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.

Multidisciplinary
I recently had an interesting conversation with one of my Twitter followers. He had challenged my use of a certain social media tool. He pointed out that many studies show the tool is ineffective. These studies use data gathered from a broad swath of Twitter users. He was relying on studies that used data which might, or might not, have any value in predicting the behavior of my Twitter followers. I pointed out that I use data from my Twitter feed to gauge whether the tool helps me, and that data supports using the tool — so far.

We had a basic disagreement. His point was that large data sets showed no benefit from the tool, my point was that a specific data set (and more relevant data set) showed I was getting a benefit. He seemed frustrated, believing no doubt that I was wedded to a worthless tool. He suggested that many of my followers probably dismiss what I say about billable hours, believing that my general arguments about billable hours do not apply to their specific cases. Let’s call this the Twitter Tool Story.

I had a second conversation recently with a different Twitter follower (let it never be said that you can’t get engagement on Twitter). This follower leads a global law firm network (more precisely, he helped create and guide the network). He wants to establish global quality standards for legal services. Legal industry trade associations would coordinate the work. While I lauded his efforts to bring quality standards to legal services, I was not in favor of the global approach. I thought it might work to establish metric categories, but I disagreed with defining specific metrics firms and clients would use globally. Legal practices vary significantly around the world due to law, local customs, and other variables. Establishing one metric would not mean much and could be misleading and even counter-productive. My follower did not agree. Let’s call this the Global Metric Story.

On Not Being Multidisciplinary

I share these stories because both point to a common problem in the legal industry: weak knowledge of statistics. I am sensitive to this issue, because I was a graduate teaching assistant for statistics courses. A little knowledge can be a dangerous thing, and when it comes to law and math, we often see that maxim played out in real life.

For most of my career, legal services providers* could get by without understanding statistics. Now that the data era has arrived, providers lacking a basic statistics understanding will find themselves increasingly at a disadvantage when compared to those who have basic statistics fluency. Queue the howls.

Lawyers point out that we tell them they must have proficiency in law, project management, process improvement, pricing theory, marketing, business development, and now math? There was a time not long ago when an undergraduate degree in philosophy and a law degree was all it took to earn a decent living. How can it be that lawyers must now know all these “secondary” areas?

Any decent response must start with the obvious. First, lawyers had it easy, and second, welcome to the complex world. I will add some brief color to the first point and then move to the second (but if you want a sneak preview, consider this essay: “Using Multidisciplinary Thinking to Approach Problems in a Complex World”).

I am sure very few lawyers would admit this, but lawyers have gotten off easy for over 100 years. While a lawyer could get by on a philosophy degree and three years of law school, doctors, business leaders, engineers, accountants, and other professionals had to go well beyond their basic field to stay proficient. Law professors took on additional fields, as the “law and” movement blossomed. Even some lawyers (myself included) added professional training in other fields. But practicing lawyers stuck to the basics—a law school education focused on reading court cases and a law student received (and was offered) not much else.

Most lawyers won’t admit that the world has changed since the late 1800s, when the current legal education system was developed. Law has shifted from a field for the generalist to one for the specialist. It also has shifted from legal theory only to legal theory plus knowledge of several other subjects. In business, those subjects include accounting (the mad rush to train in-house lawyers in basic accounting after Sarbanes-Oxley was passed, comes to mind); in employment law, organization theories; and in securities law, finance. Even then, we have just scratched the surface. Is isn’t that lawyers now must do more, it is that for 100 years they got by doing less.

On Being Multidisciplinary

I mentioned a blog post a bit earlier (“Using Multidisciplinary Thinking”). The post was written by Shane Parrish, who says that at one time he spent his days “in management with an intelligence agency.” I like spy thrillers, so I was a sucker for this bait (apparently I am not the only one, because Parrish has a long list of well-respected individuals who like his site). But, the real thing I liked about this post, apart from its heavy focus on Steven Pinker who is one of my favorite writers, was the focus on “multidisciplinary.”

I asked a few lawyers what “multidisciplinary” meant to them, and got the expected answers: corporate and litigation, finance and tax. Not exactly what Parrish meant.

Parrish focused on Pinker’s form of multidisciplinary thinking. Start with your hypothesis, but then look at it from many perspectives. In Pinker’s case, this can mean psychology, sociology, economics, and history. This technique takes you much farther from your home base than what lawyers traditionally do. But, it doesn’t mean you must become an expert in every field.

Now, many lawyers will say they are not asked to do what Pinker, a professor at Harvard, is asked to do. The role of a lawyer, they say, is not to delve deeply into the “why,” it is to solve the problem facing the client. Hence, the lawyer’s technical and narrower focus. A client does not need her lawyer to ask why companies in many European countries use employment agreements for senior and even mid-level employees when U.S. companies do not. That client needs her lawyer to provide an enforceable agreement that specifies the relationship between the company and the employee.

If that is all lawyers have become—technicians and scriveners—then game over. Software can perform the drafting function, with some input from the client. One lawyer could perform the work of hundreds, perhaps thousands, and that is why I and others talk about excess labor in legal services. I also argue that excess labor for technical tasks can be re-deployed to value added strategic activities.

The lawyer could, of course, choose a different path. With the number of employment-eligible people increasing who choose freelancing over full-time gigs for one employer, the entire structure of “employment” shifts. The multidisciplinary lawyer could look at what that means for employers and employees, and think about how to understand that world through the law. That lawyer advises her client on a broader scale, while ensuring that tasks such as drafting agreements is done in the most efficient and least costly manner.

Two Stories Highlight the Multidisciplinary Problem

We should go back to the Twitter Tool Story and the Global Metric Story. The challenges they raised exposed more about what my two Twitter followers don’t know about statistics than anything else. Both favored the general over the specific. In the Twitter Tool Story, the flaw in my challenger’s reasoning lay in trying to use conclusions from general data on a specific case, given that we had superior data. There may come a time when my Twitter followers resemble the population of Twitter users included in the studies he relied on. But not today. For whatever reason (perhaps because my Twitter followers do not mirror the population of Twitter users at large) my specific data does a much better job than the general data in predicting the behavior of my Twitter followers.

The Global Metric Story takes us down the same path. An attempt to build a metric that we can use around the globe, in over 240 countries (and many more jurisdictions within those countries) to predict quality favors the general over the specific. We need to measure quality. But, quality to a corporate client in Jakarta, Indonesia does not need to mean the same thing as quality to a corporate client in Alabama, United States. In fact, from past experience, applying the same quality metric in both places would be a disaster.

Those who know more about statistics may be muttering that there are tools we can use to compare the populations from which we pull data, ways to compare the metrics, and on and on. All true. My point is not that my challengers needed to be statisticians, only that their lack of knowledge about some basic issues in statistical measurement and social sciences hampered them. More significantly, it limited what they could do for their clients. A quote from Steven Pinker helps sum up the predicament my Twitter challengers faced:

If you’re just manipulating numbers, you never know whether you’ve wan­dered into some preposterous conclusion by taking numbers too seriously that couldn’t possibly reflect reality.

It would help them to know more about statistics, but it would also help to have a multidisciplinary perspective so they could see how to use statistics in the real world. Remember, knowing about a field is not the same as becoming an expert in the field.

Our Greatest Asset Is Curiosity

My Twitter challengers highlighted another reason why lawyers (and here I do mean lawyers, not legal services providers) will find the road ahead increasingly difficult to travel. The obsession with time-equals-money has squeezed curiosity out of lawyers. In law school, an increasing number of students draw a line between the courses they take, passing the bar exam, and getting a job. Yes, to practice law you must (still) pass a bar exam. But, the obsession means a narrower focus on relevancy when picking classes.

Once law school and the bar are behind a lawyer, the focus on a niche increases. Again, the driver is money. Clients will pay for specialists—those who can answer a question on the phone, without research, and in the shortest time possible. That type of specialization works for the tactician, not the strategist. As problems grow in complexity, the tactician must know each step to get from start to goal, while the strategist must see the bigger picture and have the perspective to question the goal.

The data shows that over many decades, lawyers have become excellent at tactics, but not very good at strategy (see this article to read a bit more). Lawyers have abandoned their curiosity. They aren’t multidisciplinary and even within “law” they know less and less about more and more.

Of course, it is a reversible trend. In fact, it is one of the easier trends to reverse. The antidote for over-specialization has two parts. First, don’t do what you don’t need to do. By this I mean turn over to computers those things computers do better than you (automation) and eliminate those things no one needs to do. Both steps free up time (up to 50% of your time, by recent conservative estimates). Second, use that time to become multidisciplinary. Employment lawyers should know more than the latest case on race discrimination. They should know trends affecting employees, what employers want when hiring, theories about workplace sociology, risks from freelancing, and so on. By expanding their knowledge set outside law to psychology, sociology, organization behavior, economics, etc., they become applied knowledge providers, not just technicians.

If all you have is the technical capacity to provide legal services in a defined area, then all you have to offer clients as a competitive differentiation is price. If you re-define your role from technician to problem solver, and re-jigger what you know beyond the law, you increase your value (to yourself, not just clients). I get asked why I write on a broad variety of topics instead of focusing on, for example, lean thinking applied to legal services. My answer is that I do write about lean thinking applied to legal services. I just define that topic in real life terms instead of how many experience it: the technically narrow field of how to do tasks such as process mapping. In real life, lean thinking is not about cutting costs, it is about freeing people and resources to focus on the strategic initiatives of the organization, to help people perform at the top of their skill levels.

* Many of you know the debate about using “non-lawyer” when referring to anyone who does not have a law degree. While technically accurate, the term has a negative connotation, suggesting those without law degrees lack some characteristic that elevates those with law degrees higher in the social order. I have switched to using the term “legal services provider” to mean anyone—with or without a law degree—who provides legal services. A lawyer is one type of legal services provider, but so is a project manager, legal solutions architect, legal data scientist and so on. Similarly, I use the term “legal services organization” to mean any organization that provides legal services. A law firm is such an organization, but so are an e-discovery business, a legal technology company, and a contract lawyer service. A lawyer working at a bicycle repair shop is not a legal services provider and the shop is not a legal services organization. But, a legal data scientist working at a legal managed services company is a legal services provider working at a legal services organization. Once I have established the terms in the text, I switch to using “provider” and “organization” (or their plural forms). I also use “lawyer” and “law firm,” but only when I mean those specific individuals and organizations.

Payback
The legal profession has never been filled with saints. Long before industrialization gave an adrenaline shot to the profession, lawyers were admired for their skills, though not known for their charitable ways. Oh sure, you can find examples of lawyers who did wonderful things, just like you can find examples in any profession of people doing wonderful things. But, we need to accept gracefully the fact that among the three learned professions (divinity, medicine, law), lawyers cannot claim the frontrunner spot except when it comes to making money.

I should not have been surprised, therefore, when I received the responses I did to my request that lawyers send me ideas for a moonshot. I thought I had carefully framed the challenge—a moonshot was on the order of, well, going to the moon. The most recent visible moonshot idea was the charge to defeat cancer. A moonshot is a big idea, a bold and ambitious attempt to conquer some amazing challenge within a reasonable period. Moonshots take us beyond what we normally can do, because they give us the feeling that as part of an inspired group, we can accomplish great things. For those lawyers who responded to my moonshot challenge, the great thing was “make more money.”

There were exceptions, of course. A few lawyers went the high road and pointed to access to justice as a worthy moonshot. But the bulk of the respondents chose “make more money” as the suitable moonshot for lawyers. As I said, I should not have been surprised, but I was.

I did not publish the results of my moonshot challenge right away, because I wanted to ponder them a bit. What does it mean when your profession (admittedly, a very small and certainly not random sample of the profession) thinks the greatest thing it could spend time on is making more money? On the one hand, you could read it as lawyers saying “get over yourselves, we are working folks just like the rest.” Lawyers are in business to earn a living, not do good.

Of course, many of us still have that voice in the back of our heads that says “we are a profession, and professionals have a higher calling than just making money.” Sure, we need to make a living. But as lawyers, aren’t we supposed to do something more? This is a conflict many of us, especially those in the Baby Boomer generation, have felt. Law was a way to earn a very nice living, and yet most of us did not give much back to our communities.

So I thought that Baby Boomers, as we reach our retirement years, might be interested in lessening the conflict by putting their efforts behind a moonshot. The results of my representative-of-nothing survey say resoundingly “no”! And this is where we get to payback.

For Over 100 Years Lawyers Have Let Things Slide

The many problems with our legal system did not spring into existence during the past decade. In 1919, Reginald Heber Smith published what for many decades was considered the leading book on legal aid societies, titled “Justice and the Poor.” At that time, the Boston Legal Aid Society, where Smith was general counsel, was one of the few legal aid societies in existence. Roll forward, and the number of legal aid societies increased, while the number needing legal aid vastly outstripped the resources of those providing it. Over the past 100 years, one could argue convincingly that the total volume of charitable work by lawyers has increased, but the per capita aid has decreased.

The list of deficiencies in our legal system is long, legal aid is one, and this is not the place to repeat all of them. The simple point is that during the last 120 years, while the legal profession has grown and prospered, society has suffered. Lawyers have prospered while clients have not. Regardless of your political affiliation, if you are poor you are unlikely to get legal assistance. No matter who you vote for, if you are middle class most legal services are priced out of your reach. Independent of which PAC your corporation supports, your corporation will face a tremendously long lag time if you try to prosecute a case through the federal courts, and you will encounter a system ill-prepared to handle your dispute. When we say justice is blind, in the modern context of the United States that means you will find a legal system struggling to handle your needs regardless of who you are or which candidate you support. The rich get better legal services because they can throw lots of money at their problems, not because they have access to better or faster courts, or even better legal services providers.

Yes, yes, there are exceptions. There are always exceptions. But exceptions do not prove the rule of law. So this is the rub. Now it is payback time. Lawyers are feeling under the gun. Society is pushing back and yelling “I’m mad as Hell and I’m not going to take this anymore.” There are many messages from the recent election and surely this is one of them. We may want to argue we have the best legal system in the world, but the numbers tell a different story.

It does not help anyone when people feel free to snub their noses at the law. Regardless of party affiliation, we all can point to instances on our side of the aisle and the other side of the aisle where the law came in second to some person’s or organization’s self-interest. This past 18 months, we have seen those transgressions become the focal point of conversation, rather than the exception. But as lawyers, we can appreciate that when law becomes the focal point of any conversation, good things probably are not happening.

The question for lawyers, then, is whether we have moved past the time when considering a moonshot is an exercise worth discussing. Doctors have their battle to eradicate (or at least make curable) all illnesses. Techies have their battle to create computer intelligence that can match or exceed human intelligence. Are lawyers left with battling for incomes that match or exceed what anyone else can earn?

Let’s talk about artificial intelligence. Right now in the legal industry, you can’t look anywhere without seeing another article about how AI is or will take over what lawyers do. In the next breath, the author speculates about what the economic impact of AI will be on lawyers. I thought lawyers looking for a moonshot might ask some different questions:

  • How do we modify existing laws for a society populated with intelligent machines and people?
  • Regardless of what intelligent machines can do, should we build into our governance systems limits on what we want the machines to do?
  • Should there be limits on what “garage tinkerers” can do with intelligent machines (yes, you may have the technology to tinker on humans in your lab, but that doesn’t mean we give you full license to do so)?
  • How will our legal system evolve as intelligent machines play greater roles and more autonomous roles in our society?

These questions represent a small fraction of the questions we will confront as machine intelligence increases, even if more intelligent machines help us live “better” lives. Yet these were not anywhere near the moonshot ideas I received.

Let’s go in a different direction. One of the major questions of our times is whether our government institutions are no longer sufficient. Are we operating a country using 18th or 19th century institutions in a 21st century world? When the U.S. Code, the compendium of federal laws, has over 67,000 sections, someone should ask whether the concept that each of us is responsible for knowing the law makes sense. Can our institutions handle the challenges being thrown at them? Does governance by regulatory agency supersede governance in other forms? Making how our government functions more flexible and less costly, whether you think there should be more or less regulation, seems like a worthy moonshot, yet it wasn’t on the list.

Nick Bostrom has posited that AI represents a unique existential risk for humans. Never before have we faced something we are creating that has the potential to eliminate us. AI is not the only such risk (nanotechnology and genetic modification are two others that make the list), but it is a leading risk. Although most lawyers would deny it, the legal profession also faces an existential risk. Not today, not tomorrow, but at some point if we continue on our current path, the need for lawyers will be gone. Technology, client friendly problem solvers from other domains, and innovative disruptors will take away what we do. There are no physical or other barriers to prevent the land grab. The efforts of state bar associations to prevent the demise of lawyers simply hasten the process of destruction. A few lawyers will remain, but the existential risk for lawyers is that most become irrelevant.

Is There A Moonshot Left In Us

Any good disaster flick has the moment when the protagonist can see what must be done to save the world. The payback of the last 18 months has brought us to the point where lawyers must ask if they can see what they need to do to save the profession and build a better, more responsive, and more resilient legal system.

A group of us who have been (at least self-proclaimed) disruptors are meeting in the next few weeks to talk about change in the legal industry. I’m sure we will cover many fascinating topics. I hope that we will find some time to talk about change in a broader sense than making more money.

There is no mandate that lawyers do anything more than what they have done for centuries. We do not have to change, nor do we have to look beyond what is in our own immediate self-interest. There is a valid argument that the legal profession reached its zenith many years ago and that it will fade away as many other professions have faded away before it. This may be our payback—we had our run and now we are being told that run is over.

Perhaps many lawyers are correct—now is the time to treat lawyering as a cash cow. We should all make the most we can from it and continue to do so for as long as we can. Something will come along to take its place, but that is not our worry.

I don’t subscribe to the cash cow theory. I think there will remain a need for societies to govern themselves and I think there is a role for lawyers to play. I remain convinced that if we can change some fundamental practices in the legal industry, we can get past this moment and revitalize the profession. I do not subscribe to Richard Susskind’s belief (and I’m overstating a bit here) that the profession is dead, it just doesn’t know it.

I am looking forward to meeting with my friends in the next few weeks and to our discussions. I hope more lawyers around the country will take some time and do the same thing. I encourage you to get together for a few hours with your friends and ask whether you believe lawyers should play a role in re-building the legal system in the United States and, if so, what that role should be. For a moment, put aside the skepticism that drives us all. I think it will be time well spent. And, if you have a few moments left over, ask yourself whether the legal profession has a worthy moonshot beyond making more money.

References Continue Reading It’s Payback Time, Or Lawyers May Have Sown The Seeds of Their Own Destruction

FirstThanksgiving

I’m taking the day off to enjoy time with my family, a rare treat as our children explore their own careers. Have a great week everyone and for those of you who celebrate the holiday, Happy Thanksgiving!

We have rolled out a new format (hope you like it). We also are looking at a way for you to help improve posts before they hit the site. And of course, we always are working on new content. Thank you for reading and watch for the latest post next Thursday.

ElectionThe 58th quadrennial United States presidential election is over and now we turn to the next four years. The discussion focuses on what to expect from the Trump Administration and the reality is we don’t know. But, as the transition begins, I hear one phrase repeatedly mentioned, “rule of law.” President Obama, Secretary Clinton, and most recently the leaders of three major law firms have all emphasized that we (Republicans and Democrats) must act to protect the “rule of law” as we go forward. It is a phrase that carries great promise and “we” should talk about what it means to say “protect the rule of law.”

A Distinguished History

The rule of law idea dates back at least to Aristotle, who used the similar phrase “law should govern” in Politics. The idea pops up again here and there in antiquity. For example, in England the House of Commons included the phrase “rule of law” in a petition to James I of England in 1610, and again in 1644 the phrase appears in a piece by the Scottish theologian, Samuel Rutherford (apparently not someone who subscribed to the modern theory of short titles, Rutherford’s piece was titled “Lex, Rex: The Law and the Prince. A Dispute for the Just Prerogative of King and People. Containing the Reasons and Causes of the Most Necessary Defensive Wars of the Kingdom of Scotland, and of Their Expedition for the Ayd and Help of Their Dear Brethren of England. In Which Their Innocency Is Asserted, and a Full Answer Is Given to a Seditious Pamphlet.”). According to Rutherford:

The prince remains, even being a prince, a social creature, a man, as well as a king; one who must buy, sell, promise, contract, dispose: ergo, he is not regula regulans, but under rule of law….

Samuel Johnson included the phrase in his 1755 Dictionary, which means it must have had somewhat common use by that time, at least among Johnson’s peers in England. Clearly, when the United States was coming together as a country, the idea of “rule of law” existed among Europeans and was becoming important in our new country. From that point on, “rule of law” is in regular use, even though implementation of the idea has seen its ups and downs

An Unclear Meaning

Given that the idea has been around for many centuries, we could hope that it has taken on a clear meaning. We could hope, but it would be for naught.

“Rule of law” seems to have many meanings today. Theorists group the meanings into three categories: formal, substantive, and functional. The categories differ in many ways, including whether the content of law must have specific meaning or whether “rule of law” refers to characteristics, but not content. The functional category focuses more on the degree of discretion man, particularly government officers, has in deciding the law (for example, to what extent does natural law play a role). For our purposes, “rule of law” must be something measurable and so we will turn to a more concrete definition.

A Mediocre Performance

Settling on a definition of the rule of law is a challenge. But a greater challenge is overcoming our perception of the United States as a leader in the rule of law compared to other countries. Most people tend to think that the United States ranks high—among the world leaders—when it comes to rule of law. This gets a bit tricky, because it is difficult to rank countries on their implementation of the rule of law if we have trouble defining it. But, we can approximate by defining key characteristics of the rule of law and when we do, it changes our perception of the United States.

The World Justice Project has for many years ranked over 100 countries to compile an overall Rule of Law Index® ranking. The Index is subdivided into eight categories and 44 subcategories. The categories cover areas such as absence of corruption, civil justice, and criminal justice. I am not arguing that the WJP’s approach is the best way to measure access to justice, but it will serve well for our purposes.

Since I am using the WJP’s rankings on rule of law, it will help to understand how the WJP defines rule of law. According to the WJP, “the rule of law is a system in which the following four universal principles are upheld:

  1. The government and its officials and agents as well as individuals and private entities are accountable under the law.
  2. The laws are clear, publicized, stable, and just; are applied evenly; and protect fundamental rights, including the security of persons and property and certain core human rights.
  3. The process by which the laws are enacted, administered, and enforced is accessible, fair, and efficient.
  4. Justice is delivered timely by competent, ethical, and independent representatives and neutrals who are of sufficient number, have adequate resources, and reflect the makeup of the communities they serve.”

Overall, in 2016, the WJP ranked the United States 18 out of 113 countries on the Index—an okay ranking but certainly not world class. For the category access to civil justice, the United States ranked a measly 28 out of those 113 countries. For comparison, in addition to countries you might expect such as Germany, Japan, the United Kingdom, and Canada, other countries outscoring the United States included Estonia, Uruguay, and Barbados.

The following quote from Judge Jed S. Rakoff, a United States District Judge on senior status for the Southern District of New York, elucidates one part of the problem:

Over the past few decades, ordinary US citizens have increasingly been denied effective access to their courts. There are many reasons for this. One is the ever greater cost of hiring a lawyer. A second factor is the increased expense, apart from legal fees, that a litigant must pay to pursue a lawsuit to conclusion. A third factor is increased unwillingness of lawyers to take a case on a contingent-fee basis when the anticipated monetary award is modest. A fourth factor is the decline of unions and other institutions that provide their members with free legal representation. A fifth factor is the imposition of mandatory arbitration. A sixth factor is judicial hostility to class action suits. A seventh factor is the increasing diversion of legal disputes to regulatory agencies. An eighth factor, in criminal cases, is the vastly increased risk of a heavy penalty in going to trial.

For these and other reasons, many Americans with ordinary legal disputes never get the day in court that they imagined they were guaranteed by the law. A further result is that most legal disputes are rarely decided by judges, and almost never by juries. And still another result is that the function of the judiciary as a check on the power of the executive and legislative branches and as an independent forum for the resolution of legal disputes has substantially diminished—with the all-too-willing acquiescence of the judiciary itself.

The rule of law we hear about is not the rule of law most in the United States experience.

The Role of Lawyers

This brings us to an awkward spot. We have leaders giving us full-throated encouragement to support and defend the rule of law at a time when our record on rule of law is abysmal. There is a terrible disconnect between the aspirational state and the current state of affairs on “rule of law.”

This type of disconnect is not surprising, especially to those who spend time with the philosophy of lean thinking or behavioral economics. In both fields, we frequently see a broad gap between the way the world is and the way we describe the world. In lean thinking, we use tools to bridge that gap. In behavioral economics, we seek to understand why the gap exists. Either way, we understand that gaps are common.

Thus, when we hear our leaders exhort us to defend the rule of law, we should recognize that the rule of law they encourage us to enforce is not the rule of law that exists. They are asking us to defend their vision of the rule of law, for surely they cannot be asking us to defend the rule of law that puts the United States at the bottom of the first quartile among 113 countries.

This is the fundamental problem the legal industry faces and lawyers face as we try to haul the United States’ antiquated legal system out of the 19th century and into the 21st century. The vision many lawyers carry is not a clear-sighted view of reality. For most, it is of a scholarly profession, providing bespoke solutions to the complex problems of society through the use of a unique science known as the practice of law.

This gap between vision and reality cannot be sustained. One of two things will happen. Either lawyers will modify their views of what they do and bring the services they provide more in line with what clients need and are willing to pay, or lawyers will maintain their views and clients will find other ways to solve their problems. The third approach, which many lawyers explicitly or implicitly hope for—that clients will stop pushing their views and let lawyers do what they want—is not a viable option.

A recent survey reminded us, as if we needed reminding, of the growing problem. It tells us that barely one out of three corporate clients is satisfied with the services provided by large law firms. Whether you are at a law firm that thinks it is different, listens to its clients, and has modified its behavior or you are at a firm staunchly defending the 19th century view of the world, you should be worried.

With each story, survey, and article that comes out highlighting the large and growing dissatisfaction among clients at all economic levels with the performance of attorneys, the situation becomes more precarious. The flimsy rope bridge that lawyers have constructed to the sides of the gap gets stretched a bit tighter, the creaking gets a bit louder, and the day gets a bit closer when the ropes holding the bridge will snap.

Some lawyers can afford to roll the dice. They can bet that retirement will come for them before the ropes break. They gamble on the number of years between client dissatisfaction and defection. The majority of lawyers do not have that luxury of taking the risk. They have too many years left in their careers to expect that clients will be that patient. Yet, the majority of lawyers hang back watching the bridge get stretched tighter and tighter by the day.

A Time for Renewal

The social media outlets, Facebook, and other organizations are starting to grasp the role they may have played in this historic election. Again, regardless of which candidate you preferred, we should all understand as part of being informed citizens, the roles that organizations play in shaping our views. Lawyers should pause and consider what role they played in this election.

Both Democrats and Republicans found large swaths of voters disenchanted with government. The legal industry plays an important role in society and our government. It is hard to say in a country which ranks 28th on access to civil justice and where, as Judge Rakoff notes, “US citizens have increasingly been denied effective access to their courts,” that the failure of the legal system to meet the needs of the citizens played no role in alienating voters.

If we are going to focus on values, such as the “rule of law,” we should all understand the differences between vision and reality. We should speak clearly when we encourage others to enforce the “rule of law.” We should acknowledge that the rule of law that once was in the United States is not the rule of law of today. Much will have to be done to bridge the gap. The starting point for all of us should not be focusing on how much more lawyers can extract from the people in furtherance of a legal system that has passed its freshness date. It should be to ask what our clients need from us and how we can best go about delivering—affordably, timely, and with the highest quality that meets those needs—legal services that return the United States to a leadership role in the rule of law.

References

Aristotle. Politics. The Barnes & Noble Library of Essential Reading.  New York: Barnes & Noble Books, 2005.

Isaac, Mike. “Facebook, in Cross Hairs after Election, Is Said to Question Its Influence.” The New York Times, November 12, 2016.

Montagne, Renee. “Social Media’s Increasing Role in the 2016 Presidential Election.” NPR, 2016.

Morris, David Z. “Zuckerberg Responds to Accusations That Facebook Influenced Election.” Fortune, 2016.

Rakoff, Jed S. “Why You Won’t Get Your Day in Court.” Article, The New York Review of Books, no. November 24, 2016 (2016). http://www.nybooks.com/articles/2016/11/24/why-you-wont-get-your-day-in-court/.

Rutherford, Samuel, and Pre-1801 Imprint Collection (Library of Congress). Lex, Rex: The Law and the Prince. A Dispute for the Just Prerogative of King and People. Containing the Reasons and Causes of the Most Necessary Defensive Wars of the Kingdom of Scotland, and of Their Expedition for the Ayd and Help of Their Dear Brethren of England. In Which Their Innocency Is Asserted, and a Full Answer Is Given to a Seditious Pamphlet, Intituled, Sacro-Sancta Regum Majestas, or, the Sacred and Royall Prerogative of Christian Kings.  London: John Field, 1644.

“World Justice Project Rule of Law Index 2016.” Seattle, WA: World Justice Project, 2016.

RuleThe race is on—in fact it is well underway. Somewhere, some lonely legal tech guru is sitting in his garage working on “the greatest thing since the invention of the hornbook.” Based on algorithms that would make most string theorists drool at their complexity, the new app will not tell you what the law is (since it is a fool’s errand to chase the past with the future changing so quickly), it will tell you what the law will be when your case reaches that AI mediator/arbitrator/jurist who will resolve the dispute.

This tool will go far beyond predictive analytics, that measly science of trying to guess human behavior, it will be predictive law. From your smartphone, you will tap in the answers to some simple questions and then set a forecast timeframe: 1 year, 5 years, 10 years. Your smartphone, of course, now has processing power equivalent to your brain, though software is still limping along far behind it. But, by analyzing 10 to the something trends and then running 10 to the something variations of those trends (now called Monte Carlo lawyering), your smartphone answers telling you what the law will be on your preferred date.

And then the pin drops. Some smart-alecky third year associate in one of those big fancy law firms points out that she has spent the past three years researching all manner of legal issues for the firm’s clients. With well over 6,000 hours invested in research, she crisply points out that predicting the future of the law is quite easy and does not require the new app. “In 10 years,” she says, “the law will look basically the same as it looks today.”

It takes more than three years for a case to work its way through a federal district court to conclusion. Then add another three to four years for the case to reach the Supreme Court. But of course that is only one case. For the Supreme Court to even sniff at a case, we must have a division among the federal circuit courts of appeal. That means many cases have to work their way up through federal district courts to final decisions in federal appellate courts, and those decisions must conflict on at least one issue that grabs the Supreme Court’s attention. Then, and only then, will the Supreme Court consider giving an answer, and of course we must put aside all the state law issues which have their own paths.

To those enormous delays, we must add the time to develop the federal statutes that will give rise to the federal cases that will, etc. It takes far more than three years to get a law on the books, and then of course we need the regulations. Only then can we begin the stream of cases that will lead to the Supreme Court. “So you see,” says the third year associate, “the law will barely budge during those 10 years. After spending my more than 6,000 hours on research, I can confidently tell any senior associate to tell the junior partner to tell the senior partner to tell the client that what they want to do may or may not be legal.”

Laggard Law Affects Us All

My question is this: which parts of the above story are made up? I’ll wait. We’ll actually, I won’t wait. I’m a lawyer (retired), but I still do not have any patience. You see, nothing in the story above is made up. Law at the federal level in the United States develops in competition with the movement of glaciers (or, to put it in more timely terms, the melting of glaciers). For a while, glaciers have been winning. The federal legal system in the United States is in gridlock. Rip Van Winkle can take his nap, wake up refreshed, and miss almost nothing when it comes to federal law.

For many lawyers, the laggardness of federal law is more blessing than curse. The law, they say, should not jump and twitch in response to everything techies do. Tech comes and goes (remember those AOL discs you would get in the mail? Google Glass?) and the law should be about general principles (Karl Llewellyn’s “law of the horse” concern) not the latest fads. It takes time for lasting themes to develop and then the law can give guidance on those themes.

There are, of course, others who hold a somewhat different view. Social media, 3D printing, genome splicing, nanotechnology, AI, and many other emerging technologies are raising questions not just of property rights or privacy (both very important), but of greater risks.

We all understand that a human is a human and a machine a machine. One has rights and the other does not. But where does the dividing line exist? As we can replace body parts with devices (sometimes mechanical, sometimes biological), the definition of human starts to slip. What about when we implant electrodes that change how our brains operate? Still human? What about the next step, when scientists using CRISPR technology to alter our genetic structure? What now?

Yes, many of these technologies are in their infancy. The effects are incredible for the individuals involved, but modest for society as a whole. Doing something to hold back or alter the course of these technologies could negatively affect the lives of hundreds, thousands, even millions of people who will benefit from the technology, just because some like to run around yelling “the sky is falling.”

So go back to the original timeline. Getting issues through the federal courts (and most of the meaningful issues arising from emerging technology will need to be addressed on a federal, not state level) can easily take more than a decade. That means issues we see today may not be resolved through the courts until 2026 or later, and that is if we start today. But to reach the point where these emerging technologies can do things that truly change the human condition will take, by the estimates of many technologists, perhaps 15 or 20 years.

Put another way, in 2026 the federal courts may be getting around to addressing legal issues arising today from emerging technologies. But, of course, those emerging technologies will no longer be emerging and will have moved far past the legal issues raised today. We already can see evidence that this will happen. Regulatory bodies struggle to come up with regulations addressing issues that are minor compared to the ones raised by technology. The Dodd-Frank law passed in 2010 required public companies to report their CEO-to-average-pay ratio. The regulations implementing that requirement take effect in 2017. Seven years to handle the debate over calculating a ratio—and without lawsuits. Yeah, the federal legislative system is well-prepared to address nanobots.

Just as the process for delivering legal services is based on a late-1800s model which has changed trivially from then to today, the processes for creating and interpreting law at the federal level have changed little over the same period (and probably longer). Society, however, has refused to conform with lawyers’ desire to keep it slow.

Reform Is Possible

It would be easy to assume that I am arguing in favor of rapid law development. Some fundamental change to the processes of creating and interpreting law that would jerk the legal industry into the present and risk changing the law so quickly that it no longer brings stability and order to society. It would be easy, but wrong.

I do, however, see changes that would pull the federal processes into alignment with what society needs today—earlier guidance on issues that have the potential to affect society at fundamental levels. The definition of “fundamental levels” is beyond this post, but I am talking about process reform so we can leave substance for another day. I’m not endorsing any of the efforts I highlight, merely pointing to examples of people taking action on the types of ideas I suggest. In other words, don’t respond by critiquing the example, address the concept.

1. Move to some form of agile law-making. See, e.g., Agile Government Leadership.

2. Crowdsource opinions from stakeholders. See, e.g., Crowdsourcing legislation efforts in California and New York City.

3. Use superforecasting to test the potential effects of various regulatory approaches. See, e.g., Q&A with Philip Fetlock on Superforecasting (as applied to geopolitical risks).

4. (Greatly) expand the use of process improvement and narrow-purpose technology in the federal court system. See, e.g., 18F.

5. Streamline the process of moving disputes through courts and streamline what courts produce. See, e.g., The Pathway Approach: Draft Rules and Examples of Rules from Around the Country.

I am not attempting to answer any of the challenging legal questions that emerging technologies already have raised. My goal is more focused. The questions need to be worked out through processes that can deliver answers that we as a society can live with, and which are delivered within a time frame that makes them meaningful, not historical oddities. By not fixing our processes today, we risk (and I think the risk is very high) reaching a point when we do need answers and not being able to get them because the architecture of our rule of law system cannot handle the challenge. A rule of law system only works when we actually have law.

FootballJordan Furlong (The Law21 Blog) posted an essay recently titled, “Playing the client’s game.” As usual, it is a well written and interesting piece and I agree with most of what he says. But the issues he talks about are very important and I don’t think most law firm partners and most law department lawyers understand them well. So, in the spirit of keeping Jordan’s football metaphor alive, I’m going to pile on a bit.

The Lawyer’s Value

This question comes up frequently—what unique value does a lawyer offer? Whenever it does, the room gets quiet and you can hear feet shuffling. Richard and Daniel Susskind tried to answer it in their recent book, The Future of the Professions, but ended up with something not very satisfactory (I suspect they feel the same way). I am not saying it is an easy question to answer, but I think the answer today is very different than the answer 120 years ago. Jordan describes the role of a lawyer as not the quarterback, but “the third-down fullback called on to blast through the line in a short-yardage situation, or the speedy wide receiver who goes deep on 3rd-and-22 to make a big play. We’re specialist performers who wait on the sidelines until we’re called upon to do one thing really well.”

To most lawyers, this sounds like a demotion. At one time we were the quarterbacks and many signed up to be quarterbacks. To hear we are third-down specialists deflates the ego. It also suggests our value is limited. Perhaps it should not come as a surprise that when we get back to the unique value question, the room is quiet and you can hear feet shuffling.

Follow the Best Legal Brains

Jordan takes us to a quote from a column by Anthony Hilton in the UK publication, the Evening Standard. I agree with where the quote starts, but then it goes in a direction that I think is wrong and takes us down a wrong path. Hilton starts, “[L]awyers have lost the glamour, the access and the special status that came with having opinions worth listening to. They have allowed themselves to be commoditised and to become the last port of call.” No quibbles there. But then Hilton goes on to say, “They have allowed some of their best brains to move in-house as general counsel in the biggest companies, taking the interesting legal advisory work with them. …” Here I have to disagree.

I don’t think that the best brains have moved in-house as general counsel or are staying in the law firms. I think both have claims to bright lawyers and not so bright lawyers. I say this because I think we see very little difference between the delivery of legal services in law firms and in law departments. Here and there, at the margin, we see some efficiency differences or more thought about what the client needs than what the lawyer wants to deliver. But, overall, there is remarkably little difference between the two worlds. There even are many cases where the general counsel wants to re-shape the law department to look more like a law firm.

Jordan moves next to the point that the number of lawyers in-house is increasing and with that increase the locus of power has shifted from law firms to in-house lawyers. Jordan nicely describes this transition, “I don’t think there’s any question that power (and therefore prestige) is increasingly accumulating on the buyer’s side of the legal service relationship.”

Corporate clients have been pulling work in-house for many years, and according to recent reports the rate has increased over the past four years. The work being taken away from large law firms is going to in-house lawyers, and to some extent to managed service providers and other alternatives to the traditional law firm source.

So far, however, that has been in-housing the law firm. As I and others have said, this is an easy and effective way to reduce law department costs by simply leveraging the cost of labor. An in-house lawyer costs much less than a law firm lawyer and in a market where lawyers are plentiful, hiring in-house quickly ratchets down costs. That has shifted power, but I’m not so sure about prestige.

Keeping with Jordan’s football metaphor, labor arbitrage is a game focused on gaining some yards quickly. Bringing work in house immediately reduces the cost of the work. After that one-time cost reduction, the law department will not get much in further cost reductions unless it tackles process improvement. The improvement might come through technology, though often in-house technology implementation comes with little or no process improvement, so again it yields a one time change in cost. The addition of an in-house lawyer does yield a temporary increase in inventory—lawyer time to work on matters—which can help with work not being done. But eventually, the in-house lawyer will have a full schedule and the benefits of a lower cost will have been realized, so the law department will be back to where it was before. After doing a run play several times, you need to pass.

The danger in believing the labor arbitrage approach is anything but a quick fix comes when we play to win the game, not just get a few yards. Lawyers are, whether they like it or not, a cost center not a profit center. Some may offset the cost by enforcing patents or taking other actions to recover damages owed the client, but that doesn’t change the law department from a cost center into a profit center, it simply offsets costs (recovering money owed is not the same as selling products or services for profit). It also seldom rises to a long-term sustainable strategy and may become even less important if some of the current initiatives to reduce cost recoveries by non-practicing patent entities go through.

Cost centers should constantly seek to reduce the burden they place on the organization, while at the same time seeking to improve quality, timeliness, and other metrics important to the business. Eventually, the CEO or CFO will ask the obvious question, “why has the lawyer headcount grown so much?” At that point, the next logical step is to substitute thinking, capital, and cheaper labor for in-house labor. Enter process improvement, technology, and labor alternatives (these could be cheaper in-house labor alternatives or outside labor alternatives). In other words, time to cut some members from the team roster.

The View from In-House

From Association of Corporate Counsel surveys to comments from general counsel, there is a growing belief that what CEOs really want from their general counsel is strategic help, not just competent management of legal affairs. Certainly, this is more true today than it was in the past and it rings true for some general counsel. But overall, I think general counsel and in-house lawyers are unduly optimistic to think that they have been hired for their strategic acumen. Put differently, if the legal work goes away, it is unlikely many of the in-house lawyers will have jobs working as strategic advisors.

The last statement probably sounds harsh, but let’s take an objective look at the situation. Lawyers are not trained in law school to be strategic thinkers. They are trained to play the role of tactician. Jordan points this out in his post, “But most lawyers are tacticians, not strategists, and they prefer neither to manage nor to be managed.” Without trying to define what law school teaches, it certainly does not teach (putting aside the random course here and there), the type of strategic analysis a first-year MBA student gets. As a student at Northwestern University’s J.L. Kellogg Graduate School of Management, I spent significant time studying strategy, working on case studies focused on strategy, and doing group projects on strategic questions. As a student at Northwestern’s School of Law (now Pritzker School of Law), I did not spend any time studying strategy.

It gets worse. When I have tried to train lawyers at large firms on strategic thinking, they have actively resisted. The comment “we are lawyers, not consultants” comes up frequently. It is the law firm lawyers who move in house, the best brains Hilton talked about becoming general counsel, who may have some interest in strategy (though again, no particular training or experience the field). Lawyers are good at breaking complex problems into small pieces, building solutions, and re-assembling the parts, but that is not strategic thinking.

For in-house lawyers, I think that leads you in this direction. CEOs know they pay a lot of money for in-house lawyers. Some of the general counsel they hire do come with significant backgrounds in strategy, not from training, but from experience. It isn’t uncommon to see large corporations hiring lawyers who have held senior positions in government or leadership positions in other organizations (even law firms, the wastelands of strategic planning). So, some general counsel are better positioned to provide strategic counseling and CEOs want them to do what they were hired to do. But that does not mean all general counsel, and it certainly does not mean all or even most in-house lawyers, are up to being strategic counselors.

Those general counsel who provide strategic guidance face a secondary problem. One person sitting in his or her office will seldom be able to assimilate the necessary information to provide that strategic guidance. That person will need help, and if that person is the general counsel then who will help her? Law departments are not set up to provide that assistance, nor are law firms. How to thread geopolitical risk through the lens of the legal function requires more than a course on international law in law school. The world is filled with strategic consultants who work with other departments in a company, but thin when it comes to consultants focus on helping general counsel and their lawyers become strategic players.

Finally, assuming the majority of CEOs want their general counsel to become strategic advisors, the numbers tell us the impact will not be significant. There are no more than 1,000 general counsel for the Fortune 1000 corporations in the United States. There are certainly deputy general counsel and associate general counsel who are the lead lawyers for very large subsidiaries and divisions, but even throwing those in the basket won’t increase the number to more than 1,500 or maybe 2,000. Double that to include lawyer-strategists in training, and you have maybe 4,000 lawyers who are in the pipeline to provide real strategic advice to the leadership of corporations. Even if you quibble with my numbers, you will still find the majority of in-house lawyers are not in a position to serve a strategic role. They are in a position to provide inexpensive (though talented) labor compared to their law firm peers and that puts them at risk of being cut from the team roster.

The Rise of Legal Ops

Jordan then takes us where many are going when it comes to leading the grand revolution. As he says, “If you’re looking for the quarterback in the corporate legal market right now, I think you need to go visit Legal Ops.” This argument makes sense. The legal operations leaders are being brought to law departments to run them better than their predecessors. They have been asked to focus on legal operations economics, technology, staffing, and outsourcing. What direction should they take? Well, they can just look down the hall to the human resources and IT departments.

Those departments went through these transitions years ago. At first, leaders built those departments to handle work inside. They followed the philosophy that individuals in the organization were less expensive and more attuned to what the organization needed than those outside. Both areas grew large and expensive. And then the CEO and CFO asked the question: “why do we have so many of these folks, and too few of those who generate revenue?”

The next step was to cut the team roster. Human resources outsourced many of its functions to organizations that had evolved to do the work faster, more efficiently, and cheaper (and, typically, with fewer mistakes). Human resources kept the plum (and manageable) assignments for itself. IT went down the same path. Companies wrote their own programs, maintained their own hardware, and overall ran sophisticated IT departments. And then they too outsourced. At the end, they kept the plum (and manageable) assignments in house and moved everything else outside.

There is, of course, a glaring difference between law and the human resources and IT. Today, finding and retaining the right employees is a massively difficult job for companies. They need complicated skill sets from a workforce that isn’t well-prepared to handle the demands. IT must try to keep up with rapidly changing technology and integrate it or leverage it to competitive advantage. Law … well, it isn’t mission critical for most companies.

In the late 1800s and early 1900s, lawyers were key to strategic success for large organizations. Today, as Hilton says in another section quoted by Jordan, “[L]awyers have allowed themselves to be pushed further and further down the food chain, and away from the seat of power. In today’s commercial world, when there is a deal to be done, it is picked over by investment bankers, brokers and public relations consultants—all of whom have a share of the ear of the chief executive. Then when all the high-level stuff has been sorted by these experts, the package is tossed to the lawyer with instructions to sort it out and make it presentable. …”

If the legal operations leaders are successful, they will further reduce the role of law departments by moving much of the work (which will include very complex work) to lower cost, more efficient, higher quality outside providers (enter managed service providers), leaving much smaller in-house lawyer staffs to handle the plum (and manageable) assignments. But plum assignments for lawyers will not be the same as they are for human resources and IT. And still there is the lack of outside strategic thinking assistance.

Refocusing the Discussion

As Jordan says, large law firms will not die. But, in my opinion, they certainly will shrink in number and most will find it difficult to exist beyond bespoke, boutique services. Jordan gives us a picture of what the world could look like, “Maybe such law firms are vestigial and will eventually fall away—to be replaced by smaller expert boutiques where legal shoppers go for occasional splurges, while the rote work that supported their predecessors is either claimed by software and systems or is performed by clients in the ordinary course of events.”

Since most law departments are no more efficient or just slightly more efficient than large law firms, there are significant “opportunities” in both spheres. Through process improvement and technology, the path to reducing lawyer headcount by 50% is clear, though bumpy. That assumes we stick with technology available today and use straightforward process improvement techniques. Push further and allow technology to advance, and we can go much farther. In other words, until we reach limits where computers can’t do what a person can do, or it is impracticable to take waste out of a process, no law of nature stops us from shrinking the workforce devoted to corporate lawyering.

Of course turning to technology and taking out waste means that we can fill lawyers’ time with work that today is being given short-shrift or not being done. Every large corporation has legal work that needs attention beyond what current staffing and budget levels can handle and unless governments around the world suddenly go on regulatory diets, the volume of legal services needed will grow. That will offset at least some of the 50% headcount reduction, even in an efficient world.

Lawyers also could become client focused. Instead of being technophobes, they could learn about emerging technologies. Everyday, technologies such as 3D printing, artificial intelligence, nanotechnology, genome manipulation, and others are becoming more important to what businesses do and sell. The laws to regulate these technologies don’t exist or are woefully inadequate and on a global basis, the cross-jurisdiction issues are wonderfully complex. Businesses are plunging forward creating opportunities and risks that, in many cases, the law department knows nothing about. Rather than fighting over irrelevant or trivial issues, lawyers could refocus their energy on issues that really matter to their clients.

Lawyers in law departments and law firms have faced a choice for many years. They can try to ride out the end of the buggy whip era until retirement, hoping there will be enough horse drawn carriages around to keep them in business until their careers are over. Most lawyers seem content with this approach, even though only a few will survive using this strategy without serious career problems.

Alternatively, lawyers can play through the end of the game. They can change what they do and how they do it and find new ways to remain relevant to their clients. They can pivot the profession to provide the type of resource society will need to help with governance now and in the future.

Imagine what would happen if eleven players from 1894 took the field today and tried to play football? But that is what happens in law. Compare how legal services were delivered in 1894 to how they are delivered today, and you will see very little difference. More complexity, yes, but little difference in how the services are delivered. Yet the client of 1894 is not the client of 2016. To win at this game, lawyers must learn how to play it today and adapt to the rules for tomorrow. I don’t think this is an in-house lawyer versus law firm lawyer question. I think it is more basic. The real question is whether lawyers are willing to do what it takes to be in the game at all.

Educating

On October 10, 2016, the Royal Swedish Academy of Sciences awarded the Sveriges Riskbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to Oliver Hart and Bengt Holmström “for their contributions to contract theory.” The Nobel Prize has been awarded twice before to economists who focused on contract theory (Ronald Coase, 1991; Oliver Williamson, 2009). Clearly the underpinnings of what lawyers do every day go far beyond what law students cover during two semesters in the classroom.

There was a time, pre-industrialization, when practicing law really was about the law. Pleading had to be in precise form and law itself was concentrated in a few areas of social interaction, such as property, criminal law, and simple transactions. But just as industrialization vastly complicated the mechanics of society, it also complicated the law.

We know this, because we have lived through many of the consequences of that increased complexity. As the volume of statutes, regulations, interpretations, cases, and other information about a topic increased, lawyers specialized and then sub-specialized to keep up with the area. When I started working in law firms, you could still work on large transactions and large lawsuits. When I became a partner in a large law firm, you could still handle cases in many different substantive areas (my areas were securities law, antitrust, environmental law, and general commercial disputes). Today, you would not find that diversity in a large firm lawyer’s practice.

Even with the increasingly focused practices, lawyers struggle to keep up with the volume of information relevant to their field. Reading the information isn’t enough, the lawyer must also find ways to access it and to combine it to the benefit of his or her client. And every day the volume grows. But this is only part of the story.

Lawyers Know They Don’t Know

College students often recount having a dream in which it is the day before or the day of a final exam and they suddenly realize they were signed up for a course but they never attended the classes or did the homework. They awake panicked, only to realize that is was just a dream.

As a general counsel, I would lie awake in the middle of the night wondering if my team and I had missed something important. Sometimes, I was focused on a particular lawsuit or transaction. Other times, I was thinking more generally—what legal issues we not addressing that come back to bite us. From my discussions with other general counsel, my late night musings were not unusual. If it is difficult to keep track of one sub-speciality, think about how hard it is to make sure your law department, especially a small law department, is staying on top of the legal issues relevant to your client.

I think we did a fairly good job with the law. But many times issues would come up where I would think that we must not have been the first lawyers to ask a question. These weren’t legal questions that some hours of research would solve, these were questions related to and part of practicing law. For example, negotiating strategy, pricing strategies (for legal services, not corporate products), operations management, organization behavior, and, of course, technology issues come up daily in any legal practice. I was often uncomfortable with the advice I was getting from law firm lawyers when we discussed these issues. In fact, many times I felt the lawyer was winging it.

When I was applying to graduate schools, one of my undergraduate mentors made a very perceptive comment. He told me that my challenge would not be academic rigor, persistence, ability to handle complex material, or any other aspect of getting a PhD and becoming a successful academic. He saw my challenge as being interested in too many things. I loved to read, learn about all sorts of things, and then try and assemble that information into coherent theories. He told me that for real success as an academic, I would need to pick an area and then know it like no one else. Through that relentless focus, I would come to see things that others glossed over—I would get the insights I needed to make my mark.

While I still disagree that having a breadth of interests is bad, I do admit that strictly from a career perspective, I might have gone further if I had picked one topic and pummeled it to the ground. I would be “the” expert and that type of expertise can take you far.

The tradeoff that I have enjoyed, is a curiosity that lead me to unexpected information and connections. I will see something done in one area, be working on something in an unrelated area, and ask why we can’t borrow from the first area and apply the idea in the second area. This ability to cross boundaries is what, in the end, helped me to become as successful as I did.

But it also led to the nagging feeling I described above—when confronted with many questions, wasn’t it the case that others had already gone there and addressed the question? Consider this example.

One of the hotter topics in the legal industry over the past decade has been alternative fee arrangements. Today, we have many names for the topic, including value fee arrangements and appropriate fee arrangements. In the end, they all mean: should we use some form of fee arrangement for this legal matter other than the billable hour? While alternative fee arrangements have made some inroads, the extent of diffusion has been much slower than many hoped (though faster than many like).

Uncertainty and lack of trust come up often when alternative fees are proposed. The idea of fixing up front a fee for a complex service that will be impacted by many variables creates a discomfort level that causes in-house and law firm lawyers to run back to the billable hour. They both recognize the level of uncertainty in legal matters and neither trusts the other to be fair when looking at the fee after those uncertainties become known. This brings us back to Hart and Holmström.

Lawyers flounder with the fee, trust, and uncertainty issues. But what they don’t do is look to what others who have studied these issues have learned. They don’t show the curiosity to say: this may be a novel issue for us as lawyers, but perhaps it is not a novel issue and others have spent time on it and can give us some guidance. Hart and Holmström have spent much time studying the concept of incomplete contracts (contracts that do not specify all the outcomes of all future contingencies) and the effect on the behavior of parties to such contracts when it comes to setting prices. Other researchers have taken what Hart and Holmström have done and gone further.

In other words, lawyers try to muscle their way through the problem without looking for knowledge. This happens time and again. Today, many law firms have so-called pricing experts. These experts help the partners price legal matters. But in reality, many (most?) of these experts know little to nothing about the voluminous research in the area of pricing. I heard one “expert” talk recently about how he had developed a pricing theory, which sounded like a mashup of intuition, old pricing “truisms,” and a bit of consultant-speak thrown in. When I asked questions about his research on pricing for professional services, he was totally unfamiliar with the area. He just made up the theory sitting in his office based on being a lawyer for many years. He is not unique.

The same story comes up when we look at other areas of legal practice. Lawyers are not familiar with operations management, marketing, organization behavior, and much of finance. Their lack of knowledge isn’t limited to the theoretical side, it also sweeps in the empirical side. Put bluntly, lawyers are unfamiliar with vast areas of knowledge that explain much of what they do each day and why they encounter certain problems. The research also shows ways lawyers could avoid the problems. But then there are the lawyers wondering whether, if they knock the corners off their square wheels, the road will feel smoother.

The lack of knowledge isn’t limited to lawyers in law firms, it extends to lawyers in-house, and lawyers in other practice areas. For a long time, this ignorance was just quirky. Lawyers were lawyers and as long as they got the job done, others were inclined to let the quirkiness go. Not so anymore. As clients have become increasingly distressed by the profession’s backward ways, quirkiness has turned into something uglier. Quirks have become obstinate refusals to affordably help clients at reasonable prices while improving quality.

Let’s Remake Legal Education

I have heard many law faculty respond to the challenge of law schools should teach law and if students want to know business, they should go to the business schools. To them, the problems outside the walls of the law school are someone else’s problems. They have done their job by teaching legal theory. But is that really true? And is it our best position to argue students need two, three, or four post-graduate degrees to practice law?

Much of the law taught in law schools today involves law taught to pass the bar exam. As I’ve said before, we have yet to see a connection between the bar exam and “success” practicing law. It is a filter that reduces competition and should not be glorified as offering more (even competency). But that practice reduces the time available to teach other topics.

The “law” that most students encounter will be law learned or developed after law school. It is hard, in many cases, to say that the post-school law is even based on some “first principles” learned in law school. Modern approaches to contracting are not the types of contracts discussed in most first year classes, and the same is true for other areas.

It is time to ask some basic questions about legal training. Is law too complicated to be taught as we traditionally do in law school? Should education in the law be evolving into education in an inter-disciplinary area, much like other inter-disciplinary areas have developed in universities? With that evolution, should we be training lawyers in research skills, statistical techniques, and mathematical modeling equivalent to what they would learn in an applied PhD program? Should we also be training legal technicians, perhaps at the undergraduate level or as part of a combined BA/MA/PhD department or school? Those receiving a BA will, with some on-the-job learning after school, be equipped to handle many of the technical aspects in law. Those going further will be equipped to guide the law and its practice.

Legal education sits in a funky place. It is not rigorous enough in today’s world to train lawyers to guide the law or legal services. Yet, it is too costly and time consuming to be treated as an extended Bachelor of Arts. With many law schools struggling, perhaps it is time to address the fundamental issue of legal education and move in line with other countries who recognize law for what it is and don’t try to pretend the lawyers are training to be the world’s intellectuals.

SymbolThis could get ugly. I’ll step our way through it so stay close and hopefully you will make it through to the end okay.

Dr. Stephen Wolfram is the guy you did not hang around with when you were in school. He was born in London in 1959. As often happens with people of high intelligence, he struggled in school and had no patience for the “silly” arithmetic books he was asked to read. But by his early teens, he had written three books on particle physics (not published).

One of the reasons you would not have hung around with Stephen in school is that he hardly spent enough time at a school for you to get to know him. By age 15, he had published articles about his research in quantum field theory and particle physics. He went to Eton College, but left before graduating and at age 17 entered St. John’s College, Oxford. He also left St. John’s before graduating and enrolled at the California Institute of Technology where, at age 20, he received a PhD in particle physics. One of the members of his thesis committee was Richard Feynman (yes, that Richard Feynman). What next? He joined the faculty at Caltech and at age 21, became the youngest recipient of a MacArthur Fellowship (the so-called genius grant).

If you think Richard Feynman was a brilliant theoretical physicist who did things ranging from assisting in the development of the atomic bomb, to creating Feynman diagrams (visual representations of the mathematical expressions describing the behavior of subatomic particles), to nanotechnology, you are right. But he also was perceptive about human character. When Wolfram wrote to Feynman saying he was considering starting an institute to study complex systems, Feynman replied “You do not understand ordinary people,” and suggested Wolfram “find a way to do your research with as little contact with non-technical people as possible.” Again, another reason why you probably would not have hung with Wolfram.

Wolfram left Caltech and joined the faculty of the University of Illinois at Urbana-Champaign where he founded the Center for Complex Systems Research and the journal Complex Systems. When he was at Caltech, Wolfram had developed a computer program called Symbolic Manipulation Program. A battle with Caltech over the rights to the program and related issues led to Wolfram leaving for the University of Illinois. Shortly after arriving at Illinois, Wolfram began developing Mathematica and within a year founded his company Wolfram Research. Today, Mathematica is widely used around the world and Wolfram Research, which Wolfram joined full-time shortly after founding it, develops and promotes the program.

In 2002, Wolfram published the book A New Kind of Science, in which he argues that the universe is digital. He further argues that simple computational systems can be devised to model and explain all of nature. In 2014, Wolfram finally named the programming langue that had been driving Mathematica for 25 years, calling it “Wolfram Language.” Wolfram Language can be used to write the computational systems, but Wolfram had been expanding the Language’s reach. Wolfram spends his time on Mathematica, on developing Wolfram Language, and on giving it greater exposure so others will use it. In essence, Wolfram followed Richard Feynman’s advice by creating a world in which he can spend most of his time working with technical people on his vision of a computational future.

And I Care Because …?

Last week, Wolfram posted a long blog post laying out his vision for computational law. The post covers a lot of ground and stretches from Aristotle to the present, so I won’t try to cover it all in my recapitulation. Instead, I’ll focus the rest of this blog on the key point in Wolfram’s blog, his argument that now is the time (and of course Wolfram Language is the vehicle) for creating a symbolic discourse language. In other words, Wolfram believes we are ready for a language we can use to express legal concepts and which computers can use to compute outputs. Creating the symbolic discourse language, within Wolfram Language (a symbolic language) is his next step. Again, talk like this is probably another reason why you wouldn’t have hung with young Wolfram.

Think of symbolic discourse language as something that exists between natural language and computer language. Without getting deeply into computer software and hardware, think of the computer’s operating system (e.g. Windows or Mac OS) as the base level. On top of the operating system we have applications, like Word. When you want to write a letter, you can open Word and just type. Word interacts with the computer’s operating system and the operating system interacts with the hardware, so that when you click “print” your letter is printed.

That system worked well for lawyers and poets, but those who used math were left struggling. They had to program the computer to run their computations, and that meant learning computer languages such as Fortran (in the old days) or C.

Wolfram created a new language that allowed people to run math and get answers to formulas or graphs without having to go deep into programming. The new language, Wolfram Language, is a symbolic language. That means you can enter relatively simple commands and Wolfram Language converts them into the complex commands that drive the computer. The more sophisticated the language, the more symbolic the commands you can use.

If you ask Wolfram Alpha, which takes as one form of input natural language, “what is the diameter of the earth?” it can translate your natural language inquiry into the code needed to search for the information, assemble it, and present it to you in a way that you can understand.

Now think of a court decision. Judges do not use symbolic language. They attempt to explain the law, the facts, and their reasoning using natural language. But using natural language can get messy. Think about separating “preponderance of the evidence” from “beyond reasonable doubt.” You get the terms, but that doesn’t mean a computer or others get the terms. They convey a concept, but not precisely.

A symbolic language could take each term and turn it into something a computer can understand (e.g. >50.0%). Once the computer can understand it, it can receive inputs and deliver outputs. Lawyers and judges would then write contracts, briefs, case law, and other materials using the symbolic discourse language instead of natural language.

If you are straining to extend this idea to all legal discourse, that isn’t surprising. It will take quite an effort to develop the entire symbolic discourse language. But Wolfram’s point is that our knowledge and tools have developed to the point where he thinks his team can do it.

Don’t Get Rid Of Lawyers Just Yet

Let’s address the first issues that come up in a lawyer’s mind when reading this story: what is good or bad in it for me? You may find it surprising, but Wolfram does not take the position that the symbolic discourse language will be the end of lawyers. He says, “Today lawyers have to learn to write legalese. In the future, they’re going to have to learn to write what amounts to code: contracts expressed precisely in a symbolic discourse language. … [I]t will help lawyers think better about contracts.” For those in legal education, this is another, and perhaps the most powerful yet, reason to start teaching law students logic and coding.

If symbolic discourse language won’t decimate lawyers, will it decimate the law. Will law become so simple that anyone can do it? Not so, according to Wolfram,

Once computational law becomes established, the complexity of what can be done will increase rapidly. Typically a contract defines some model of the world, and specifies what should happen in different situations. Today the logical and algorithmic structure of models defined by contracts still tends to be fairly simple. But with computational contracts it’ll be feasible for them to be much more complex—so that they can for example more faithfully capture how the world works.

He goes on to describe how the symbolic discourse language will interact with machine learning software that is gathering information from other sources (e.g., the internet) that the language uses to inform the contract. This gets a bit tricky, but I’ll take a stab at explaining it borrowing from one of Wolfram’s examples.

The contract calls for X to happen when condition Y is satisfied. But Y is something itself difficult to define as “satisfied” or “not satisfied” in simple terms. Wolfram uses the example of fruit. I will pay you $10,000 for delivering to me a certain quantity of fruit meeting the standard “Fancy Grade.” The question is whether the fruit met the standard.

We could define the standard as no more than Z% of the fruit has blemishes and we can further define a “blemish”. A computer could examine all the fruit, calculate the percentage of blemished area, and feed that into the contract yielding an output: pay or don’t pay.

Many lawyers may be shouting “huzzah” right now. We’ve just said that law will evolve to a symbolic discourse language (in other words, legalese of a different type), become more complex, and require knowledge of both legal principles and computers. Is law going back to an opaque art that will require clients to pay for access? I don’t think so, but let’s leave that question to the side and explore other “what does it mean” questions.

Crushing Poetry Out Of Law

Every law student knows the Aristotle quote, “The law is reason, free from passion.” Wolfram says that symbolic discourse language would take us there, “In a sense, the symbolic discourse language is a representation in which all the nuance and ‘poetry’ have been ‘crushed’ out of the natural language.” This will raise some interesting questions, particularly when it comes to equitable considerations. Should contract law be devoid of poetry?

Going in another direction, we can ask how symbolic discourse language might affect our understanding of the economic underpinnings of contracts. On October 10, 2016, the Royal Swedish Academy of Sciences awarded the Sveriges Riskbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to Oliver Hart and Bengt Holmström “for their contributions to contract theory.” They have focused much of their work on the area of incomplete contracts. The theory starts with the thesis that contracts are incomplete, because they cannot specify what is to be done in every future situation.

Part of specifying the future is data, part is computational power, and part is complexity of the contract. Today, we can’t possibly analyze sufficient data to predict all possible future consequences. Even if we could get enough data, we would need tremendous computational power to analyze it. Finally, writing a contract to cover all the contingencies would result in a document no one would dare write or read.

Wolfram posits a future where those problems would be greatly mitigated. Computers can scour vast databases and use machine learning to analyze data relevant to the contract. With access to tremendous computing capacity, the power to analyze the data becomes available. Finally, if the contract will be written in code—and given that the computer itself could write at least some of that code—we don’t care how long the contract becomes. We can see a touch of this today in electronic trading on the stock exchange. Computers gather and analyze the data, develop algorithms based on the data, and place the trades.

As you can begin to see through the fog, data plays an ever more important role in contracting. Data helps inform the terms of the contract, but data also becomes the fodder for the programs that determine whether terms of the contract have been met. Data also affects the dispute resolution process. If both parties and the court have access to massive quantities of data and the computing power and systems (machine learning) to analyze the data, dispute resolution could become focused on very narrow issues as more contract issues are answered through complex contracts and data.

We Still Have Ground To Cover

Wolfram’s post (which consumes 20 single-space pages) touches on some of these issues and addresses many more, yet still leaves large gaps in its wake. The core proposition is this. Work so far, with some exceptions (many of which Wolfram notes) has been focused on backing into discourse analysis by examining what courts have done and attempting to find ex ante ways to construct systems for describing the logic of law. Wolfram proposes to construct a symbolic discourse language that lawyers, judges, legislators, and society would use to create law. Computers could use the language, augmented by machine learning analysis of relevant data, to evaluate questions arising under the law.

Wolfram acknowledges the huge amount of work it will take to accomplish this feat. But, as his biography suggests, he is not someone to shy away from challenging questions or large amounts of work.

Lawyers should consider what Wolfram proposes in a different light. Perhaps Wolfram will succeed or perhaps this will be a challenge that survives him. But, most of the work we see today involving computers and law involves attempts to automate the present or to decipher the past, not create the future. Just as we are at an inflection point in the delivery of legal services, one could argue we are at a similar point in the substance of law. It has become too chaotic and faces challenges too great (e.g., explosion of relevant data, speed of societal change), for the current approaches to developing law to work. Add on to that other issues, such as the privatization of law and many issues never reach the courts, affecting the evolution of common law.

Wolfram’s path is not artificial intelligence in the law. It doesn’t remove lawyers from the equation (though that is theoretically still possible at some point). Instead, and at a closer point in time, it leverages the power of computers to use data, handle complexity, and make law (in theory) more precise (though at a cost to humanity, a topic for another post). Those are benefits we can deliver to clients and, ultimately, what makes his path intriguing. It will be up to lawyers to determine whether they let this turn out to be an ugly or beautiful path.

ValueNetworkPrior to World War II

During the Edo and Meiji Periods up until World War II, Japan’s economy was influenced and then dominated by zaibatsu. Eventually, four zaibatsu became the most powerful: Sumotomo, Mitsui, Mitsubishi, and Yasuda. Each zaibatsu was controlled by a family. The zaibatsu controlled significant portions of steel, banking, mining, and other core industries that were critical to Japan’s industrialization.

The typical zaibatsu was made up of a holding company, a banking subsidiary, and many industrial subsidiaries concentrated in a few core industries. Those industrial entities, directly or indirectly through other subsidiaries, formed a vertically integrated system. The four zaibatsu were powerful, but there were many smaller zaibatsu focusing on less critical industries.

The Japanese military was not fond of the zaibatsu. The zaibatsu wielded enormous economic power and had great influence over the government in areas such as trade and foreign policy. Outside the military, the Japanese population  viewed zaibatsu with suspicion and awe.

While the zaibatsu increased their power as Japan’s industrialization increased during the early 1900s, they lost much of their power going in to World War II when the Japanese government took over many of the zaibatsu-controlled industrial operations. Coming out of the war, General Douglas MacArthur, leader of the allied effort to assist Japan in re-building, took further steps to dissolve the zaibatsu. He was not completely successful at eliminating them and remnants of the systems still exist today. But the devastation of Japan’s economy, the introduction of many Western ideas, and the desire to move further away from the feudal-like structure of the zaibatsu meant it was time for something new. As Japan began re-building a new structure helped the country take the next step.

The Keiretsu

A keiretsu is a loose affiliation of companies that work together. Typically, they have interlocking ownership structures. The keiretsu, unlike the zaibatsu, are not controlled by a family and are not monopolies. Each keiretsu is built around a bank that provides primary financing to the companies in the keiretsu.

The Toyota Group is affiliated with Mitsubishi UFJ Financial Group (MUFG), which is part of the Mitsubishi Group. Toyota Group’s keiretsu consists of many tiered suppliers who produce parts or sub-assemblies for Toyota vehicles. There are horizontal keiretsu and vertical keiretsu, and Toyota Group is considered one of the largest vertically integrated manufacturing group keiretsu (a seisan keiretsu).

Japan’s laws do not allow banks to own more than a certain minority percentage in industrial companies. As a result, the keiretsu are not as tightly integrated as the zaibatsu. Even ownership among keiretsu industrial entities usually is limited to minority positions, allowing member companies to participate in coordinating and directing other companies without directly controlling them.

The keiretsu system has not been replicated outside of Japan, with  possible exceptions in South Korea and India. Within the United States, for many legal and cultural reasons, the keiretsu idea has not taken hold.

Modern Law Firm Systems

Although the United States does not have keiretsu, we have seen a very distant and pale cousin appear in the legal industry. It is the law firm referral network. These networks have been formed to help clients who need services in many jurisdictions, but who prefer to connect into a pre-existing network over creating their own network. There are two basic types of lawyer referral networks.

First, there are the dues-paying membership law firm networks. These networks pre-screen firms, provide an administrative hub, and restrict member firms to providing services in certain jurisdictions (exclusivity). They exist somewhere between trade associations and vereins.

Second, there is Dentons’ Nextlaw Global Referral Network. The Network is structured similar to other referral networks. But, Denton argues, it differs from the traditional law firm referral network in two major ways. First, traditional law firm referral networks usually require that member law firms pay to join the network. The fees cover the administrative costs of the network, which include advertising, vetting current and potential members of the network, educational events, and handling administrative duties associated with the network (such as maintaining and populating a web site). Second, Dentons does not give member firms territorial exclusivity in its Network, something other referral networks usually do.

However, both network types lack an essential characteristic of a lean network and, therefore, do not move us toward an improved legal services system. The Toyota keiretsu integrated the the operations of each supplier with those before and after it. It was this integration, done through understanding and interconnecting processes, that caused the network to rise well above any competing supplier system.

Why Keiretsu Are Superior

When a client works with multiple law firms, or even one law firm using multiple offices, or even one office of one law firm, it will get—well, it isn’t sure what it will get. Each lawyer will do his or her thing his or her own way. The legal industry is famous for its love of autonomy and lack of standardization.

Sticking with the traditional law firm referral network model, the lawyers in each firm deliver services using their own processes, standards, timetable, and customs. For each firm, this is a custom mix that someone must integrate with what all the other firms are doing. For the client, this means a lot of wasted time (integration), risk (variation among firms), and extra labor (re-work and fitting the work of firm A into the slot left by firm B). Simply putting the firms in a network or on the same software backbone doesn’t solve the problem (though it adds cost to the system).

Toyota Group faced the same problem. No matter how lean it would get, it relied on many suppliers who in turn relied on many suppliers. If that chain wasn’t well-integrated, Toyota Group would be limited in what it could achieve. The solution was to work with those tiers of suppliers to create the integration necessary for continuous improvement.

If a Toyota assembly plant gets its engines from a first tier engine assembler, then the engine assembler must deliver to the plant exactly what that plant needs, when it needs it, and configured exactly the way the plant wants. Toyota Group did not need the wrong engine built efficiently, the right engine delivered late, or the right engine delivered on time, but poorly constructed. That meant Toyota Group needed to work with its engine supplier to develop the value chain through both of their systems. This is key: Toyota Group and the supplier worked to create one integrated, seamless, value chain built on continuously improving processes.

The same problem existed for the engine supplier, which received parts from many second tier suppliers, and so on back through the chain. The value chain was not just what the Toyota assembly plant did, it was what every supplier that participated in the chain did, from the business that made the bolts through the assembly plant itself. Otherwise, waste would get passed along and build up in the system, much as many streams filled with debris will eventually dump all that debris into the major river. Cleaning the river does no good if the streams continue to send debris.

Law firm networks do not integrate the way Toyota Group integrated. Part of the problem lies in legal services delivery. Someone must work with the organization at the head of the system, and then convince that entity and the supplier entities to work together—for the good of their clients—to improve and integrate the system. Then, of course, all of those entities must fulfill the promise. If the head of the system is not standardized, efficient, run on metrics, etc., then the rest of the value chain will have similar flaws.

You can already hear an objection. Each firm argues that it works with many clients and firms and that it can’t adapt its systems for each one. The firms and lawyers will ask why they should “optimize” for one system, or how they could possibly optimize for many systems. This objection comes from not understanding process improvement.

Within Toyota Group, the same objection could have been (and probably was) made—at least below the assembly plant. The supplier companies do not work solely with Toyota Group. They work with suppliers outside the network and they have customers other then Toyota Group. Toyota Group encourages that diversification. Each supplier benefits from learning and improving its processes, because it gains (or maintains) a competitive edge. It improves its financial prospects and becomes more valuable to the companies with whom it does business. It is hard to find a supplier who can plausibly make the claim that using too much labor, delivering mediocre quality, having high variability in its products, and engaging in other wasteful practices works to its benefit.

The Client Network

Although a Toyota assembly plant is a manufacturer and the client is the ultimate  customer, in this story the assembly plant is the customer. In the legal industry, the customer, for large corporations, is the corporation not the lead law firm. Clients should be building networks that contribute to their value chain, not the law firms’ value chains. To do so requires a very different way of thinking than what we see in clients today.

The client needs to start with a value focus and define what it means when it says “value.” It should then assemble suppliers in its value chain who are willing to align their goals with the client, and suppliers means more than law firms. Those suppliers must work together to define the points along the value chain. Then they must go the next step and define processes. The suppliers and client must work as a team to improve and then improve again. In other words, continuous improvement must be built into the client’s supply chain, through law firms, managed service providers, e-discovery vendors, and so on.

For large corporations, this approach sounds feasible, if not easy. But what does the small corporate client do? It can’t reinvent the legal supply chain, but it can reinvent its own supply chain and choose suppliers based on those who will work with it on process definition and improvement. Supplier selection based on what the supplier can and will do becomes more important that name recognition. The size of a supplier recedes in importance and the supplier’s ability to flex, to re-work processes, to understand value chains, to remove waste, and to align itself with its clients goals become selection criteria. Again, we do not see this level of continuos improvement throughout legal services value chains.

The need for end-to-end value chain process improvement in the legal industry leaves an interesting opening for businesses, such as managed service providers (MSP). Clients, rather than depending on law firms to do the integration, could turn to the MSPs to play that role. By providing legal project management, process improvement, technology expertise, and metric knowledge, the MSPs can knit together the law firms, MSP, and other providers (e.g, e-discovery companies) into well-integrated, cost effective, legal services networks. Medium and even small clients could tap into these networks.

The MSPs would have better goal alignment with clients and more incentives than law firms to work with clients for the long-term (long-term benefits accrue more to businesses with long-term perspectives than to law firms which operate on one-year perspectives). They also can build and maintain networks where one client may need Brazilian counsel one time, but across many clients that assistance is needed frequently so there is an incentive to continue improving processes. The MSP also can help with tasks, such as project hanging deals where tight network integration would reduce the friction costs in-house counsel encounter when creating ad hoc deal networks. Of course, a law firm could decide to play the MSP-integrator role, but we have not seen firms willing to take on the challenge (again, we see only loose networks with little or no process improvement integration).

Conclusion

The lawyer referral networks that exist today have been built for the benefit of the network members, not the network users. Law firms participate because they believe the network will increase their exposure to clients and, ultimately, client revenue. This network structure is similar to the zaibatsu, which were built for the benefit of the controlling families. As a client, however, that is not the network you want.

As a client, you want a network structure that delivers value to you, and that means a structure that is aligned around your goals. Unless your goals include spending money on inefficient structures, modern referral networks are not likely to align with goals such as increasing efficiency, cost, and timeliness.

The network that will add the most value to your business should be built with you—the client—at the focal point. You are the starting point for the value stream that will deliver services that are fit for your purposes. The members of your network must be flexible, able to adapt what they do to operate smoothly within the value stream passing services through the network with minimal waste, and well-positioned to add value along the way. In other words, networks should not be law firms strung like pearls on a string. They should consist of diverse service providers who are strategically positioned to deliver what is needed, when it is needed, in the way it is needed.

So far, we have not seen a law firm network emerge with this process-focused, goal-aligned, value driven structure. Even attempts by clients to build networks have focused far too much as cost and spent almost no effort on a true grassroots approach to building the system. Technology will exacerbate the problems of the current lawyer referral networks, though they will undoubtedly herald their use of technology to integrate the members of their networks. As with most changes affecting the legal industry, the real question of change goes back to the client. Will clients today take the lead in building true, value enhancing networks or will they continue to settle for the modern equivalent of country club friends?