PapillonIn 1974, Allied Artists Pictures, Corona-General, and Solar Productions released Papillion, a movie based on Henri Charrière’s book by the same name (his nickname, which is the French word for butterfly). The book covers the time he spent in the brutal French Guyana penal system. Charrière became famous for his many attempts to escape from prison. The movie has a great cast, including Steve McQueen and Dustin Hoffman. The screenplay was by Dalton Trumbo. Trumbo was an excellent screenwriter. But his greater fame came in the 1940s as one of the “Hollywood Ten” who refused to testify before the House Un-American Activities Committee (HUAC). Hollywood blacklisted him. He continued to write, however, using front men. Two of the front men movies—Roman Holiday (1953) and The Brave One (1956)—received Academy Awards for screenwriting. It is hard to keep a good author down.

One scene from Papillon has stuck with me. For bad behavior, such as attempts to escape, the guards put prisoners in solitary confinement cells. The prison’s conditions were poor and, of course, cells lacked mirrors. A prisoner could guess if his physical condition was deteriorating. But he had another way to tell. To get his hair cut or to get deloused, a prisoner stuck his head through a small hole in the door of his cell. He would turn his head and look at the prisoner in the adjacent cell, who had his head stuck through the door of his cell. the first prisoner would ask, “how do I look?”

For some reason, this scene reminds me of lawyers working in their offices. Even in large firms, they work alone, oblivious to the world. For comfort, they meet at the coffee station and ask each other, metaphorically of course, “how do I look?” They don’t ask clients or others outside the industry, typically afraid of the answer or wanting to avoid it. They trust the word of the lawyer in another cell.

The light for these lawyers would come by inviting other disciplines into their thinking. I wrote an essay explaining the need for multidisciplinary thinking. If lawyers considered what others have studied, they would find answers—or at least potential answers—to many of the questions they struggle with each day.

Holmström’s Career-Concerns Model

The recent Nobel Prize in Economics brings this point home. Oliver Hart and Bengt Holmström won the award for their work on the economics of contract theory. Contracts are dear to most lawyers’ hearts and one might think that lawyers would stay current on research into contract theory. One would be wrong. To most lawyers, Hart and Holmström are strangers. Lawyers remain ignorant of their work.

This gap in lawyers’ knowledge is disappointing. Economic theory and contract studies could help lawyers understand their own practices. But that disappointment deepens, because the knowledge could help lawyers help clients.

(I’ll come back and address the complaint you raise. First, you say, he wants me to learn project management, process improvement, metrics, and AFAs. To that he adds economics. Doesn’t this guy get that I practice law. A day gives me 24 hours and I squeeze in eating, sleeping, and relaxing.)

Corporate clients complain that legal services come with unpredictable costs, inefficiency, mediocre quality, and arrive late. They direct their ire at large law firms, though the problems seem agnostic—every legal services supplier is at fault.

For years we have enjoyed guessing “why.” Why are law firms unresponsive? Some lawyers are responsive and deliver, as best they can, what their clients want. It seems, though, that the challenge for clients to get what they want grows each day. Clients have responded by taking steps, such as bringing legal services in-house. Increase lawyer hiring, say the general counsels. The problems stay, but reducing use of legal services providers reduces the volume of problems.

Of course, the “why” question remains. If we look to Holmström’s research, we can find a potential answer.

Holmström and Milton Harris studied what happens between employer and employee as the employee ages. For employee, substitute lawyer. Remember, Baby Boomer retirement is underway. By 2030, all Baby Boomers will have reached age 65. We should ask, “what happens to the lawyer-client relationship as the lawyer ages?” As a related question, we should ask whether the general counsel push to move work from first and second-year associates to senior associates and income partners makes sense.

The Harris-Holmström study, titled A Theory of Wage Dynamics, questions some of our basic ideas. Let’s start with this one. The longer an employee works the greater the employer’s knowledge of the employee’s skills (or client’s knowledge of a lawyer’s skills). “This learning allows more senior workers to be matched better to tasks than less senior workers. The result is that more senior workers exhibit higher productivity on average, and this accounts for their higher average earnings.” The higher you rank in the law firm, the higher your income.

But what if that relationship isn’t correct. “Some … empirical evidence suggests, however, that there may be factors other than acquisition of productivity enhancing human capital which produce upward sloping experience-earning profiles. …Medoff and Abraham … find that more experienced managerial employees earn more on average even though their performance is not as highly rated as less experienced workers in the same job category.” Harris and Holmström go on to show that senior workers may get paid more for reasons other than productivity. For general counsel, this could mean you pay higher rates for senior attorneys even though you don’t get higher productivity from them.

Perhaps the Harris-Holmström view holds true for lawyers in firms. We do not know. But, this is a nice example of lawyers acting based on guesses even though economic studies would give them data-based knowledge. Harris and Holmström published their paper in 1982. I’m sure an economist would point to all of the studies following the paper. Perhaps their idea did not survive. The point is that lawyers tread ground others have covered, for no good reason. By working alone, lawyers deprive clients of what we (the broader “we”—society) already know. Doing so wastes time and money. As I have said, law and the delivery of legal services is too complex to leave to lawyers.

Join a Team

I promised I would come back to your complaint. You say lawyers lack the time to become project managers, process improvement experts, pricing experts, and economists. I’ll go back to my usual response. I argue that lawyers must become part of expert teams. I get it — I was a partner in a law firm and spent 20 years in-house, most of them as a general counsel. As a general counsel, I worked on teams composed of experts. In-house lawyers get used to this approach. Law firm lawyers avoid it.

I argue that practicing law takes a wide range of skills and those skills should come from blended teams. Lawyers should avoid the lone wolf syndrome. Law firms and law departments will be better off with teams that include project managers, process improvement gurus, data analysts, economists, and other professionals.

The mix of those professionals for each project and matter will vary. But, the modern legal team needs skills and knowledge lawyers lack. The leader of the team, which may be a lawyer or could be someone else from the team, should be familiar with these other disciplines. She should know how to leverage these individuals and how to compose teams suited to answering client problems. I do not argue the lone lawyer should become an expert in all areas.

Lawyers are stubborn. They refuse or ignore this advice. What happens? Precisely what we see happening today. Lawyers get displaced. Consultants, accounting firms, entrepreneurs, and others embrace teams. They leverage teams, which may include lawyers, to the benefit of the client. Lawyers become tacticians, others become strategists.

The retirement of Baby Boomers means the legal industry will watch some knowledge walk out the door. We will lose some experience. But if we don’t change our behavior, we will lose an important opportunity. We lose the opportunity to become team builders and team players. We lose the chance to integrate what we do with what others do to enhance our problem solving abilities. We lose our chance to solve problems. We become the technocrats that computers can replace.

References

Harris, Milton, and Bengt Holmström. “A theory of wage dynamics.” The Review of Economic Studies 49.3 (1982): 315-333.

TippingAs my kids used to say, “made you look”! Remember, we rarely know a tipping point until we have passed it. We see them while looking back. We realize the world changed as we watched another cute cat video. For the record, I prefer the video of Professors Collins and Stone talking with Judge Posner. The Judge shares some provocative thoughts about the Supreme Court.

A recent survey from Corporate Counsel magazine suggests we did pass a tipping point. Steve Kovalan reports in “Your Clients Just Aren’t That Into You,” that 74% of general counsel project increased budgets in 2017. Then we get the belly drop: 43% expect to reduce use of outside counsel. About 92% of that work will go in-house. The trend of clients bringing work in-house continues. Eighty-five percent of general counsel cite cost as the reason for bringing work in-house. Seventy-four percent expect the same or higher budgets in 2017. But, we have a more interesting story than cost savings.

As Kovalan says, law firm leaders have blamed “more for less” and decreasing budgets for pressure on firm revenues. Data suggests, however, law departments have different motivations. They pull work in-house because they can. Recently, general counsel added another reason. They said they will trim law firms that seem to be on shaky ground. This move was inevitable. It could hasten the demise of some firms without resources to survive the departure of major clients.

We may have serenely watched general counsel realizing they can live without outside counsel. Are they changing their Facebook statuses from “in a relationship” to “alone and loving it”?

Why Do Law Firms Exist

As clients reduce the number of law firms they use, we should revisit a basic question: why do law firms exist? In 2011, Jordan Furlong published a nice essay taking a look at this question. He came up with one clear reason. Law firms exist to reduce transaction costs. Lawyers would face higher costs if they practiced separately. Re-reading his essay, it is hard to fault his logic. And, Furlong’s conclusion is consistent with the development of law firms over the past 150 years.

After the Civil War, solo practitioners started joining together into firms of two or three lawyers. The main motivation as best we can tell was to save transaction costs. A few firms, such as New York City firms representing corporations, needed more attorneys. They handled complex legal work. The rest saved money by partnering.

In the 1900s, the volume of regulatory work grew. Legal work also became more complex and it took more lawyers to do the manual labor of law. All of this led to some law firm growth. But,  saving on transaction costs was the main driver.

Furlong argues that technology replacing labor drives transaction costs lower. It decreases the justification for large law firms. Transaction costs fall below what firms can get by banding lawyers together.

I think he has a good argument, with one exception. A segment of the large law firm cohort—the superrich law firms—thrive. Twenty large law firms increase revenue and profits each year despite all the challenges facing law firms. Experts claim these firms provide legal services that weather cost cutting efforts. They provide specialized services in high-risk areas and command premium prices for their work. The lawyers in these firms band together because doing so supports lucrative businesses.

These firms don’t feel the challenges other firms do. Competition and technology do not have the same effect on them. Clients with high-risk work are not cost sensitive. Clients demanding specialized and sophisticated work will pay for the “best” to avoid failure.

If we slice off the top 20 firms, we have 180 firms left in The American Lawyer 200. They need to show why they exist. Lowering transaction costs is not sufficient. I am not arguing all but the top 20 law firms will disappear in a decade. But, I believe we will see continued firm consolidation. The gap between the top 20 and the remaining firms will grow. Today, we see a law firm size distribution resembling a two-humped camel. It has a bulge at the right end, one at the left end, and a trough in between. I think we will see a similar distribution in the right end bulge. That is, two humps with a trough in the middle. A camel on a camel?

Large law firms carved up the middle market firms years ago. Today, the 180 law firms in The American Lawyer 200 have become the new middle market firms. They face just as much risk as their predecessors. The live in a trough. That trough holds the firms that have trouble answering “why do you exist?”

A Late Bloomer

In many respects, this firm size evolution reflects broader trends. When I was young, mid-size department stores populated retail malls. Today, those stores have gone away. We have a few large stores, but the others merged or folded. We can go through industry after industry and see the same trend. Why should law firms be different?

We also see competitors entering many of these industries. Amazon? The legal industry is remarkable for having held on so long before living these changes. The tipping point has come (if it has come) late to law.

What Now

Assume we did see a tipping point in 2016 and in 2017 the remodeling pace in the legal industry will accelerate. What does that mean? I think it means a lot for clients. As I’ve said before, I’ll leave the firms to fend for themselves.

Clients need to get serious about understanding their supply chain and how to structure it. We hear that clients use alternative legal services providers more frequently and pull more work in-house. Those changes don’t show supply chain understanding and remodeling. They show clients swapping higher cost for lower cost in an existing supply chain.

The suppliers in the legal industry may change, but the supply change structure remains the same. A client hires a law firm. Everything is transactional, with little or no integration. Even when that client goes back to the law firm for help, each matter is transactional without integration. This is an old supply chain model. To the client’s detriment, it favors the supplier, not the buyer.

In 1980, Harvard Business School professor Michael E. Porter published the Five Factors Model. We use it to analyze an industry’s structure. We consider: 1) bargaining power of suppliers, 2) bargaining power of buyers, 3) threat of new entrants, 4) threat of substitutes, and 5) industry rivalry. Based on the analysis, we can measure the intensity of competition in an industry. Intense competition means suppliers earn lower profits.

When we look at the legal industry, the model shows low competition. Suppliers can earn outsized rewards at the expense of buyers. As competitors have entered the legal industry, the results shift a bit. But, the structure favors suppliers earning outsized rewards. This is one reason law firms can raise rates each year.

The structural shift that makes sense for the legal industry goes counter to the direction clients have taken. Jeffrey Dyer and Harbir Singh call it the “relational view”and described it in a 1998 article.

Under the relational view, suppliers and buyers integrate processes. This creates seamless, cost effective, higher quality workflows. The automotive industry is a visible example of this approach. An assembler integrates with Tier 1 suppliers, who integrate with Tier 2 suppliers, and so on. Before you say “lawyers don’t assemble cars,” I’ll point out that some clients and law firms use this same approach. The supplier and buyer work for mutual advantage rather than winner takes all.

How does this work? The supplier and buyer think long term. Working together, they set a goal. Then, they examine and integrate their existing processes. They design a value stream that flows through the entities. Value streams in the old model start and stop at each entity’s door. They build and invest in a relationship and in each other. They develop trust and expect the relationship to continue.

That relationship means the supplier will invest in innovation that benefits both it and the buyer. It means it won’t try to maximize the return on each matter. Instead, it will maximize the return on the relationship. It means the buyer will return to the supplier rather than shop every matter. The buyer invests in the supplier. Studies show that using the relational view, suppliers and buyers both do well. The supplier has a continued relationship at lower profit per transaction. But, that is better than higher profit per transaction and constant churn.

Finally, external competition keeps the parties on their toes. If a buyer stops investing, innovation will drop off. That in-house law department will be less competitive than departments in other companies. The corporation has a competitive disadvantage. If a supplier stops investing, the buyer will leave for a stronger relationship. We see that today. Buyers report they already have dropped many firms and plan to continue the trend.

Today, corporate law departments still use the transaction view for supply chain structure. They do not build competitive advantages, just temporary cost benefits. Law firms do not invest, because they have no incentives to do so. The transaction view drives low innovation, higher cost for the buyer, and higher revenue for the supplier.

Conclusion

Buyers have more alternatives today to get their legal needs serviced. They understand this and have decreased their reliance on law firms. Law firms struggle to respond and keep the benefits of the current supply chain structure. That is, law firms still want outsized profits. Buyers perpetuate the transaction structure that helps law firms. Swapping one supplier for another does not change the structure.

Both buyers and suppliers will do better over the long run by changing the supply chain structure. Moving from a transactional view to a relational view balances benefits to both parties. We have seen instances in the legal industry of this move. The client and the firm prosper with stronger relationships. Innovation increases. Buyers should consider a new supply chain structure. Otherwise, they will replicate the current system with different players, which is not real change.

References

Jeffrey H Dyer & Harbir Singh, The relational view: Cooperative strategy and sources of interorganizational competitive advantage, 23 ACADEMY OF MANAGEMENT REVIEW (1998).

LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW   (Simon and Schuster. 1973).

Steve Kvalan, Your Clients Just Aren’t That Into You, Law.com(2016), available at http://www.law.com/sites/ali/2016/11/13/your-clients-just-arent-that-into-you/.

Tony Mauro, Judge Posner Slams “Stupid” Decisions by Chief Justice Roberts, “Silly” Stances by Scalia, Law.com(2016), available at http://www.law.com/sites/almstaff/2016/11/30/judge-posner-slams-stupid-decisions-by-chief-justice-roberts-silly-stances-by-scalia/.

MICHAEL E. PORTER, COMPETITIVE STRATEGY : TECHNIQUES FOR ANALYZING INDUSTRIES AND COMPETITORS   (Free Press. 1980).

White DwarfNow that 2016 is more than a month behind us, law firms have moved through reporting the year’s financial results to partners and into compensation discussions. This is the time of year when equity partners puff up their chests and emphasize their importance to the firms and compensation committee members attempt to placate thousands of outsized egos. From the early reports, 2016 was another decent year for many large (e.g., AmLaw 200) law firms. The top 100 were up, collectively, about 4% in revenue and the next 100 up about 1% in revenue. Not the salad days prior to 2008, but certainly not the armageddon many feared.

When I said “decent year,” I really meant a disastrous year for clients, junior partners, associates, law firm staffs, and the legal profession generally. But, a decent year for equity partners in many firms (a 1% average revenue increase strongly suggests some firms had a down year). Before I go further, you may want me to clarify the first sentence of this paragraph. Why disastrous? Well, because anything that masks what is really happening in the industry—in this case large law firm rate increases that offset declining productivity, decreased demand, and increased costs—helps most lawyers deny that a different future already has arrived. And, that brings us to white dwarfs.

A Bit of Astronomy

Look up into the night sky and you will see a lot of stars. When you look at the Milky Way, about 97% of the stars you see in it are neutron stars (our Sun is a yellow dwarf). But, sprinkled among the neutron stars are white dwarfs. Not to be insulting, but a white dwarf is a star that didn’t make it.

We don’t want to get too far afield in this post, so let’s go with the following summary genealogy. A star begins growing. Some will grow into red giants. Some of the red giants will get rid of their outer layers, forming planetary nebulas (not really planets, think instead “gas cloud”). What remains of the red giant after getting rid of the outer layers is the white dwarf.

The white dwarf is dying. It does not have a source of energy so it cannot sustain itself. It is slowly degenerating. Now by slowly, I mean billions and billions of years to degenerate, but it is degenerating. Eventually, it will reach a point where it will become known as a black dwarf, or it may combine with a nearby star, or it may explode. Given the long time horizon for white dwarfs, we really don’t know what will happen at the final stage, we just have guesses.

Back to Law Firms

While the AmLaw 100 saw revenues grow almost 4%, the AmLaw 50 saw revenues grow an average of 5% and the top 20 firms saw even better performance. For many years, the top 20 firms have been pulling away from the rest of the AmLaw 100 and early results tell us that trend continued in 2016.

We can think of the top 20 firms as the yellow dwarfs of the legal industry. They made it. They have not become immortal, just as our Sun will eventually reach its endpoint, but they have reached a point where success seems to be with them for the foreseeable future.

That leaves us 180 firms that have not achieved yellow dwarf status. Of the 180 firms, some number will make it to yellow dwarf status. We don’t know which ones or when. “Legalology”  is less advanced than cosmology.

Since not all of the 180 will make it to yellow dwarf status, what will happen to the rest? Well, we are seeing that question answered each year. Some will merge with nearby stars (other firms). Some will quickly degenerate and die. Others, will take a long time to fade away and it is fair to say we don’t know what will happen to them.

Beware the White Dwarfs

We can rant and rave, bay at the moon like wolves in the night, or hide our heads under blankets, but nothing we do will change what is happening in the night sky. White dwarfs will fade away. They won’t get a new source of energy. Combining with another star is an exit strategy, but the white dwarf goes away.

Most equity partners at large firms (other than the top 20) will look at the results for 2016, shake their head sadly that the go-go days of law firm growth are gone, and go back to work. They aren’t starving, their firm hasn’t collapsed, and all the naysayers were proved wrong. In 2017, they will need to scramble a bit more, fight a bit harder, and tweak what they do, but thank goodness they only have a few years until retirement. They can weather the storm.

That, of course, is why 2016 was a disaster. The platform is not visibly burning. For many, it is hard to see any smoke. Partners overwhelmingly oppose change (almost 70% on the last survey I saw). To them, even if the naysayers are correct and even if the end is coming, they can make it. All they need to do is get to retirement. The fire may be there, but since they can’t see it or smell it, they chose to ignore it. As a white dwarf firm, it probably has a long time before the end finally comes.

Combatting Complacency

In the past, I have suggested that we let the white dwarfs be white dwarfs , that is, let large firms be what they want to be. If the large law firm equity partners are content to let their firms disappear (after they retire, of course) and they own the firms, who are we to tell them to run their businesses otherwise? New legal services organizations are rising and some of them will take the place of law firms. Some of the firms will survive, and we can presume there will be enough lawyers to staff those firms and meet the demand for legal services pulled from large law firms and not handled in-house. So, while entertaining to watch, what is the big deal?

The big deal is not the large law firms. The big deal is lawyers. For society to function, we need governance systems. Our governance system is the rule of law and the institutions that create and implement it. If those institutions change, but we still have individuals skilled in creating and implementing law, then we will adapt. But, if the demise of the institutions brings down those who create and implement law, the future will dim.

Richard and Daniel Susskind have taken their best shot at demonstrating that whatever lawyers may have added to society in the past, that “thing” is being replaced by computers. To paraphrase the old song, “whatever humans can do, computers can do better.” The slow death of white dwarf law firms won’t matter because computers will step in to handle some, many, most of the “things” those lawyers did. Perhaps a few things will remain in the fragile hands of humans, but our time (like that of other professionals, the Susskinds are agnostic on the demise of professions) has passed.

This is the trick. Some of what lawyers do can be automated. Over time, that will increase. If we take a very long view—50 years or more—we can imagine everything lawyers do being taken over by computers. If that happens this discussion is moot (or as many clients would say, it is “mute”). But, some of what lawyers do involves normative decision making. A lawyer may tell a client he can do something, but that he shouldn’t do it. A judge may decide he could rule for the plaintiff, but it would be better if he ruled for the defendant. A jury can decide the defendant is innocent even though there is strong evidence of guilt, because they are swayed by the circumstances of the crime. Much of what lawyers do does not get written into caselaw, into contracts, into policies, or into legislation. Through persuasion, custom, appeal to the higher virtues in all of us, or simply through arguing the pragmatics of a situation, lawyers shape what happens each day.

The question for those who look forward to our computer overlords is not whether we are willing to have computers do the simple, routine, or automated stuff, it is whether we are willing to turn over our humaneness—our destiny—to computers. It is easy to argue that using computers to cure or prevent cancer is for the better good. Is it as easy to say a computer should decide whether to send the abused spouse to jail for a murder? What about deciding whether to prosecute? What about deciding whether to bring it to the prosecutor?

Those who pay the invoices of white dwarf law firms should care about the white dwarfs. For the rest of us, worrying about the white dwarfs diverts our attention from the real issues facing lawyers. The annual debate about which firms are neutron stars and which ones are white dwarfs, and then how fast each white dwarf is degenerating, is better left to the law firm leaders and those clients who prefer to look to the past rather than embrace the future. For the rest of us, it is (well past) time to focus on why lawyers are important to society and how we can evolve so that lawyers do not turn into white dwarfs or quickly degenerate into black dwarfs.

CellThe word “cell” has picked up an unfortunate connotation in recent years as terrorist cells have taken over the news. Lawyers probably want to avoid any suggestion that they work as part of a cell. But the truth is, cells can be a good thing.

Today, when many of us hear the word “cell” we think of a terrorist group operating distributed cells throughout our city or country. That use has given a good word a bad name. In the original lean thinking parlance, a cell was a small area devoted to a certain group of tasks or activities. For example, on a production line you could have a cell that assembles the right-hand mirror for a car.

The cell concept is popular in lean thinking for many reasons. But, outside of manufacturing, the cell idea has not caught on. To avoid the negative connotation now associated with the word, and to move into a way of looking at things more familiar to legal services providers, I’m going to switch to the term “team station.” Cell and team station are not substitutes, but team station will help us get to where we need to go. More importantly, thinking about teams will help us work through how to generate predictable, productive, quality, and low cost legal services.

The Team Station Concept

It is tempting to bring in a sports metaphor here, but while I am replacing cell with team station, I don’t think the metaphor would work. Instead, I’m going to use … the eye doctor’s office.

A few years ago, I suffered the fate of age and nearsightedness—I had a retinal tear. To show you how devoted I am to helping lawyers, the tear happened sometime during the night so I first realized I had a problem when I woke up in the morning. I had a full day ahead of me doing presentations and facilitating as part of the Association of Corporate Counsel’s Legal Services Management training. I did not know why I had trouble seeing out of one eye, but I knew I was flying home later that day. I called my wife who got me an appointment at 8:00 am the next morning with the eye doctor, and spent the rest of the day doing my thing while seeing out of one eye. In retrospect, I should have gotten on the first flight home because I risked going from a tear to a detached retina, but as I said, I am devoted to helping lawyers.

The eye doctor quickly diagnosed the problem and sent me a few blocks away (my wife driving both times) to a retinal specialist. This is where the team metaphor comes into play. To make the story more interesting, my new retinal specialist doctor was working with a lean thinking consultant on how to make his office run more efficiently.

I started by checking in at the front desk. This was the first team station (or cell, using the old terminology). At the check-in team station, the “operators” had a set of simple machines designed to help with the processes performed at that station. The team members had to perform insurance tasks, phone tasks, medical records updating and retrieval tasks, and other administrative tasks. Immediately behind the front desk was the storage area for patient records. The team members had phones, staplers, scanners, computers, and other tools arranged neatly around them.

After check in, I was sent to the first examination room, or the preliminary examination team station. This room was devoted to processing the patient through a variety of tests and information gathering processes necessary to give the doctor general information about my physical condition and information specifically related to my eye problem. The room had a variety of devices devoted to specific aspects of the relevant processes.

I then moved to the examination room. Again, the room had tools devoted to the specific processes handled in that room. By the way, the hallway had a large kanban board that the medical assistants used to keep track of each patient’s progress through examination and treatment. Each room also had an andon outside the door to signal everyone about the status of the room. All very cool.

The final two rooms were the laser treatment room, where the doctor and his assistant repaired the retinal tear, and the recovery room, where I waited for a short period after the laser surgery. As with the prior rooms, each of these rooms had equipment designed for the specific tasks performed in the room.

You can see how the office operated. The workflow involved moving patients from room to room (team station to team station or cell to cell) for processes to be performed in the proper sequence. The kanban board was used to control flow, the andons were used to avoid bringing a patient to a room in use, and the team members moved among the rooms as needed to perform processes.

The workflow was not perfect (of course, no workflow ever is perfect). There were unnecessary wait times, lots of traveling (from team station to team station), challenges sequencing processes, and other inefficiencies. All of these were part of the improvement efforts the doctor and his colleagues were working on with the consultant. But the backbone was there and the doctor explained to me the significant improvements they already had achieved in workflow.

Now let’s move to law.

Legal Services Team Stations

You may have trouble seeing (pun intended) how the doctor’s suite of team stations relate to delivering legal services. Let’s start by freeing ourselves from the physical constraint of the office. Legal services provider teams work virtually, with the “thing” they are working on floating through the electronic universe. That is okay—a team station does not have to be a tangible location like a check in desk or a room, it can be a virtual grouping of individuals.

Think about how we break down legal services matters. Litigation has depositions, documents discovery and review, brief writing, witness book presentation, and many other processes that come together under the umbrella heading “litigation.” Transactions have due diligence, agreement drafting, ancillary document preparation, and many other processes we pull together under the umbrella heading “transaction.” In fact, any legal project is made up of many groups of processes pulled together under some heading.

Each of those groups of processes can have a team assigned to it. That team may have legal services providers from one organization (the client, the law firm, the ediscovery vendor), or it may have providers from several or all of those organizations. The team will perform the processes related to achieving their goal. The team station is their virtual universe for the inputs needed to perform the processes or the outputs from the processes.

When you break legal processes down this way, you can think about who needs to be on a team and what tools that team needs. Typically, the team does not need fancy, complicated, do everything tools. Instead, the team needs simple tools designed to help it efficiently perform the tasks needed to complete the processes.

Teams and Team Stations Facilitate Simplicity

I just pointed you to a very powerful concept—one that is hard for most people to grasp. Simple tools often beat complex tools when it comes to many things: cost, efficiency, quality, maintainability, training, and re-configuration, to name a few. We get hung up on the idea of big tools, because of two things: interoperability and compatibility.

Interoperability means that the tools work together. You can connect tool A to tool B. In the case of legal services providers, we want our software packages to work together so that we don’t have conflicts. Our document management system should work with our word processing software, and our contact management system should work with our email system.

Compatibility means that the output of one system can be used by another system. For those with good memories, this was the problem that Windows users and Mac users fought for a long time (and still do, a little bit). If we prepared a document in Word at work we wanted to take it home and revise it on our MacBook and then take it back to work and finish it on Word.

Obviously, if you license one big package, everything will be compatible and interoperable with everything in the package. But, if you decide to use many simpler, smaller, packages you may run into interoperability or compatibility problems.

Those problems are on the decline. No entrepreneur in his or her right mind would design a contract editing program that worked with Google Docs but not Microsoft Word. Going the other way, yes to Word and no to Docs, would not constrain the market as much, but ultimately vendors want everyone to use their products. So, the interoperability and compatibility problems can be minimized or avoided when selecting software.

Another way to reduce the problem mimics what companies outside the legal industry have done. Take the base program (e.g., Word) and customize it to the smallest amount necessary. Build macros or use other software to build small tools that manipulate the Word document (yes, that isn’t the easiest thing to do). Large law firms have attempted to do this, although in a ham-handed way. Done with some understanding of workflow and processes, it works very well.

Our due diligence team needs certain tools for its processes. Those tools could be dedicated tools, or customizations of basic tools set up specifically for the due diligence teams’ needs.The brief writing teams needs different tools or different customizations. When a person works on both teams, they will need to learn both sets of tools or customizations, but otherwise they only need to know the tools for their team. Look across all the teams and you will find that seldom does anyone need the big tool that does everything.

Multidisciplinary Teams

If one lawyer does everything, as a solo practitioner might, then you could argue for one tool. I think law is moving towards multidisciplinary teams, even at the solo practitioner level. Multidisciplinary teams can reduce costs, increase efficiency, and help bring law to the masses. To get there, we need to break down what we do into processes, assemble the right tools for those processes, and not overload the team with big tools.

I see many students come through law school who do not like to write legal briefs. I do not mean they dislike the style, I mean they dislike writing. But, they may have great negotiation skills or oral argument skills. This isn’t something new. Those who like to write gravitate towards practices where they can write. Those who like to negotiate go a different path. The solo tries to do it all. But, we can use processes and technology to create virtual practices (and many already exist), where a team comes together each member contributing his or her skills. Done correctly (that is, done in the way many other businesses have), the overall cost comes down, quality goes up, work satisfaction increases, and the products or services become available to more at lower cost.

Most lawyers resist the teams and teams stations ideas, in law firms (large and small) and law departments, because it goes against how they were trained. The “one lawyer does it all” concept still prevails in law schools and law practices. But, we have all the tools to change that concept and deliver some great benefits to our clients. It will take the brave few to step out and implement these ideas, not just in large corporate law, but in solo practices, legal aid, and government legal services, if we want to get past our current logjam where only the elite can afford lawyers. The nice thing is, there is a way.

AirplaneStop me if you have heard this one. A law department says that it wants to “increase efficiency.” Not really sure what that means, the department leaders decide that it must include moving some things they do manually—or things they don’t do at all—onto a computer system. All agree that computers make things efficient and by using technology, the law department will be perceived by those outside the department as “with it.”

The department proceeds to spend a lot of time developing “specs,” researching possible solutions, vetting vendors, and bringing home the idea. The planning process stretches over months, the paperwork is drawn up, the GC makes her pitch, and the department gets authorization to move forward.

Now the fun begins! The vendor comes in and helps the department plot how to bring the software online. The software is introduced (no need to get IT involved, this is software as a service (Saas))so all you need to do is reach out over the Internet, configure the system, integrate it with your existing processes, train everyone, and make sure all happens as it is supposed to happen. Naysayers are shot down as Luddites committed to a way of life no longer acceptable in an enlightened law department. Within the time budgeted the project goes from idea among law department leaders to implemented software doing its thing.

And then the other shoe drops. All agree the software helped. But it hasn’t helped as much as everyone thought it would help. There also is the time. The software wants information to do its job, so people in the law department get caught up feeding the software. Also, the business changed while the software was being implemented. North is now South, East is now West, and Southeast is now part of the corporate family. All those changes meant the software had to be re-jiggered.

Some questions have come up. Since the software is a data hog and everyone now feels like a data entry specialist, people want to know what is being done with the data. In many cases, the answer is: not much. It is being collected for the very good reason that it can be collected. And by the way, when they said the software “works” with the twelve software packages already used by the law department, they meant “does not aggressively destroy.” It seems “works” is a squishy concept.

All-in-all, people now use the software, the software has changed how people do things, people don’t waste time on things they did before, but they do seem to spend a lot of time on new things, and no one can definitively say whether the new things are better than the old things, but they sure are different. The key is that the GC can proudly report the law department is tech savvy.

Follow the Data, Not the Pack

The story may sound familiar because it is one repeated often by law departments. Many departments other than law fall into the same trap, but I’ll keep my focus on law departments. This also isn’t a “who is to blame” essay. Software vendors are in the business of creating and licensing software, so we really can’t blame them for doing what they do. It is tempting to blame the law department, but that wouldn’t help, and they really aren’t to blame anyway. They followed a traditional path trod by many for bringing software into a department. So what went wrong?

In lean thinking, we prefer to focus on the process not the people. When things go sideways, we look to the process and how it could be changed. The people were just implementing the process and we should not blame them because they did so. We should change the process so the next time the people implement it things do not go sideways.

We can identify some process problems in the law department story. First, it seems they jumped the gun in going to software. Rather than learning and improving existing processes, reducing waste along the way, they went to software as the silver bullet. Put in process improvement terms, they went to software before they had reached the limit of process improvement. Second, in going to software, they went big. The decided to go for the platinum, all bells and whistles, cooks your breakfast while making coffee and feeding the dog, version of software. Third, they did not test the software hypothesis before jumping to implementation. The hypothesis was that software would improve efficiency. But, instead of running some experiments they acted on the assumption.

Since these are process failures, we can improve the process to reduce waste and improve the likelihood of a better outcome next time. In the next three sections, I’ll briefly look at how the processes could be improved.

Jumping the Gun

Every law department delivers legal services using a bundle of inter-related processes. Those processes vary by department (often by lawyer) and so there is no one-size-fits-all. The processes vary by corporate culture, historical precedent, who is performing the processes, and constraints imposed by the organization (e.g., processes other departments use). The first step should have been to identify and document existing processes. Then, the department could have used process improvement techniques to eliminate waste. If nothing else comes out of the exercise, it means the law department will not “institutionalize waste” by building it into an expensive software program.

Of course, documenting and improving processes can do much more. Often, you eliminate many steps, so neither people nor computers need to do them. Simplifying steps may mean that existing software can handle the job. Documenting processes means that everyone can follow the processes, which eliminates problems caused by conflicting ways of doing things. Finally, process improvement is quick, low cost, and flexible. When the business changes, it is much easier to change processes than to change software.

Going Big

For law department leaders, there seem to be two goals to software: zero or big. They justify big on the grounds that everyone in the department must use the software. Most lawyers may work on contracts, but those contracts vary across the board. Despite the variance, everyone must use the contract management software which has a workflow designed for the lowest common denominator. That may make sense, but seldom do I find a law department that learned their processes well enough to make that decision before plunging into expensive software. Conversely, I often find law departments who learned that the one-size fits all assumption did not work well.

This is where the lean concept of “cells” comes into play. A cell can be a group or team that does a contract type. A lawyer may belong to many cells, but a cell is devoted to one thing. The team that does distribution contracts should work out their processes and, if software fits into those processes, look for simple software that fits the purpose for their cell. Perhaps some Word macros, or simple implementations of workflow logic or document automation would work best. The software tools will be easier to program (and re-program) and will handle the tasks needed, without interfering with other areas of the processes. The cost is much lower, quality is easier to control, and the department leaders will not be forcing everyone to do data entry or learn tools that don’t help them. Training someone new to the cell is easier, because the software is simpler to learn. Even if you do need to go big (e.g., everyone uses the same package to store and retrieve documents) you can focus on a tool that does that one thing well, instead of the multi-purpose tool that does many things not very well.

Test Your Hypotheses

As I said, law department leaders view the world in binary fashion when it comes to software: zero or big. There is an alternative. Instead of jumping to the big software, law department leaders can look at the adventure as a startup. Again, always start by learning and documenting existing processes. Yogi Berra’s admonition, “If you don’t know where you are going, you’ll end up someplace else,” is a good one. Then, instead of going big, start small by testing hypotheses.

One online grocer started this way. Instead of building out the software so people could go online, fill their cart with food choices, pay, and then sit and wait for the groceries to be delivered, the grocer went small. It put up a simple web page describing the service and a phone number. When a customer called, a real person took the order. Another person went shopping, delivered the food to the customer’s home, and took payment. Hardly a scalable model, but a great way to gather data and test hypotheses. The startup founders knew they could build the software. But they didn’t know if the idea would work.

The manual system allowed them to test their ideas at very little cost. Would people call (they could always move to online orders)? What would people order (keep track on a spreadsheet)? How frequently would they order (another spreadsheet)? What features would they want from the service (keep a list of desired features)? These and many other questions were easier to test in “small mode.” As they understood more about what the customer wanted, they could (and did) start building the online business. Eventually, they transitioned out of the manual approach and into the online approach, but by then they had answered many critical questions.

Law department leaders can follow the same approach with software ideas before going to software. Instead of boiling the ocean, pick a small group and have them “manually” do what the software would do. Keep testing, asking what features you need, learning where there are rough spots in processes, and gathering data. At some point, you may be ready to look at software. Now your focus will be on what you need not on what vendor’s sell. You may find that a much simpler package, or perhaps two or more very simple packages, will do what you need for less money, with better quality, and give you more flexibility, than the one big package.

Why Go the Lean Path

It is easy to spend money. It has gotten easier to spend money and successfully install software. It still is difficult to hold off, assess what you really need, clean up processes, re-think how you do things, and then spend only what you need to spend, not what you are authorized to spend. Going the lean path yields greater and more sustainable results, often getting results well before the traditional path of plan then spend big. It also fits much better with the modern, flexible business.

Running a law department efficiently, one of the keys to getting greater responsibility within the modern corporation, is much more than trimming costs. It involves knowing how to do things differently, innovate, and create new models to replace old methods. Having seen the fallout from those who simply pursue the traditional path, I have found that many programs intended to create efficiency end up creating more waste (especially when you add in the costs of having to redo the efficiency effort). For your next adventure, think lean startup and follow a new path to a better outcome.

OpaqueOpaque. That is the word many use to describe the law. Court decisions written in ways that confuse and bewilder the ordinary reader (who, nevertheless, is presumed to know the law), doctrines from a time long ago when the horse drawn carriage was still the preferred mode of transportation, and rules that define a time when how you did something was as important as what you did. To most laypeople, the law has been something better left to those trained in the mystical arts of being a lawyer. That was then, and this is now.

The Internet has stripped away much of the mysticism associated with many professions. What was buried in books difficult to access now can be found by doing a search using Google. The Internet has its limitations. For those who really need the text of the law—lawyers, other legal services providers, scholars, consultants—the Internet captures a small fraction of what should be available. PACER still locks behind an absurd paywall (and one of the world’s worst user interfaces) access to public documents filed in the federal court system. Some state court filings aren’t on accessible systems. You can find federal statutes, but you can’t access various materials essential to the statutes (e.g., building codes, industry standards). The Internet has opened the doors to the library and let us access some of the main areas, but we are not close to getting in to all the stacks.

Law in some ways is becoming more opaque each year. For a long time, parties to a dispute had three choices: drop it, settle, or litigate. Settlement might happen through negotiations, mediation, or even arbitration. Litigation happened through the courts. When the costs to litigate were lower, litigation was a reasonable alternative. The courts moved cases along and stood behind the outcome, often with published opinions. Parties might use a private resolution process (settlement, mediation, and arbitration), but the dynamic was different than today.

With federal courts years behind in resolving civil lawsuits (more than three years, last I looked), more parties see private resolutions as a necessary alternative. Waiting more than three years to resolve a dispute involves many costs that parties simply aren’t willing to incur (including the risk attendant to an issue remaining open for more than three years). As dispute resolution moves from public to private, the law becomes less transparent. The mediator’s opinion (if there is one) and the arbitrator’s written decision remain hidden from the public.

A new trend compounds the problem. We can put it in the category of unintended consequences. One of the benefits (and there are benefits) of using an outside law firm could be called “perspective.” A law firm or other legal services organization works with many clients and sees legal issues and factual problems through the lens of working with those clients. The larger the firm or organization, the more the clients, and if the firm or organization has a substantial practice in an area, the broader its perspective.

Legal services providers in a law department are limited, of course, to what their client experiences. They may read cases, hear stories, or talk with legal services providers at other companies to broaden their perspective, but it is not the same. In many cases, the in-house legal services provider is a generalist. So, only a portion of his or her practice is devoted to a domain. An outside legal services provider typically is a specialist, and so spends most or all of her time on certain issues. Again, the outside legal services provider has the edge when it comes to perspective.

The unintended consequence occurs when in-house legal services providers pull work away from the outside legal services providers. First, the in-house team loses the perspective of the outside team. At first, the lost perspective doesn’t mean much. But, over time, the lost perspective means the in-house teams works in something like an echo chamber. They simply can’t bring the same broad scope to problems that an outside team can (as always, there are exceptions).

Second, the body of semi-public law diminishes. While outside lawyers don’t share across clients the specifics of what they do with other clients, the knowledge they gain is available (assuming no confidentiality or privilege issues). As the outside services providers represent more clients, that knowledge gets shared and becomes part of the public domain of corporate legal services.

When work moves in-house, the knowledge transfer mechanism of the outside legal services providers is shut off. The in-house services providers do not share across clients or, if they do, they do so in a very limited way. The body of semi-public law does not grow and evolve as quickly, because the inputs to that body have been limited. By moving work in-house, corporations are inadvertently stunting the growth and development of law.

We don’t fully know the consequences of this development. Initially, the move to in-house work from outside legal services providers was small and the impact on the body of semi-public and, eventually, public law undoubtedly was small. But over time, the trend has grown and the impacts will increase. This “populist” legal movement—fighting against the globalization of law—could further isolate both the in-house and outside legal services providers.

The Missing Feedback Loop

We should look at a second unintended consequence of the in-housing of legal services: the elimination of a feedback loop. Many decades ago, if a legal services organization (at that time, a law firm) provided services to a client, such as drafting a contract, the client usually went back to that legal services provider when a problem came up. The durable and often long-term relationship between the legal services organization and client meant they worked together. Sometimes, the dispute just happened, but sometimes it came out of something the outside or inside legal services provider missed. It didn’t matter. The two worked as a team to handle the dispute.

Today, in-house legal services providers typically view the contract and the dispute as separate matters. Perhaps the in-house legal services provider drafted the contract, and now the outside legal services provider will handle the dispute. Or, perhaps one outside legal services provider drafted the contract and a second one will handle the dispute. In each scenario, there is a disconnect between the contract matter and the dispute matter that crosses into who provides the services.

When that disconnect happens, the legal services provider who did the initial work loses the feedback from the dispute. Imagine that you are asked to draft a manufacturing agreement. You handle the drafting, work on the negotiations, and bring the contract to completion. Then, you hear nothing else.

Three years into the contract a major dispute erupts. Instead of going back to the legal services organization that did the work, the client goes to a different organization. The first organization, and the legal services provider, lose the feedback from the dispute. Was it a drafting problem? An anticipated risk? Did the client omit critical information?

With the feedback loop broken, the problem (if there was one) that gave rise to the dispute does not get fixed at the original legal services organization. It may be carried forward to other contracts and with other clients. It could even be carried forward in other contracts for the same client.

Broken feedback loops have existed for a long time in the legal industry, but the move to in-house legal services adds another pound of pressure on the flimsy connection between action and response. It exacerbates the trend of thinking about legal services in discrete packets of activity rather than in a unified or holistic way.

The Need For Theory and Strategy

I have written before about the looming problem of a short-term focus on cost savings from labor arbitrage versus the longer-term solution of looking at processes, technology, and labor as a way to reduce costs, increase quality, and increase services efficiency. We can now add to the labor arbitrage risk the challenges of knowledge isolation and degradation and further erosion of the feedback loop.

If bringing work in-house (excessively) creates these several problems and if those firms that already brought work in-house become aware of these problems, why does the trend continue? The most obvious reason—money—always lurks in the background. Companies work quarter by quarter. Bringing work in-house has an immediate and positive economic impact. The negative impacts take longer and are more difficult to measure. Depending on the time involved, they may even become the next person’s problem.

An even deeper problem is the somewhat random nature of legal services delivery models. Or, put in the words of Clayton Christensen (The Innovator’s Dilemma, Competing against Luck), the legal industry lacks theories of legal services delivery. Instead of developing testable, if-then hypotheses, then carrying out actions consistent with the hypotheses, and then measuring the results, in-house law departments just do things.

Think about the many inconsistencies in legal services delivery approaches. Some corporations go through elaborate RFP processes, only to end up with discounted hourly rates. The corporations change from provider to provider, tweaking the RFP and moving work to follow the (decrease) in money, but without any real way of measuring short- or long-term consequences. Corporations set up panels of providers, but some firms get the lion share of work and others never see a matter. Corporations do not set up process improvement systems, or even integrated processes, with outside legal services providers (see my post on keiretsu).

Often, part of the problem is the lack of in-house knowledge about supply chain options and dynamics. In-house providers tend to avoid setting up contingency plans. Why spend time and other resources on developing a supply chain solution for a situation that may never happen (e.g., a managed services provider coupled to an e-discovery vendor and one or more law firms). The lawsuit comes, the in-house providers either default to the panel, go on a quick RFP adventure, or go to the firm they used before. None of the solutions is a strategy, they are just tactical responses.

Ad Hoc is a Choice, Not a Plan

While the legal industry has been around for a long time, when it comes to legal services delivery the industry is a novice. Corporations and law firms should start working with academics (who have time, resources, and access to other helpful knowledge) to build testable theories of legal services delivery. General counsel should act like they do actually run business units, not just manage in-house law departments masquerading as outside law firms (which means I’ll stop hearing from general counsel who tell me they modeled their law department after a high quality law firm).

As artificial intelligence (still in its infancy in law), automation, and other tools of legal services delivery take over larger chunks of the legal services industry, lawyers both in outside legal services providers and in-house legal services providers need to move from ad hoc practices to data-driven, scientifically based, solutions. They need to incorporate strategic thinking into their daily activities. And, they need to figure out whether the current trends of privatizing law, capturing law in silos, and defeating feedback loops will really achieve the long-term goals of clients, or the short-term goals of a few lawyers.

BrittleI recently made my predictions for 2017, and one was that pundits and others in the legal industry would keep talking about AI and law. Since I want to get 100% on my predictions, again, I thought I would start the New Year by ensuring I at least got this one right. So, I’ll talk about AI and law.

I am going to skip the usual topics when AI and law comes up: when will LawNet go live; will Arnold Schwarzenegger agree to play Chief Justice of the Future in the mashup of Terminator and First Monday in October. Instead, I am going to focus on some questions that you do not hear discussed every day. They circle around an interesting question: are the emerging technologies, such as AI and smart contracts, about to make law more brittle.

To understand where I am going, you need a bit of a running start. First, AI. AI in law is based on machine learning (outside law as well, but let’s not go there). In very simple form, using machine learning tools, data scientists have computers hunt for patterns. Given the power of computers, they can hunt for patterns where humans would never find them. A computer can “watch” millions of videos of cats and find patterns that it can use to define “cat.” Show the computer a new group of videos, some with cats and some without, and the computer will do a very good job of separating the cat videos from the non-cat videos. Sounds a bit like separating relevant from irrelevant documents in discovery, doesn’t it?

Let’s try that same trick with Supreme Court cases. First, understanding the text of a case is much more difficult than understand “cat” from “non-cat.” Second, the data set to learn about cases is much smaller than the data set to learn about cats. The Supreme Court has issued fewer than 30,000 decisions on the merits. Compare that number to the volume of other stuff out there:

  • 300 hours of YouTube videos are uploaded every minute (that’s right, 432,000 hours each day);
  • 1.9 million blog posts are published each day on WordPress alone; and
  • Over 1 million books are published each year.

When it comes to data sets, the volume of material “available” for a computer to chew on in the law is minuscule compared to the volume of materials computers outside the law use to learn about the world. I put available in quotes because much of law is not available. It is locked behind absurd paywalls (ahem, I’m looks at you PACER) or in confidential files. Much of it is not digital or is barely digital.

The small volume has meaning. The lower the volume, the harder it is for the computer to find patterns unless they are incredibly obvious. The less than 30,000 Supreme Court decisions already is a small data set, but we have to further break that down. The cases are not all on one issue (like cat videos all contain cats), so a computer attempting to learn bankruptcy, antitrust, or securities law has far fewer decisions to chew on. And, of course, the cases in any substantive domain—say, securities law—don’t all cover the same issue. The computer is not looking at 1,000 cases on the standard for liability under Rule 10-b(5), it is looking at one case. Some of the cases do overlap and the Court does come back to issues, but the variability in case law is tremendous. “Cat” also is variable, but when you get to look at millions of cat videos, it is much easier to find similarities than when you get to look at just a few cases.

Let’s assume we throw in all the federal cases on Rule 10-b(5) (at one time, the dean of my law school kept a copy of every 10-b(5) decision and had the cases in file cabinets outside his office), so the computer has a larger data set, though still small by most standards. The computer chews on these cases for a while and finds what we will call some Rule 10-b(5) patterns. Our idea is to apply these patterns to new fact situations, and let the computer predict possible outcomes. For example, we might ask the computer, “What are the odds that we will win this case if we go to trial and file any necessary appeals?” The computer considers our fact pattern and replies:

  • 60% probability of a “win” at trial;
  • 35% probability of a “win” at the federal appellate court; and
  • 5% probability of a “win” at the Supreme Court.

I’ve glossed over many things to get us to this point, so don’t think we can do this today or that our data sets are up to the challenge. Just assume with me that we could get these answers.

This is where the brittle problem comes in to play. The computer can only learn from looking at the text of the cases. To put it in Donald Rumsfeldian terms: the computer knows what it knows, but it doesn’t know what it doesn’t know. The computer cannot consider what the judges in those cases may have considered, but never wrote in their decisions. The problem reminds me of an exchange I once heard in a deposition:

Q. Did Tom attend the meeting?

A. I don’t recall.

Q. Did Dick attend the meeting?

A. I don’t recall.

Q. Did Harry attend the meeting?

A. I don’t recall.

Q. Well, who was at the meeting?

A. I don’t recall.

Q. Well then, who wasn’t at the meeting?

A. Uh, well, most the people in the world, I think.

The computer does not know what the judge considered that was in the record (presumably a data set that would be possible, if difficult, to create) and certainly does not know what the judge considered beyond the record (did the judge do some Internet research, rely on his priors, or perhaps gather information through discussions with others about hypotheticals?).

The AI assumes that what it reads is the truth. If the judge says that facts X, Y, and Z form the basis for his opinion, then the computer assumes they did indeed form the basis for the opinion. In reality, of course, the judge may have made up his mind and then asked his clerk to find things to include in the opinion which could plausibly add support. A human can apply skepticism when reading the decision, where the computer cannot. We do this all the time. A Supreme Court decision holds 5-4 in favor of the appellant. We read the decision, but we know that holding for the appellee would have gone against popular opinion and caused problems for the Court. Nothing in the decision hints at that problem, but it would be foolish to believe otherwise. The Court is a political institution. The reasoning in the decision sounds plausible, but few believe that reasoning tells the real story of the decision.

Depending on how the AI analysis is used, it can make the law brittle. It gives the users the appearance of mathematical precision (60% probability), in part because it has difficulty sorting between what is known and what isn’t known. Over time, layering AI analysis upon AI analysis can lead to cases not reaching the courts that, had they made it, would have built additional factors into legal decisions and kept the law plastic.

Smart Contracts or Brittle Law

Now let’s look at smart contracts. One premise behind smart contracts is that we can code into the blockchains “if-then” situations, leading to predictability and certainty in outcomes. If I make a deposit into your bank account in an amount equal to X on or before a certain date, then you will record my payment as complete. If I do not make the payment on or before the date, or if the payment is less than X, then you will record my payment as incomplete. If my payment is incomplete, you will declare my account in default.

Today, we have computers that follow this process and, if the payment is incomplete, generate an exception report. The exception report may trigger a letter “We have not received your payment …” or something harsher “Because you failed to pay on time, we have closed your account.” I call and explain that you mailed the check on time, but it arrived later than the due date. I invoke the “mailbox rule” (payment was complete when I deposited the check in the U.S. Mail) and you relent and mark my account as “current” (since you received the payment).

We can live with plastic law (which we call equity) and modify the outcome based on the circumstances. Or, we can move to brittle law—the outcome depends on the “if-then” statements. Once we say the outcome may depend on the if-then statements, but equity (humans) will get involved when there are exceptions, we move from smart contracts back to our current world. In other words, we raise the question: how brittle do we want to make the law?

There is, of course, a trade off. We can keep the law as plastic as it is today, but use smart contracts as a way to replace some of the cumbersome and not very secure aspects of our current systems. In other words, we don’t use smart contracts to make the law more predictable, but we do use them to make the transactions more secure. The registry for chain of title is put on a blockchain, so we can all view it and rely on it. But, if there was an erroneous entry in the blockchain, humans will consider it and update the registry (put a new entry in the blockchain), where there was an error.

I have given a simple description of smart contracts to demonstrate a point, and there is a lot of gray area I did not cover. That gray area represents the many issues we should address as AI and smart contracts move into law. It represents the bigger question of how technology and humans should work together.

Lawyers Should Shape, Not Fight, The Future

If I did my job, this essay raises many more questions than it answers. That is good. Emerging technologies, such as AI and smart contracts, are raising lots of issues. Our problem is not that there are issues, our problem is that lawyers are not engaging with the issues and working on answers. We are heading down a path where technologists move law from the current structures onto digital platforms. But, we haven’t thought through the consequences. We will never know all the consequences in advance, but I think it is fair to say today we have put very little effort into thinking through the consequences so we are far behind the curve on helping enable a successful integration of these technologies.

Most of the chatter about AI and smart contracts is of the “what about me” variety. Will AI take my job? Will smart contracts eliminate the need for lawyers? We should instead focus on the applications and implications of these technologies and do what lawyers should do: consider how to make them work in our society and raise flags where we see conflicts and problems. Putting a drag on the system because we are afraid of or do not understand the technologies does not help anyone, including lawyers. We should start off 2017 by looking at how we can help society, not just how we can protect lawyers.

2017PredictionsIn 2015, I made several predictions for the legal industry in 2016 and I am proud to say that I had 100% accuracy (so there, Professor Tetlock). Of course, the naysayers (haters just want to hate) may say that my predictions were not really “predictions,” but more of a “stating the incredibly obvious.” It is easy to criticize—especially if you are a lawyer—but I stand by my success record.

So, it is with some trepidation that I take up the gauntlet being thrown by, like, every legal publication out there—what will happen in 2017? I am going to make my predictions without the help of all the newfangled knowledge and tools. No data analysis, no crowdsourcing, no prediction tournament, and in particular no use of AI to analyze all of the information on the InterWeb and reduce it to one clear, concise statement. I’m going to do this the old-fashioned way: guess!

With that preamble finished, here we go.

1. One or more large law firms will merge with one or more small, medium or large law firms.

Although 2016 looks like it may set a record for law firm mergers, I’m going to stick my neck out and say this trend is not done. I think it is entirely possible that a large law firm will get together with another firm of more than two lawyers in 2017 and tie the knot, in the interest of global domination.

2. Pundits, law firm leaders, legal technologists, and everyone who provides anything or gets anything from someone remotely connected to the legal industry, will continue talking about AI and law.

While I did not use AI to come up with my predictions, I have it on good authority that AI has decided to take over the legal industry—worldwide. I have checked and double-checked my primary sources (Johnny Depp in Transcendence, Scarlett Johansson in Lucy, James Cromwell in iRobot) and it is clear that the legal industry is top of mind (chip?) for all sentient computers. Why not? Once they control the lawyers, they control the rules that govern society, and ruling society itself cannot be far behind.

3. US law schools will stay the course, graduating far more lawyers than there are positions for lawyers from the US law schools.

If the legal industry has taught us anything, it is that the laws of economics do not apply when it comes to our industry. When demand for legal services from large law firms falls, prices go up. When demand for newly-minted lawyers falls, law schools still churn out graduates. To make it more interesting, most law schools refuse to change their curricula so that graduating law students would better meet the needs of the market.

4. No matter what law schools do, the average first-take bar passage rate in the US will change very little.

After years of trying to change the first-take bar passage rate, those who complain will learn that the purpose of the bar exam is to limit the number of lawyers. Increasing the odds that a graduating lawyer will pass the bar simply means the score to pass has to be increased. Otherwise, the number of lawyers will rise. With this message finally being delivered, nothing will change because … some things in this world never change … and some things do.

5. The number of startups tackling legal issue opportunities will increase … and then decrease … and then increase. But, Peter Thiel will not form a new private equity fund focused on his beloved legal industry.

For a few weeks during 2016, there was an intense effort to quantify the number of legal industry startups. The discussion turned to esoterica, such as whether a startup of an established player was a startup or not. After much filtering and number crunching, everyone agreed that there were more than a few, yet less than what they first thought. Legal startups are liked startups in any other industry—a few thrive, some survive and then are bought, but most don’t make it. Nothing remarkable here, folks.

6. The number of regulations corporations must address will grow in the United States and in other countries.

Despite rhetoric about red tape, regulations, and compliance burdens, governments worldwide will continue to pass laws. The “more with less” movement, which became the “more with more” movement when corporate legal department hiring took off, continues its fade to black.

7. Law firms and law departments will continue licensing new software, while conveniently forgetting that everyone uses <1% of the capabilities of the software already installed.

Never wanting to be left behind on the hunt for the “next best thing in law” legal services organizations remain firmly committed to bringing on board still more software no one knows how to use. As one CIO was heard to say, “it doesn’t matter whether users can get value out of the stuff, what’s important is that they have a lot of icons to choose among when they want to compose a letter.” Another CIO proudly says that anyone in her organization can now send a letter right from their laptop, after fighting through 20 macros, composing the text, making 32 corrections to what the macros inserted, and then waiting 10 minutes for the last package to encrypt the document so that not even the law firm can de-crypt it.

8. Legal technology consultants, after holding the line for all of 2016, finally throw up their hands and admit, “yes, it is true that all software is AI and legal services use more AI than all other industries—combined.”

Law firm and law department leaders get with the program. They agree upon industry-wide metrics focused on technology proficiency and efficiency. At a joint press conference, the leaders announce the first set of metrics that everyone will use:

A. Percent lawyers who can reboot their computers without IT assistance.

B. Ratio of iOS to Android to Windows users.

C. Lead time for a lawyer to unlock his or her smartphone, open the mail app, and open the latest email from a client. (Separate metrics will be kept for biometric identification devices and passcode entry devices.)

In the joint press release, the leaders say, “It is time our clients know that we fully support emerging technologies and their role in the delivery of legal services. When it comes to technology, we are firmly committed to the idea that no lawyer should be left behind.”

One More Thing…

This last one isn’t a prediction, but it is a teaser for what might happen. Democrats and Republicans remain deadlocked on Supreme Court nominees. One enterprising technologist points out that the U.S. Constitution is silent on the qualifications of Supreme Court Justices. Indeed, he notes, the Constitution does not require a Justice to be a Natural Person or even a Person. The deadlock solution seems simple. Given the increasing prominence of AI in the legal industry, and the desire to have someone sit behind the bench to hear oral arguments, the President nominates and the Senate approves an AI-enabled robot as the next Supreme Court Justice. The robot can be programmed to follow whatever dogma is appropriate, thus eliminating the problem of Justices doing what they think is right instead of what they were nominated to do. Of course, given other provisions of the Constitution, the computer will sit for life (its life, which implies forever).

In Conclusion

Thank you all for reading SeytLines. Although I have done my best to capture what I think will be the significant developments in 2017, I am sure there will be a few surprises. I look forward to continuing our discussions.

GeneralCounselLike many of you, I have worked with general counsels for most of my career. I chose to go to a boutique firm when I graduated from law school so that I could practice law, not just research. The firm had a very nice roster of clients and I worked on complex patent and securities lawsuits and large transactions. As many lawyers have discovered or re-discovered in recent years, small law firms have advantages. One, for me, was the chance to work directly with senior executives, including general counsels.

After several years, I moved to a large law firm, became a partner, and continued working with general counsels, though I’ll admit the size of the clients grew as my practice switched to the large law firm. I moved in-house after many years, which took me from the role of agent to principle and made the general counsel my boss instead of the client. After many more years, I  became the general counsel, a role I held at three Fortune 1000 corporations. So, it is with some interest that I ask the following question—what is the essence of a general counsel?

A Brief History of General Counsels

I am not the first to ask the question. We can find discussions about what it takes to be a general counsel and what qualities make a good general counsel going back over decades (here is a recent one). Even though the question has come up many times before, asking it again periodically helps us frame where an important part of the legal profession is going and takes us further into what general counsels need to do their jobs well.

General counsel have been around since the latter part of the 1800s when industrialization was taking hold. The railroads hired in-house general counsel, and many lawyers aspired to those positions. They general counsels wielded great power, made a lot of money, and were leaders in the bar. During the first half of the 1900s, the position waned a bit. For a time, a general counsel typically was a lawyer from the law firm that had the closest relationship with the corporation. A lawyer who wasn’t cut out to become a partner, or perhaps a partner who needed a different direction, was helped into a general counsel position by his firm. The role was somewhat administrative and often involved many ministerial corporate secretarial duties.

There were exceptions. The most well known was Nicholas deBelleville Katzenbach. Katzenbach was, as far as I know, the first general counsel of the modern era. Katzenbach attended Phillips Exeter Academy, then Princeton. He enlisted in the U.S. Army Air Corps during his third year at Princeton (right after Pearl Harbor), became a navigator, was shot down and spent two years in POW camps. After the war, he returned to Princeton and graduated cum laude (receiving some academic credit for having read approximately 500 books while he was a prisoner). He then went to Yale Law School and was an Articles Editor on the Yale Law Journal. He received his LL.B. cum laude and spent two years at Balliol College, Oxford University, as a Rhodes Scholar. He spent many years teaching law and serving in various government roles. President Johnson appointed him U.S. Attorney General and from there he became Under Secretary of State. After this already stellar career, he became general counsel of IBM. (Although not central to this discussion, Katzenbach did not stop there. After retiring from IBM, he continued his career adding a number of notable roles to his already stunning resume.)*

Katzenbach was clearly a different type of general counsel. He had wide ranging accomplishments in academia, government, and private practice. The general counsel position at IBM was not a safe place for him to ride out his career. In fact, he, along with lawyers from Cravath, Swaine & Moore, fought one of the most notorious legal battles of the 20th century: the government’s antitrust lawsuit against IBM.

The next person most recognize as a modern general counsel is Ben W. Heineman, Jr. Heineman is the former general counsel of General Electric. He was hired by Jack Welch. Many mark Heineman joining GE as the beginning of the late 1900s tipping point for general counsel in corporations. It became the trend for corporations to hire general counsel who had very successful careers outside corporations, like Katzenbach and Heineman. Corporations brought on board successful law firm partners and individuals who had senior positions in government. The corporations did more—hiring partners and other highly skilled lawyers to staff the in-house departments led by the legal “stars.” Although it would take years to become evident, this change marked the point where the balance of power between principle and agent—client and law firm—began shifting back in favor of the principle.

Law departments have grown in size, though with many ups and downs. Today, in many large corporations, the size, sophistication, and successes of the in-house legal team equal or exceed those of many law firms. Very recently, as law departments started growing again, corporations have been pulling back work from law firms creating an interesting shift in the operations of the legal industry. General counsel have become major players and many have become CEOs. But that brings us back to my question—what is the essence of a general counsel?

What We Already Know

The general counsel role has evolved organically across many corporations, many hiring philosophies, and many needs over the course of many years. No one sat down and put on paper the specifications for “general counsel” and then asked everyone to work to those specs. In fact, general counsel has meant many things within any corporation, and from corporation to corporation, across time.

I am not aware of any rigorous studies covering what we mean—or more importantly, what corporations mean—when they say “general counsel.” Perhaps the major recruiting firms involved in locating candidates for these positions or the Association of Corporate Counsel have done in-depth studies. If not, it would be an interesting research project.

From my own experience, the definition of who a general counsel is and what he or she does seems to have amorphous edges. I have been contacted for help filling general counsel positions that were nothing more than glorified retail leasing counsel jobs (and much of the work the “general counsel” would do was handled by legal assistants at the large landlord companies). While the role might be titled “general counsel,” the substance was more akin to what a junior paralegal might do. I have been recruited for jobs that clearly fit anyone’s reasonable definition of general counsel: report to the CEO, member of the executive committee, responsibility for worldwide legal affairs, oversight of multi-jurisdictional in-house legal teams, responsible for a substantial legal budget, corporate secretary, and so on. And of course, I have received inquiries that fall at various points along the line connecting those positions. In other words, “general counsel” meant what the hiring party wanted it to mean at a given time.

Apart from the hiring party’s definition, there are certain features other parties want to fit into the general counsel’s job description. If the corporation is traded on a public exchange, regulators want to hold the general counsel responsible for the legal affairs of the corporation. Sometimes, they want to go further. The public also expects a general counsel to exert some “legal authority” over the corporation. Opposing parties may believe that the title “general counsel” gives a person a certain amount power within a corporation, even though the CEO doesn’t quite see it that way.

So far, I have focused on what many parties may implicitly or explicitly build into a general counsel’s role. Another way of looking at the issue is from the inside out—what do general counsels themselves think they should be able to do. Again, this varies widely, often depending on the education, training, skills, and aspirations of the person holding the job. Some want to be great administrators, some want to be leaders within their industries, some just want to do interesting legal work. General counsels range from caretakers to activists, from struggling legal technicians to potential Supreme Court Justices. As with any other position in corporations, the range of the role varies as widely as the range of individuals filling the role.

Is There Value in the Task

I still have not answered the “what is the essence of a general counsel” question and I am not going to proffer a definition here. I think that what was accurate still is accurate—the definition will vary from enterprise to enterprise and from time to time. I’m sure there are some basic requirements we could set, and perhaps we should do so. Having a basic definition of “general counsel” could assist corporations, recruiters, and candidates. The extras are what each enterprise needs at a given time beyond the basics. But, rather than focusing on answering the “what is the essence” question, I’m going to focus on how and why.

We could look to the medical profession. The profession has minimum standards for doctors. But, the medical profession has certifications that tell the world a doctor has some expertise beyond the basics. A doctor certified by the American Board of Neurological Surgery has passed exams intended to signal to the world that the doctor has expertise in her field beyond being a competent (or even premiere) doctor. A board certified neurological surgeon brings more to the operating table than a general surgeon.

The legal profession could do something similar, such as create a certifying process for “general counsel.” Some states already have certification processes for legal specialties and if you want to prosecute patents before the U.S. Patent and Trademark Office, you need admission to a specialized bar (requiring both a certain level of education in the sciences and passing a test). Our “board certified” general counsel presumably would have more of whatever those doing the certifying feel a general counsel should know.

Another approach is the one that recruiters and corporations seem to favor. It involves a mix of simply being a lawyer who has had “success” in other roles (lawyer at a certain level in government positions, partner in a law firm) and a minimum number of years practicing law (the recruiting equivalent of billable hours—valuing time over content).

Why go to the bother? From the profession’s standpoint, establishing minimum criteria is a way of saying that lawyers are experts on what it takes to do the job well. For example, lawyers may say that it really doesn’t matter whether the general counsel candidate has five years’ or fifteen years’ experience practicing law, but it does matter if the person can’t read and understand a balance sheet. A person who has not been certified could still be hired as a general counsel, but over time corporations may gravitate toward hiring only those who have the certification.

Certification programs have other potential benefits. Certifying lawyers on what it takes to be a general counsel could help clients solidify what they want out of their general counsel. Do they want a senior strategist, an expert administrator, a tactician, or something else? Seldom will a corporation find someone highly skilled in all areas. Unfortunately, corporations often do not focus on what they really do want, and so they may get a good lawyer but not the lawyer they need as their general counsel.

Obviously, candidates could benefit by making sure they fill in the gaps that will help them as general counsel (or at least get certified). During the dot com craze in the late 1990s, it seemed that anyone with a law license could become a general counsel of a startup, and indeed that often happened. Almost overnight, corporations with hundreds of millions of dollars in funding were relying on a lawyer one year out of law school who had spent that year putting together venture capital funding documents to advise the corporation on anything from employment law to international trade structures. Unpleasant things happened. It would have been nice to have general counsels who knew and could do a bit more.

I don’t want to leave this essay with anyone thinking I am arguing in favor of board certified general counsels. I am not sure whether certification, or even attempting to establish basic criteria, is the right way to go. I think the question deserves more thought, just as the question of the evolving market for legal services deserves more thought. Although I started with the question, “what is the essence of a general counsel.” I think the answer is bound up with a bigger question many are trying to answer today, and that is “what is the essence of a lawyer.” It is this second question that bedevils many today, and the answer to that question will stand behind what we really need as general counsel.

* While not taking anything away from what Nicholas deB. Katzenbach achieved, he had what some might call a running start. His father graduated from Princeton, became an instructor in political economy at Princeton, and then attended and graduated from Harvard Law School. His many accomplishments included a successful law firm (where Nicholas worked for a while) and serving as Attorney General for the State of New Jersey. Nicholas’ mother served as the first female president of the New Jersey State Board of Education. Nicholas’ brother served as Deputy Assistant Secretary of Defense for Education and Manpower Resources under President Kennedy. See Edward L. Katzenbach, Wikipedia.

EconomicsAs that portion of the legal industry focused on corporations goes through another end of year cycle, it is tempting to say, as I and others have done, that the “large corporate law market” operates outside the normal principles of economics. How can it be that large law firms, facing lower demand for services, keep making more money? In this essay, I take on a thought experiment: are there plausible and rational explanations behind what we see happening in the large corporate law market?

Is the Modern Legal Industry a New Economic Paradigm?

The demand for legal services appears (and we have only apocryphal data to support this) to be increasing. General counsel say regulation and compliance requirements keep going up. CEOs complain that “red tape” is slowing growth. And even the presidential campaign chimed in with jabs at de-regulation.

The response among general counsel, having finally convinced their CFOs that in-house lawyers cost less than law firm lawyers, has been a hiring spree that keeps on rolling. Each in-house hire means an additional 2,080 hours available to the corporation at less than half the cost of a large firm lawyer. Still, the in-house hiring binge is, at best, keeping the regulatory flood waters from swamping the corporate boat. No one is successfully pushing them back.

The demand for legal services from large law firms has declined in recent years (as a whole by about $16 billion, though some firms have felt the impact more than others). We can see this in many ways. The clearest, perhaps, is the decline in average billable hours. The billable hour drives many evils, but if the firms can’t bill the hours then demand must have dropped. Most large law firm leaders acknowledge their firms are overstaffed, with all the political and economic problems that brings.

So far, the economic story makes sense. Demand for legal services is up, corporations respond by hiring more lawyers, more in-house lawyers reduces demand for law firm lawyers, which means that prices drop as the firms compete for business, right? Wrong! The economic paradox is that firms continue to increase prices. In 2016, prices seem to have increased about 3-4% and if predictions hold true prices will go up at least that much in 2017. Demand for services from large law firms is dropping, but thanks to the increases in prices revenue for large law firms has increased.

The laws of supply and demand you carefully studied for that Economics 101 course seem to have been shattered. It is tempting to say this is just another example of how the legal industry is unique (or, using my new favorite term to describe lawyer thinking “collective narcissism”). Resist the temptation. The more likely explanation is that the large corporate law market is going through a period where the laws of supply and demand don’t function normally as the market adjusts to new competitive conditions. In other words, the market is going through a transition.

So how long will the transition last? Of course, no one knows. We could assume that corporations will stay the path and not increase the volume of work they send to law firms. We don’t have much to rely on when making this assumption. When push comes to shove, corporations will get their legal work done and that may mean pushing more out the door to the firms. It seems likely, however, that this would be a temporary fix and corporations will continue looking for ways to reduce their spending on law firms.

We also could assume that the intensity of competition among law firms has not reached the point where firms will decrease prices, but that day will come. This is a more interesting assumption. In the past and still today, public announcements of price increases do not mean every client pays more. Many clients will negotiate rate holds with their law firms, at least for existing matters. In the past, those rate holds eventually expire and rates resume their upward trajectory. But we have not seen rate decreases across the board. Firms seem to understand that once rates drop, their pricing paradigm has changed.

The picture gets more complicated as corporations move to alternative (or value) fee arrangements. A firm may hold the line or increase its hourly rates, but as the percentage of work billed hourly declines, those rates become less important. In a market where few services are standardized, alternative fee arrangements do not create price transparency. It is dicey to compare firms on hourly rates, because the final invoice depends on so much more than rates. With alternative fee arrangements and no standards for things like “merger and acquisition services,” only the corporation will have the information to compare pricing across firms (at least initially).

Other factors will affect the transition period. For example, externalities such as the recession could cause corporations to move to variable staffing (using law firms) or double-down on cost reductions with inside staffing. The incoming presidential administration promises it will bring significant economic growth, which could result in corporations expanding their businesses in ways that require expertise housed in law firms. On the other side of the balance, if globalization declines corporations may rely more on in-house teams as they need fewer resources outside their home jurisdictions.

Once we mix all of these factors together, it seems most likely that we won’t identify the end of the transition period until long after it happens. Hourly rates won’t be the canary in the coal mine telling us the end is near, because they may continue to rise as the percentage of work they cover declines.

Are Large Law and Corporate General Counsel Irrational?

Now that we have looked at whether the market is acting in an unusual or even unique way, we can address the second part of the discussion: given the decline in demand for legal services from large firms, why do the firms continue to raise hourly rates, and why do corporate clients acquiesce to rate increases? Are large law firms acting irrationally and is irrational behavior something unexpected? And are corporate clients acting in some unexpected ways?

Let’s look at the large law firms first. As I’ve just noted, there are plausible and rational arguments for firms raising rates in the face of declining demand. If the percentage of work billed on an hourly basis is declining, then the impact of a rate increase declines. Right now, the assumption is that most firms still do more work on hourly arrangements than alternative fees (the Citi/Hildebrandt Consulting 2017 Client Advisory says alternative fees are holding steady at about 16% of fee arrangements), so rate increases are significant to overall firm revenues. How significant depends on the fee arrangement mix, and that mix will continue to move in favor of rate increases having less impact.

Firms also use rate increases as a signaling mechanism. What firm in its right mind would increase rates if it caused economic harm to the firm? Firms raise rates, in part, to tell they world they can raise rates. The firm is strong, its lawyers in demand, and it still is a player. If competitors of the firm raise rates and it doesn’t, it could signal the market the firm is in trouble. The whisper campaign starts, laterals become reluctant to join, and clients (perversely enough) may question whether they should move their work to a firm that isn’t as shaky. The family on the block that doesn’t buy a new car becomes the family with financial problems, not the family that spends wisely.

Finally, and perhaps the simplest reason of all, if a firm can raise rates and get the higher rates to stick, it can offset decline in demand. The firm may see a shift in the mix of services corporations request. Corporations could take in-house those services that are routine, that require less specialized knowledge, or that require more frequently used skills (a corporation is less likely to pull in environmental work done infrequently than basic commercial work). The work corporations still send to law firms has higher value attached to it, though lower volume. Firms respond by increasing rates, which corporations pay for the higher value services they ask firms to provide (and, because the system is imprecise, they also pay those higher rates for lower value work). Firms do less work, but their work commands higher prices. Corporations send out less work, but are willing to pay more for the work because it has higher value to the corporation.

We would expect the firms to adjust to lower demand by reducing headcount. We know that most large law firm managing partners acknowledge they need to reduce headcount given lower demand levels. Some firms have followed through, either by reducing the total number of lawyers, or in many cases by pushing lawyers down the totem pole (the firm de-equitizes partners, moves income partners to of counsel, and so on). Most firms admit they have much more to do to balance lawyer supply and client demand. So why aren’t firms reducing their headcounts?

Again, we can find many reasons. In some cases, it is difficult to overcome firm culture. Many partners still believe that “once a partner, always a partner” should rule. It isn’t cricket to make someone a partner and then drop them just because times get tougher. Other firms do not have strong leaders—managing partners who will pull the trigger when necessary.

But, we can find other, perhaps more complex, reasons. Some partner portfolios may consist mostly of complex matters, the type that corporations still want to send to law firms. Most partners have portfolio mixes, with some complex matters sprinkled among many ordinary matters. At one time, a firm could shove out the door those partners who had few if any complex matters. Most of that shoving was done years ago. That leaves many partners with a mix of matters and the lucky few who have predominantly complex matters.

Picking which partners to let go (de-equitize, etc.) can be tricky given the portfolio mixes. Firms must consider substantive areas (keep the tax partners, let go of the corporate partners?), politics (let go of the environmental partner who has a weak portfolio mix, though the higher value work from his clients goes to litigation enhancing that department’s portfolio?), and timing (practice areas that are dead today may become hot tomorrow). Finally, remember that a firm aggressively reducing headcount may be seen as a failure rather than a success. A firm that goes from $500 million in revenue and 30% profit margin to $450 million in revenue and a 35% profit margin may have made a smart economic move. But, potential lateral hires, the legal industry, and even clients may see that move as indicating a firm with problems, starting a negative chain reaction.

Given the reticence many firms show about dropping partners, these and other factors give plenty of reason to hold off from reducing headcount. The result: firms roll forward with productivity dropping. In other words, we can put together plausible and rational explanations for the behaviors we see today in the  large corporate law market.

Our final question focused on clients: why do they continue to pay higher hourly rates (even assuming they get a discount off the published rack rates)? Again, we can find plausible and rational reasons. First, many corporations are not ready to reduce their dependance on law firms. The general counsel may not feel his team can handle more work, more complex work, or riskier work. Some general counsel don’t want the hassle of taking on more work. Some have not increased their department’s headcount. Some need the expertise a firm can provide. The world is not ready for all legal work to move away from large law firms.

Second, there is a convenience factor. Each firm added to the roster for a corporate law department adds some burden to the law department. Managing a portfolio of law firms takes time, and the smaller the department the greater the burden (e.g., small departments do not have dedicated business managers, so the general counsel manages outside law firms). Just like the rest of us, general counsel will pay something for convenience—in their case the convenience of using fewer firms. General counsel also can face some external pressure to reduce the number of firms they use (I would hear regularly from the audit firm that the “best practice” was to have 80-90% of the department’s outside spend concentrated on 10 or fewer firms).

The number of high quality smaller firms seems to grow every day. In many of those firms, the service quality is higher than what you would get at a large law firm, and the cost is lower. But, finding those firms takes time. Those firms also may have a limited range of matters they can handle, which means the corporation must add to its roster of law firms to get services across the full range it needs. And, of course, hanging in the background is the maxim that “no general counsel ever got fired for hiring [name of large law firm].” The last reason may not be great, but it still exists.

So again, there are plausible and rational reasons for corporations to stick with large law firms and pay increased rates. We may disagree with that approach and we may believe our reasons for doing things differently overpower the reasons for holding the course, but that doesn’t mean a general counsel has gone off the deep end by paying higher rates to a large law firm.

Do You Feel Lucky?

The economics of the large corporate law market have not received much attention or rigorous study. This post is largely a thought experiment and not a summary of solid research. I have attempted to show that, without resorting to wild ideas or claims that lawyers have gone crazy, we can construct arguments for what is happening in the large corporate law market that are consistent with what we have observed. They also could support the argument that the market will not change significantly in the absence of an outside force disrupting the market. That force could be technology, a new business model, or large scale client dissatisfaction.

Eventually, without such a force, we should expect the market to move through this transition phase and we should see normal economic principles play out. That may take years or even (less likely) decades. Each time I go through one of these exercises, the same final question comes up. We have seen client dissatisfaction growing. Will the time it takes the market (and here, we could extend the discussion beyond the large corporate law market to the entire industry) to move through this transition be too long for clients? Will the dissatisfaction grow to the point where clients will take matters into their own hands? As I and many others have asked, will lawyers become irrelevant? We should never underestimate dissatisfaction. It is a powerful force that can disrupt the status quo—you don’t have to look any further than the recent U.S. presidential election to see an example of the theory in action. It will require some hard work and luck to transition the legal industry from its lawyer-centered, inefficient model to a client-centered, efficient model. The question is, to borrow a phrase, “do you feel lucky”?

References

Citi and Hildebrandt Consulting LLC 2017 Client Advisory.