small processes, they can go it alone without the trainer. For larger or more complex processes, they can use the trainer as a consultant. As the team brings on different members and those members become trained, the process improvement knowledge spreads and many teams can do process improvement simultaneously. Eventually, you move from isolated events to continuous improvement.

At continuous improvement, teams take on larger or more complex processes, while everyone does daily process improvement. An organization where all the employees look for and implement improvements each day will achieve tremendous efficiency and cost savings. It also realizes the compounding effect of process improvement.

The Power of Compounding

If we go back to our first example, the team eliminated two hours of waste from a five hour process. Whenever teams do process improvement events, they find more things to improve than they can tackle during the time available. The ideas they don’t reach go into a “parking lot” and become the ideas to implement during the next event. Assume our team went back to the five (now three) hour process two months later. After two more days, they may be able to cut the time from three hours to 1.5 hours (a 50% reduction). The ROI would be $5,354, so doing the event would make sense. Overall, with two events, the team has taken the time to do each iteration from five hours to 1.5 hours, a 70% reduction in about two months. In process improvement events, reductions in the 50% to 75% range are quite common, at least at the start.

Many of you will have caught another benefit. The three and one-half hours saved each iteration become available for reassignment. The employer could do some combination of the following 1) use the time for other work not being done, 2) use the time to do work currently being done by an outside law firm, 3) use the time to do new things that need to be done, or 3) (gasp) give the time to the employee (e.g., reduce the work week from 50 hours to 46.5 hours). There is a value to each of these and we should include that value in our ROI calculation, which means the positive ROI for each of the two events just increased.

You can see how process improvement brings “force multiplier” benefits to an organization. This is one reason why organizations of all stripe have embraced process improvement. You also can see how it engages employees. My description covers the most basic form of process improvement, and yet you can see employees attacking the problems that bother them every day. Becoming a process improvement virtuoso takes years of dedicated practice just like becoming a piano virtuoso. Talented process improvement trainers can accelerate the learning and effects of process improvement teams, so organizations find they want to have them around at least until the develop or hire their own experts. That increases cost a bit, but the cost increase is quickly offset by the increased efficiency.

The Law Firm View

The ROI analysis I just did makes sense if you work in a law department. The lawyers and their colleagues do not get paid more if they spend more time doing work, so efficiency rates high on the list of things valuable to them. But what about a law firm? Law firms work on the the inverse presumption: the more work they do the more money they make (under the still-predominant billable hour model). Why would lawyers in a firm do process improvement if their clients were not demanding it?

We will go back to our familiar ROI analysis. We will use the five hour to three hour to one and one-half hour example above, but now we will do the calculation from the law firm’s perspective. To make the example easy to follow, we will assume the cost to the law firm of the lawyer and the cost of other professionals is the same as the cost to the company. That is, a lawyer costs $250 per hour and other professionals cost $70 per hour. I know the cost for these professionals at law firms often is much higher, but that is not the point in this example. You will substitute actual costs for my imagined numbers. Our purpose here is to learn the method not find absolute truth.

One more note about the cost of lawyers and other professionals to a firm. There have been many arguments about whether the cost of the lawyer is her base salary or draw, or base salary or draw plus bonus, and whether to add in overhead. On the first question, I think cost is what you pay the person – all in. You should use salary plus bonus or draw plus bonus (using the prior year’s numbers is close enough). On overhead, I also think you should apply an overhead cost, because the firm spends the money.

Now let us go back to the calculation. In the first year, we assumed a total cost of $15,000 to the employer (in this case the firm). That included time, trainer, and supplies. In the law department example, we assumed 11 months of savings at $500 (two hours) per month. But, for the law firm, there is an additional impact. The firm saves those two hours but it also does not bill those two hours. At first blush, it seems like we should save $500 but lose the revenue of two billable hours (assume each lawyers bills at $500 per hour, so two hours lost revenue means $1,000). Our cash flow calculation now changes.

In the first year, we spend $15,000 and then we have 11 months of $500 – $1,000 (two hours cost saving minus two hours revenue loss), or 11 x -$500 = -$5,500. For years 2 though 5, we have twelve months each year of -$500 cash flow per month, or -$6,000 per year for each of four years. We can run the ROI calculation (the result is -$35,927), but it doesn’t take a finance expert to know that if you lose money every year, the ROI will be negative. It looks like this is a disaster from the law firm’s perspective.

As you may guess, the problem does not lie with process improvement  it lies with our calculation. To be a bit more precise, we are not properly looking at the inputs, outputs, and value so we have a GIGO problem (garbage in, garbage out). Our calculation gives us a misleading result because what goes into our calculation is not accurate.

Next week, I will go through how we can correct the inputs to our calculation so we get a meaningful result. If you are skeptical, think of it this way. Toyota started doing process improvement in the early 1900s and pulled together the program by the 1970s. It still carries on the program today. Beyond Toyota, process improvement has swept through companies in all industries, manufacturing and service, so that today it is easy to find even very small companies regularly engaged in process improvement. Process improvement has proven its worth and next week I will show you how our ROI calculation, once we improve the inputs, shows that process improvement works even in law firms.

The Cost of Lean (Part 1)

Posted in Uncategorized

LeanCost

In this two-part four-part post, I am going to cover how to calculate the return on investment from a process improvement event and why I think you should do (a lot) of process improvement before moving to software.

Efficiency. It has moved from new buzzword to table stakes status in most conversations about legal services delivery. But how to get efficient is still a debated topic.

One the one side, we have the techno-efficiency advocates. Get this program, get that program, or better yet get them both and you will become more efficient. Computers trump humans.

On the other side, we have the human-efficiency advocates. To become efficient you must practice, practice, practice, as in practice law a long time. The more you practice the larger your toolkit of efficiency tricks grows, the more efficient you get. Nothing magical here. The 30-year practicing lawyer writes a brief more efficiently than the 3-year practicing lawyer.

In the middle (not a popular place to be this political season), are those who advocate for some combination. I use the term “augmented lawyer” to mean one who combines the best of the human and computer worlds to practice law. To become an augmented lawyer, I say lawyers should start by learning processes and process improvement and then, after a while, introduce simple, dedicated technology that handles certain defined tasks.

I get resistance when I argue that process improvement is a low cost approach to improving things. In fact, I get called on this low-cost assertion often enough that I thought it was time to lay out the argument.

The Process Improvement Argument

Process improvement is incredibly complex and unbelievably simple. I often compare it to playing the piano. In one short lesson, you can start making music. But it will take a lifetime and some serious coaching if you want to master the instrument. The same holds true with process improvement.

The simple end starts something like that first piano lesson. A trainer will take you through the basic theory, some simple methodologies, and explain how to keep track of what you do. Process improvement lessons can be short or long, but a half-day is a good length of time to get your introduction to process improvement.

The standard  event lasts one week. Stop laughing—I realize that lawyers will not devote a week to anything unless they can bill the time. For the legal industry, a three-day event is pushing it and one- to two-days seems to be the limit for most lawyers. For your first process improvement event, it is best to block out that half-day for training and then one- or two-days for the event. You will learn much more and have a far better outcome than if you try to dribble the training and event over several days or weeks. Once you know the basics, you can use the dribble approach, just recognize it slows things down, results in fewer benefits and introduces more risk to finishing improvement projects.

The size of a team, not including the trainer, isn’t fixed. You can do a one-person event or a 20-person event, though I would avoid both extremes if possible. The size I think works best ranges from six to eight. The supplies for a team are simple. Sticky notes, fine point markers, a conference room, and a clear wall to which you can tape long sheets (liked 30” x 10’) of kraft or butcher paper. The total supples cost under $25.

Now to the core. If we assume a six person team for two and one-half days plus a trainer for one-half day (and we make some assumptions about wages and the trainer’s fee), we could say that the first event costs around $38,025. To get there, I used $250 per hour (a rough number for an in-house attorney) as the cost of each attorney ($250 x 6 x 8 hours x 3 days), plus another $2,000 for the trainer, plus $25 for supplies. A note to those who do this training for a living. I have no idea what process improvement trainers charge today, so my apologies if this number is far off.

That sounds like a huge investment, but let’s look a bit deeper. First, you might include six attorneys on the team, but I would recommend against doing so. You would have a better team if it included a people with a mix of skills: paralegals, assistants, project managers, and anybody else who works in your firm. In other words, process improvement works best when you have a combination of skills.

Next, look at the time spent cost. There are four major views on this issue. One view is that time spent is a sunk cost. The employer (firm or department) will pay the participants for the time regardless of what they do. The cost to the employer is a sunk cost and should not be included as a cost in the way that the trainer’s fee is a cost. A second view is to include the cost, as I did above. A third view is to include an opportunity cost. Assume each timekeeper could have billed the time and then include what the firm would have been paid if it had billed the time. The fourth view sometimes is used by law departments. They include the replacement cost: what did it cost the department to go outside and purchase legal services to do what the employees would have done if they were doing their regular jobs (e.g. cost of hiring a law firm to do two days of work).

Each view has merits and there is no right or wrong answer. As a general counsel, I used the approach I first described (cost) because it was consistent with how the companies where I worked accounted for training generally. I also used teams that had lawyers plus others, so the cost was much lower. Using no more than two attorneys on a team, the cost for the other participants usually was less (often much less) than $70 per hour, but to be conservative I’ll use that figure. Updating our calculation, we get $14,505 which I will round up to $15,000 (($250 x 2 x 8 x 2) + ($70 x 4 x 8 x 2) + $2,000 + 25). That still seems like a lot of money, but it is far less than the $38,000 starting amount.

Of course, the real question is what does the employer get for that $15,000? The obvious answer is an improved process, by which I mean a process with waste removed. The value to the employer is the stream of future process iterations multiplied by the savings due to the waste reduction, discounted to the present value.

There are a few other things the employer gets for its investment:

1. Six employees with basic training in process improvement. Think of this as at least the start of “train the trainer.” Each of these employees is on a journey to train other employees and lead improvement teams. Right now, they can look for and start implementing small improvements in daily activities based on what they learned.

2. Six employees who have seen the value of waste elimination. This is the beginning of a culture change process. Once you are educated about waste, you look at things differently. You start asking “why” more frequently. Unless an organization can charge its customers for waste and still achieve all its corporate objectives (ironically, law firms have been doing this throughout their existence), getting rid of waste is a good thing.

3. I can add many other things to the list, but I will just pull some of them together here. The participants build teamwork skills, analytical skills, and process understanding skills. The teams learn how to use metrics to track performance, so team members learn how to construct and use metrics. As your teams evolve to include clients, you build stronger client relationships and goodwill by reducing the waste burden you impose on clients. In short, lots of good things come out of process improvement teams.

The Process Improvement ROI Journey

But lawyers always look for the honey pot: what is in it for me? To get there, we must do a return on investment (ROI) analysis, and to that, we must go back to that confusing equation:

The value to the employer is the stream of future process iterations multiplied by the savings due to the waste reduction, discounted to the present value.

Let’s break it down into its components:

1. Stream of future process iterations. The team will focus on a process., A process is a defined series of steps taking us from a start to a goal, which we repeat over and over. Law practices are filled with processes. Conflicts checks, sending emails, preparing for depositions, drafting contracts, are all processes. This component reflects that once we improve a process, we get the value of that improvement each time we run the process. Each time we do a conflict check, it takes less time. We want to add up those savings to calculate our ROI.

2. Savings due to waste reduction. Our process improvement team focused on taking waste out of the process. To know if they succeeded, they used metrics. For example, if the process took four hours before improvement and three hours after improvement, they removed one hour of waste, a 25% reduction in time. As they say, time is money so we can calculate a cost savings from waste reduction. There are many metrics, but typically we can reduce any of them to cost savings.

3. Discounted to present value. This is the finance part of the equation. One dollar five years from now has a different value than one dollar today. You could invest a dollar today and, assuming you invested wisely, you would have more money in five years. Conversely, one dollar five years from now should be discounted to a lower value today (again, I could invest the lower value today to get the dollar in five years).

There are a few ways to calculate ROI, but I will use one finance departments often favor: the five year no terminal value ROI (yikes!). Stay with me. This fancy term simply means we will calculate the value of the cost savings over fives years, discounted to present value, and see whether the result is positive or negative. A positive value means we saved more than we invested when examined over that five year period, and a negative value means we invested too high given the savings. Five years is not fixed in stone and today you may find companies that look for a faster payback, for example three years.

For our first example, we will assume that the team looked at a process that took one lawyer five hours to perform. We also will assume the lawyer does the process once per month. Over five years, our lawyer will do 60 iterations of the process. If the team shaved two hours off the five hour process, the 40% waste reduction will save 120 hours over the next five years. Using our standard cost of $250 per hour, it looks like the savings to the company would be $30,000. But, we need to compare that $30,000 to the $15,000 you will spend today on the team, so we need to discount the savings back to present value.

We could spend a lot of time arguing about what number to use as the discount factor. Think of it this way, if I asked you to tell me today what percent return you would get on your investment over the next five years, you probably would find that hard to do. To avoid the debate, most people in finance departments default to using the corporate cost of capital. This is another debated topic, but in simple terms it means what the company must pay as a return to get the capital needed to run its business. That could be the return rate to stockholders or bondholders. (Hint: no, you do not have to calculate this, just ask the CFO.) For our example, we will use 10%.

This is the equation we will use to calculate the ROI:

ROI Formula

Again, yikes! Next week: I will go through the ROI calculation, tell you why you should know how to do an ROI calculation, and talk about the other side of the coin: why I think you should start with process improvement and pursue that for a while before looking at technology.

Another “It’s the Data, Stupid!” Essay

Posted in Change

DataStupidIt was the 1992 election campaign, and James Carvill, candidate Bill Clinton’s campaign strategist, was fighting to keep the troops focused on what mattered. He hung a sign in the campaign’s Little Rock, Arkansas campaign headquarters with three messages:

1. Change vs. more of the same

2. The economy, stupid

3. Don’t forget health care.

Nothing stays quiet in politics, the contents of the sign made it out, and now we all know the phrase “[it’s] the economy, stupid.” The phrase has been modified and used in many situations, including: it’s the data, stupid!

The Four Revolutions of Legal Materials

We can segment the history of legal materials using several dimensions. I divide the history into four phases:

  • Parchment to paper
  • Paper to published
  • Published to digitized
  • Digitized to data

At one time, legal materials meant writs penned by lawyers or scriveners. The few things written were put on parchment (sometimes called vellum, an animal skin paper). While it is easy to think we are far past this phase, the House of Commons and House of Lords in the UK recently debated whether official acts should now be recorded on paper instead of vellum (answer: no, vellum will still be used).

The next step was from paper (by now, wood pulp or cotton based) to published. Books of cases, closing binders, treatises, all became the place to go for collections of documents.

In the latter part of the 20th century, we moved from published to digitized. Documents were created and stored on computers and case books became online research databases. Today, we live mostly in the digitized era. But in law, even though documents are digitized they aren’t very useful.

The Era of Legal Data

Digitization still represents state-of-the-art for law firms and law departments. But the next revolution is digitized data, and that move already has started.

The world of law is the world of unstructured documents. Imagine working on a document with the following sentences:

Grainger accepted payment from Duncan. Duncan delivered the payment to Grainger by handing him a check made payable to “Grainger Consulting, Ltd.” in the amount of $2,150.00, dated April 21, 2014.

The sentences mean nothing to the computer. They could as easily be written this way:

Xxxxxxxx xxxxxxxx xxxxxxx xxxx Xxxxxx. Xxxxxx xxxxxxxxx xxx xxxxxxx xxxx Xxxxxx. Xxxxxx xxxxxxxxx xxx xxxxxxx xx Xxxxxxxx xx xxxxxxx xxx x xxxxx xxxx xxxxxxx xx “Xxxxxxxx Xxxxxxxxxx, Xxx.” Xx xxx xxxxxx xx xx,xxx.xx, xxxxx Xxxxx xx, xxxx.

This is unstructured text. The computer does not have information about the characters or words telling it, for example, that “Grainger” and “Duncan” are named entities or that “payment” is something different from “handing.”

We can easily give the computer more information, and we often do this through something called “tagging.” You already know about tagging. You tag photos with the names of the people in them, you tag blog posts with the subjects covered, and if you are an SEC lawyer you have seen XBRL tagging of financial data in 10-Qs. The tagging you see and do (with the exception of financial data) requires that you manually assign the tags. But, much of the tagging for text, as with financial statements, can be done automatically. Instead of a digitized, but unstructured, document lawyers could have data—a document broken into pieces that can be manipulated with the proper tools.

Legal Data and The Future

Of course, the key question is not whether lawyers can convert text to data, but what is the value of doing so? It the conversion simply means computer geeks have another thing to play with, then it makes no sense for the world at large to shift.

The value of doing so, I believe, is deep and will accelerate the change from law being a religion of the past practiced by a cloistered tribe, to a flexible tool of the future that can help individuals and organizations at all levels of the economic ladder. That is big value, so the next question will be “what do you have to back up that belief?”

We all know by now that data—as an augmentation to what we can do as humans and not as a replacement—will play a big role in our future. The same is true for lawyers. Let’s go through some examples.

As a transactional lawyer, one question I was often asked was whether what we were proposing to do or what the other side was proposing to do was “market.” This simple question usually leads to a spirited, but worthless, debate between opposing counsel. The proponent of the clause argues it is market, the opponent argues it isn’t market. Clients sit there perplexed: surely this is a question that can be answered objectively? The answer is “of course,” but not as law is currently practiced.

Three years ago, as I was working on a large (over $1 billion) financing agreement, the question came up all the time during negotiations. The firms on either side of the negotiations were (and are) top tier firms recognized as “the” firms to use for financing. Yet, neither firm could answer the market question. The usual response was “we could have our library staff look at recent financing documents to see if there is a pattern.”

The documents they would search were “materials agreements” to the companies involved, and so they had been attached to filings with the SEC. That is, they were publicly available. Anyone could download the document, convert it to data, and do searches on the documents. In fact, collecting these documents, tagging them, and using them as a corpus would have put any firm in a great position. But, to my knowledge, no firm has gone that far.

As a second example, consider the many briefs filed in lawsuits each day. Judges consistently complain about the quality of brief writing. Their complaints, by the way, are not directed solely at small firms or lawyers who occasionally appear in court. The epidemic of poorly written briefs extends up through the ranks to the largest firms.

If those briefs were turned into data, we could use the data for many purposes. For example, we could perform quality studies on the briefs. We also could compare the briefs to the court decisions (did the brief overlap with the decision, were the cases cited used by the court, did the arguments make their way into the decision, and so on). We could compare briefs across firms and even develop quality measures to tell us which firms and which lawyers have the best written most persuasive briefs. Instead of measuring the quality of law firms based on where the lawyers went to school, we could measure quality based on the legal product.

The list of ways we can use legal data is long and growing every minute. Legal data can be combined with data from other sources to construct predictive modeling. Data streams from sensors and mobile devices can be combined with legal data to create early warning systems—predictive analytic models that tell us when certain actions may lead to a lawsuit. Turning documents into data also is the first step in converting contracts into smart contracts, connecting law to the world of blockchain technology.

I’m a Lawyer, Not a Computer Scientist

Most lawyers are dizzy at this point. They don’t understand technology in its basic form (Can you describe to me how the internet works? What happens when you hit “send” for an email?) and now I’m asking them to go from those .docx files to computational linguistics and natural language processing. Time to run!

The key is understanding the difference between the lawyer trying to do it all, and the lawyer managing a collaborative team that does it all. None of us can do everything (despite what we think), but we all need to learn to manage teams. Law departments should move from hiring lawyer after lawyer to hiring one or two legal data scientists (who may be lawyers with technology training). By using the legal data scientists to automate certain steps (document assembly) and combine that with data tagging, a law department would take itself instantly into the 21st century. The future of law belongs to teams.

One final note about legal data. What law firms and law departments seem not to realize is that stored on their servers is 21st century gold. Today, Google, Facebook, and Amazon have put themselves in enviable positions. They each control massive data sets that enable them to analyze the world in ways we didn’t believe possible a decade or so ago. It will be difficult for other companies to build comparable data sets. IBM CEO Virginia Rometty puts it nicely:

What steam was to the 18th century, electricity to the 19th and hydrocarbons to the 20th, data will be to the 21st century. That’s why I call data a new natural resource.

In the law, the large legal publishers have data sets that also give them an advantage. Other publishers are looking for data sets that will help them build positions in the publishing industry similar to what Google, Facebook, and Amazon have done in their respective domains. For example, Elsevier recently announced it is purchasing the Social Science Research Network (SSRN). SSRN is a significant publishing platform for social sciences and humanities, and one of its main libraries is devoted to law. Overall, it has about 673,000 papers. Elsevier will be combining SSRN with its technology platform, Mendeley:

SSRN is devoted to providing “tomorrow’s research today” through specialized research networks in the social sciences and humanities. We facilitate the free posting and sharing of research material (e.g., conference papers, preprints, non-peer-reviewed papers) in our subject areas. Social science papers tend to have fewer co-authors, so networking and sharing ideas, hypotheses and drafts during the research process are critical; SSRN helps authors evolve their research and communicate their results worldwide.

Mendeley is a researcher workflow tool that helps researchers organize, discover and share their research. Mendeley is also becoming a collaborative environment for sharing early results of research but is more focused in science, technology and medical fields. Its technology platform, enhanced by Elsevier’s investment, uses metadata from articles and usage on its site to develop a suite of analytic tools that directs researchers towards the best people to collaborate with and what to read.

What does the combination really mean? It gives Elsevier unprecedented access to an enormous database. It isn’t the papers, it is the data. In this case, data represents influence or impact within the scholarly community which is something very valuable to scholars and institutions. As one blogger put it: “The reason is obvious to anyone who works in the university: impact = higher rankings, higher rankings = more and better students, more donors, more reputation for the institution… all of which translates into the ability to hire more high impact researchers.” The motivation to access data may be different for lawyers, but the need is no less than in academia.

Lawyers also object by saying that the knowledge of how to convert text to data and manipulate it is a computer science, not something for humanities majors who became lawyers. Ironically, text tagging grew out of the humanities where language, history, philosophy, and other professors have been tagging text for decades.

Lawyers love to find excuses for resisting change. In fact, a recent Altman Weil survey shows that over 90% of large firm managing partners know their firms need to change (become more efficient), and yet over 64% of partners resist change (up 20 points from a year ago). So be it. There will be a few firms that can get by ignoring change, while technologists and clients (the real clients) work behind the scenes on software that reduces or even eliminates the need for lawyers (don’t chuckle, the software already exists).

Lawyer are their own worse enemy. The profession is changing slowly and will not disappear overnight or perhaps ever. In the meantime, the demand for lawyers (versus legal work) shrinks, alternatives pop up daily, and the world moves past the era of scriveners with their vellum. If you don’t believe me, just check—it’s in the data.

Make Some Beautiful Music

Posted in Change

MusicI remember going into the basement of our house in the 1950s and 60s and listening to music on the large record-payer we kept there. The LPs, as they were called (LP for long playing) spun lazily at 33 1/3 revolutions per minute. The discs were thick, heavy vinyl and you had to handle them carefully or you would scratch the surface (and incur a fair amount of displeasure from your dad). If you liked music, you had to master the skill of gently letting the needle down onto the LP and then lifting it up when the album was done playing. None of that “automated” needle moving!

Music was special, I think, because it wasn’t so easy to come by. You could turn on a radio (AM) and fiddle with it to get a clear channel. But the station played what it wanted to play and if your musical tastes were not the same as your parents then the radio sitting in the living room was probably off limits. For many of us, a record player in our room didn’t happen until we got to middle school. Even with a record player, your record collection was limited.

Because music wasn’t everywhere, it became a group activity. Your friends had some records, you had some records, and someone would “borrow” their older brother’s or sister’s record player. By pooling records, you could spend an afternoon listening to a broader variety of music than you could get at any person’s home. If you look at pictures from the time, you often see groups of kids gathered around the record-player. Today, you see the individual with earplugs listening to iTunes. Music was a team-event.

Growing the Orchestra

Most large law firms, though certainly not most lawyers, accept that clients have moved from tolerating inefficient lawyers to expecting more efficient partners. Say the words “project manager” 10 years ago and you got a blank stare from everyone in the room. Today, ask a firm about project management and it will immediately jump to tell you about the firm’s program.

Project management and process improvement are just getting their start in legal service delivery. Lawyers have grown tired of hearing about them, so the number of conferences and webinars on the topics have dropped off. My friends outside the industry are astonished when I tell them that most law firms think they have control over the project management thing and aren’t that interested in learning more about process improvement. These are disciplines that take decades to understand and apply to complex work, yet lawyers think they have them mastered after 60 minutes.

It is difficult to explain to lawyers and firms the gap between where they are in these fields and and masters of the methodologies. More recently, I have used this metaphor. Imagine your five year old tells you she would like to learn to play the violin. Pleased, you take her to her first lesson which lasts about one hour. You sit in on the lesson, so you know what the teacher has told your child and can reinforce it during practice.

The teacher explains the basics of the violin. It is a stringed instrument, she explains. You can bow the strings or pluck them to make sounds. The teacher explains the parts of the violin, shows the basics of moving the bow across the strings, and how to hold a violin properly. The teacher then takes your child through the steps to play a few notes and asks the student to practice the tune during the week.

You leave the lesson with a happy child who goes home and promptly ignores the new violin sitting in its case. That night, your tell your husband about the lesson. Then, you say that you are ready to play a concert at Carnegie Hall. After all, you say, you heard the violin lesson, you are a lawyer, you got this because how hard can it be? Lawyers are smart and quick and can learn new skills in a flash. You must be a violin player, because you sat through that one hour lesson.

You have a few children and you repeat this exercise with each of them. The next week it is a clarinet lesson and the week after it is a flute lesson. Each time, you return home claiming you are ready for the big concert because you sat through that one lesson.

The story sounds ridiculous, yet I meet the lawyer in this story every week. After a one hour lesson in project management or process improvement, they feel ready to play the big house. “Of course I know project management,” they want to tell clients. “Yes, we are all over process improvement,” they proclaim to general counsel. The metaphor works for me, because the one-hour violinist is just as silly as the one-hour project manager or lean thinker.

Make Your Own Kind of Music

To keep the metaphor alive, I tell lawyers that if they really are looking for their place in the story about musicians, they are the composer. This shocks many lawyers, because they expect me to put them in the place of the conductor. Lawyers are not good conductors, as a general rule, but they fit naturally into the composer’s role.

A good composer understands the capabilities of each instrument and how to blend them to make the music. Each composition calls upon different combinations of instruments and explores their capabilities in unique ways. A good composer excels at blending these capabilities. The composer typically plays one or two instruments herself, so she understands the role of the instrumentalist, but her forte is not as the soloist it is as the creative person who can craft the beautiful music.

The conductor serves a different role. He helps the orchestra interpret the composer’s work. The orchestra is guided when to go faster or slower (adagio does not mean the same thing to everyone). He blends the voices, increasing some and decreasing others, so that the combination achieves what the conductor thinks the composer wanted.

If we translate roles, the conductor is the project manager. The members of the orchestra are the lawyers, process improvers, analysts, paralegals, and other legal professionals who form the team executing the composition. The composer is the lawyer whose creative vision (the structure of the deal) is being played out.

Many lawyers (especially litigators) believe they must be the conductor and some are very good at the role. But, that usually assumes that the client has no concerns about cost and is willing to pay whatever it takes to “win” the lawsuit. In some cases, the composer conducts and the outcome is fantastic. But “some cases” does not a rule make, and most clients are cost sensitive on most cases. Too many lawyers think they are Leonard Bernstein conducting the New York Philharmonic in the first rendition of West Side Story.

The Future of the Legal Orchestra

It is easy to overuse a metaphor, and I’ve probably already gone past the point of no return. But, perhaps the visual image will stick with you. It takes a long time, over many years and performances, to learn do something well. A good project manager or process improvement guru will have spent years polishing his or her trade. They did not just jump into the role. An astute lawyer should know that he must use talented people in each role on the team that is executing his vision, and that it would be bad for the lawyer to try to jump in and play a role for which he is unprepared.

Lawyers have great difficulty, having been trained in law school and law firms to rely upon their own skills, in ceding their autonomy to the group. In the early 1900s when legal “teams” meant two lawyers working together, the skill of the individual lawyer was paramount. Louis D. Brandeis did much of the work himself on many of his famous cases. Today, Brandeis would have large teams with dozens or more lawyers working on the same cases. The skill lies in leading the team. The leader must provide direction, but it is the rare leader who can provide that direction and give day-to-day guidance at the same level.

The 21st century buzzword for the orchestra in business and law is “collaboration.” Collaboration is the way today of explaining that team-event we used to do when I grew up listening to music. By pooling our resources, just as we pooled our records, we can improve over what any one of us could do on our own. It seems we are returning to the need to get along with one another.

By 2020, about 50% of the workforce will be freelancers. Law departments will realize they can’t afford dedicated staffs encompassing all of the skills needed to do the legal work for their clients. They will build ad hoc teams using combinations of dedicated staff, law firms, and freelancers who will work together for a project or tow and then disband (this already happens – think company, law firm, and Axiom).

While companies will use more freelancers with a wider variety of skills, the real change will be this: technology will be the glue that binds them. Instead of a world with dozens of software packages that don’t play nice music together, we will use platforms that interconnect with dozens of programs (SAP for lawyers). Corporations will plug in law firms, freelancers, and other parties as needed and then close out the team when the matter is done. As this happens, the team will get more creative, the tools more useful, and the results more powerful. Then we will really hear some beautiful music.