CashCowPicIn 1871, on the evening of October 8th, Catherine O’Leary was milking her cow in the barn behind her house in Chicago. The cow kicked the lantern, breaking the glass and starting a fire. The wind was high and the weather dry, so the fire spread fast eventually engulfing more than three square miles of Chicago. The Great Chicago Fire, we are told in a minstrel tune, was due to Mrs. O’Leary and her twitchy cow:

Late one night, when we were all in bed,

Old Mother Leary left a lantern in the shed;

And when the cow kicked it over, she winked her eye and said,

“There’ll be a hot time in the old town, tonight.”

At least, that is the urban legend. As with other urban legends, this one is not true, but it makes for a great tune. The Great Chicago Fire was real enough, and it did start in Mrs. O’Leary’s barn, but the fire department concluded a spark from a chimney was the likely cause. Still, lawyers should take heed that cows have a history of being around when bad things happen.

From Milk Cow to Cash Cow

The story about Mrs. O’Leary’s cow sparking the Great Chicago Fire is fun, but another cow may be fanning a bigger fire in the law right now. The story of the legal industry’s cow begins about 100 years after Mrs. O’Leary’s milk cow lived.

Bruce Henderson was the founder and for many years president of Boston  Consulting Group. He created a simple matrix for a company to use when evaluating its business units as part of an overall growth strategy.

The “growth-share” matrix, often called the BCG Matrix, relies on measurements along two dimensions. Business units are measured along the Y-axis as having high or low market growth rate. They are measured along the X-axis as having high or low market share. The resulting matrix includes four categories (high-high, high-low, low-low, low-high) which Henderson gave the names stars, question marks, dogs and cash cows. This is where we got the business slang term “cash cow.” A farmer’s dairy cow yields a steady return (milk each day) for a relatively low investment (an area to graze), and a business’ cash cow yields a steady financial return for a low investment.

BCGFourSquare

Using the BCG Matrix to categorize its business units, a company decides on a strategy for growth, following the BCG philosophy:

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:

  • stars whose high share and high growth assure the future;
  • cash cows that supply funds for that future growth; and
  • question marks to be converted into stars with the added funds.
Plotting Law Firms and Law Departments

If you are leading a law firm and believe in the BCG Matrix, you evaluate each of your business units—practice groups—using the two dimensions. Then, you create a scatter chart plotting each practice group on the Matrix. For example, most law firms would put cybersecurity practices in the question marks box—they have a high market growth rate, but each firm has a low relative market share.

Each year, we see more firms evaluate their practices by implicitly following the BCG Matrix. When they complete the analysis, the firms shed attorneys in practice areas that are dogs and try to recruit lateral partners for question marks practices. This approach to managing the portfolio of practices that make up a law firm is one of the reasons we see such a hot market for lateral partners. One firm’s dog can be another firm’s question mark, so partners move from firm A to firm B.

Law departments also can use the BCG Matrix. Demand for services within law departments varies as the nature of the company’s business model varies. By categorizing service areas using the BCG Matrix, a department can look at where it may want to invest (demand is increasing) and where it may want to explore alternative service providers to significantly reduce costs. Put another way, general counsel should not spend a lot of money on the dogs and figure out how to invest in the stars.

Managing the Herd

Because law firms and law departments still operate on labor-centric models, shifting resources usually means firing and hiring. Certainly at the law firm level, we see firms rather routinely shed associates and sometimes partners when certain practice areas turn into dogs. We also see, as I noted above, firms hire partners and even associates when other practice areas turn into question marks or even stars. There are significant costs to this approach, but until firms find it in their self-interest to move away from the labor-centric model, we will see this behavior.

Law departments also shift by firing and hiring, but do so with more nuanced moves than law firms. General counsel are more tolerant of re-tooling lawyers within a department, perhaps because the majority of law departments still employ many generalist attorneys whereas law firms focus on specialists. Law departments tend to shift by dropping or adding outside counsel. In fact, this was one of the perceived benefits of using outside counsel. If M&A cooled off and litigation became hot, the law department would shift its outside spending accordingly.

Most Law Firms are Cows or Dogs

There is another way of using the BCG Matrix and it is happening right now in the legal industry. If you look closely, you can see many firms—or, more precisely, many equity partners—using the strategy.

Equity partners own a law firm. As investors, they should decide how to maximize their investments in the firm. They could build a strategy using the BCG Matrix for practice areas. Another approach is to think of the entire firm as one business unit. In other words, rather than ranking each practice area on the two dimensions, rank the firm as a whole on the two dimensions.

If the equity partners at most large law firms do this, they should conclude that their firms are not stars. Instead, they should put their firms in the cash cow or dog quadrants. Most firms are experiencing little or no top line growth and many have seen revenue drop. The market for large law firm services is fragmented, so no firm can claim a significant market share. Intellectually, that would put many law firms in the dog quadrant. But these firms do generate cash flow well in excess of costs. In fact, despite the decline in the market for large law firm services, law is still one of the most profitable professional service business models (accounting firms beat law firms last year).

If we asked equity partners in small firms and mid-size firms to do the same exercise, we should get the same result. Some firms will be the exceptions, just as there are about two dozen large firms that seem to fall into the star quadrant. Overall, however, firms are more likely to be cash cows and dogs.

How Law Firm Leaders Manage Cash Cows

To understand what this classification means, we should add another fact to the story. Law firm leaders and equity partners tend to be older. Many are baby boomers, which means they are roughly ages 52 to 70. In fact, not only are they older, they are older than their counterparts in companies. A recent study found that less than five percent of law firm leaders are from Gen X, whereas up to 30% of major company general counsel are from Gen X.

If we combine the results of the matrix exercise with the baby boomer information, we get an interesting picture. Most firm leaders (equity partners) will continue working for a relatively short period, perhaps another 10 years. The legal market is changing, but slowly. Over the next 10 years, we will not see carnage among the large law firms, though we will see the weaker firms picked off.

Equity partners may decide—rationally and as owners of a firm—to forego any significant investment in the firm or its future, invest only that which is necessary to keep a firm operating at its current level, and take the cash. In the BCG Matrix model, this would be milking the cash cow. The strategy will not keep a firm alive forever in this competitive market, but it will work to keep the firm afloat long enough for those equity partners in power (and their peers) to retire comfortably.

There are, of course, many others who work in law firms. The firms hire associates, promote some to non-equity partners, and maintain some level of staff in various other areas, including paralegals, IT staff, clerks, librarians, and so on. What happens to all of these people when firm leaders follow the cash cow model?

Some of these people realize what is happening and, if they have choices, leave the firm. Many do not realize what is happening. Some of them will be forced to look for work when the firm merges or fails, and some will be fortunate enough to move to a successor firm or find other employment. What works for an equity partner does not look so good for others in a firm.

Breaking Out from the Herd

Some lawyers think it is unfair that law firm equity partners can act in their self-interest and not protect all the employees of a firm. If you think that way, you may want to talk to the former partners of Dickstein Shapiro who lost their capital investments when the firm closed its doors. Ultimately equity partners are investors and to expect them to act altruistically is silly.

That does not mean we should ignore other stakeholders. Associates and non-equity partners (and even junior equity partners) should consider the future and how best to prepare for it. Some firms have decided to give these individuals a voice in the future of the firm. Other firms make it clear that only equity partners will have any voice in the firm’s future. A very few firms seem willing to make modest investments in their future.

Associates, non-equity partners, and junior equity partners must decide what they want and the best way to get there. But they should remember, that failure to act is a form of acting. The best way to predict the future is to make your own.

Lawyers have a strong tendency to remain bodies at rest, like content cows in a field, unless forced to act. When a firm receives enough work to keep its lawyers busy, even if only to a modest degree, lawyers will stay still and graze comfortably on what comes along. If you are one of those contented lawyers, now may be a good time for you to lift your head up, look around, and shape your own future. Otherwise, you may be the last cow in the barn when it burns down. 

ClientsEatLawyersMarc Andreessen famously titled a 2011 essay in The Wall Street Journal “Why Software is Eating The World.” Even lawyers, the guardians of “we won’t change,” have had to concede that software is here and not going away.

Large law firms have piled on software programs in the name of efficiency (though most are efficiency killers). Even small law firms have access to and frequently use software in many parts of their practices. I know one lawyer who built his practice by cobbling together online services and software to do everything imaginable. He now packages his “how to” as a business proposition to other law firms.

With software eating the world and decades of focus on productivity and process improvement in corporations, you would think most businesses today operate at the speed of light, leaving behind that tagline about operating “at the speed of business.” It turns out that in some ways, many businesses now operate more slowly than they did a few years ago.

When Law Gets in the Way

In a recent article in Fortune magazine, Tom Monahan, the chairman and CEO of CEB, cited statistics showing the slowdown in corporate processes. For example, according to CEB’s studies, in 2010 it took on average 42 days to hire a new employee, but in 2015 a study of 400 corporate recruiters showed the time had increased to an average of 63 days. IT has seen a lot of process improvement activity, but in the past five years the average time to complete an IT project has increased by more than a month standing today at a bit more than 10 months to complete a simple project.

The old saying “time is money” is true when it comes to delays. According to Monahan, an open entry-level position can cost a company $400 a day and a delayed simple IT project can cost it around $43,000 a month. Slow down a business process and you better have a good reason.

Many things affect how quickly processes move, so pointing to one cause and claiming it explains everything will not work. But, there are some causes that lawyers should find unsettling.

Compliance and risk management, both areas where lawyers typically play a role, have contributed to the process slowdown in corporations. For example, compliance, privacy, and data protection—all rich in legal issues—have grown significantly during the five years covered by CEB’s data.

Enterprise Risk Management (ERM), an area that took off after changes in the federal securities laws, also has seen significant growth. For public companies which bring significant risk areas to the board and have to include risk management disclosures in their proxy statements, ERM has added complexity.

Lawyers will quickly point out that these are important areas, taken seriously by regulators, consumers, stockholders, and other businesses, and that they deserve significant attention even when they do negatively impact business speed. Pointing to important protections in these areas and claiming they are drags on businesses is like claiming sterilizing instrument packs puts a drag on the medical profession. Maybe so, but we are all better off with the protections.

Certainly compliance, privacy, data protection, and risk management practices have grown and all indications show they will continue growing as the risks to businesses increase and become more complex. But, and this is the kicker for lawyers, having to do something is not the same as having to do it inefficiently or expensively. And this is where clients are stepping in.

Nibbling Around the Edges

There is a small, barely perceptible trend touching the corporate legal services part of the legal industry. Like most disruptive forces, it is creeping in here and there, not really noticed except by the few who directly feel its impact. Like the small crack in the dam that has the potential to become something big, this trend could change how many corporations view legal services.

In some corporations, clients are taking lawyers out of the process of handling what historically have been viewed as legal matters. This is where “clients are eating the lawyers.” As clients see they have alternatives to lawyers to solve problems that lawyers used to handle, and as they see that those alternatives cost less and move faster, they are shifting work away from lawyers.

Consider contract management. While most law departments handle corporate contracts, many corporations have used contract specialists to do the work. Those specialists, seldom lawyers, manage the process of assembling the information, negotiating, drafting, and monitoring contracts. I was hired as one company’s first general counsel. For more than a decade it had used a paralegal to review , negotiate, and manage its contracts, with only infrequent help from a lawyer.

Today, we have software designed for clients to use to review and negotiate contracts. Initially aimed at smaller businesses, the goal is for clients to use the software to handle most of the work of reviewing and negotiating common contracts. The client would call in a lawyer only for tricky provisions.

The areas Monahan mentions—compliance, privacy, and risk management—have become areas where corporations look to specialists outside of law departments. Some of this is driven by a “separation of powers” rationale, but some of it is driven by the belief that lawyers bring too narrow a view to problems requiring breadth of vision.

Many corporations have moved to separate the compliance function from the law department. As the general counsel, I was also the chief compliance officer. Today, that is not always the case and at the companies where I worked like at many other companies, the boards actively considered whether to separate the roles.

Privacy is a complex area, involving specialists in many areas in addition to law. But, as it grows in complexity and importance, privacy is becoming its own function operating separately from the law department. Admitting some self-interest in play, this is what one privacy professional says when asked whether a law degree is necessary or even helpful for a privacy professional:

Ellen Giblin, CIPP/C, CIPP/G, CIPP/US, privacy lead at Boston Children’s Hospital, … says a law degree just isn’t necessary to succeed in privacy. Unless, that is, you’re doing privacy litigation, of course. But the bulk of the work done by a privacy professional at any organization is in risk management and information governance. If you think of a privacy professional’s work in terms of a pie, the pie is made up of privacy, data security and compliance. There is a particular slice of that pie that includes work on data breaches, and for that, yes, it’s necessary to involve a lawyer to ensure compliance with data breach laws and regulation. However, “outside of a breach, a law degree is not necessary as long as you have the correct governance skills,” she said. “And there are lots of certifications that require the necessary skills.”

In fact, the article goes on to say, privacy professionals often find lawyers get in the way of dealing with potential privacy breaches because they bring a narrow perspective to a broad issue. Once again, the danger sign is lawyers making it easy for clients to decide to do without lawyers.

Risk management was a backwater area for most corporations. The very word “insurance” made most managers look for someplace to hide. Lawyers handled litigation and worked with the risk management department when insurance kicked in, and the risk managers handled the administrative work of making sure the corporation insured its facilities, collected on claims, and had a safety program.

Then, the world of risk exploded. It turned out that corporations faced a wide range of risks beyond fires and slip-and-fall cases. More importantly, it was not clear that many corporations systematically looked at their risks and took steps to protect against them. Welcome to the era of Enterprise Risk Management.

Many corporations cobbled together combinations of auditors, risk managers, lawyers, and finance staff to create risk management systems. Over time, the sophistication and complexity of these programs have increased. Lawyers were involved, because many risks had legal ramifications or were themselves legal risks, and because the securities laws added new disclosure requirements. After all, corporate lawyers had often claimed a management leadership role.

Today, risk management typically resides outside the law department. As described by the authors of a recent article in the Association of Corporate Counsel’s Docket, “ERM has become something of a runaway train, and while lawyers have made attempts at climbing aboard, we still have not made much progress toward integrating what we do with what ERM is trying to do.”

Risk management is a finance function or has its own separate structure. Lawyers, often weak in technology, statistical analysis, and other core risk management skills, sit on the sidelines. If a risk becomes a lawsuit or requires other specific legal skills, the client calls the lawyers. Otherwise, many of these clients see lawyers as more of a problem than part of the solution.

Monopolies Don’t Last Forever

Lawyers have held the monopoly to provide legal services for a long time. But, like most monopolies, it is hard to hold on when disruptors provide faster, better, cheaper, and often higher quality ways to accomplish what the monopolist does. Clients, and here I mean the real clients in corporations, want what they want. They have problems to solve, businesses to run, and many constituents to satisfy. They did not get into business to work with lawyers.

Lawyers, like true monopolists, are fighting hard to protect the monopoly. The harder they fight, the more likely they will lose. It will take time for the shift away from lawyers to happen, mostly measured by the turnover of generations in lawyers fighting the battle. The prolonged battle, however, is encouraging clients to look harder alternatives to using lawyers. Clients will continue eating lawyers this way, because when lawyers unnecessarily get in the way of business, they lose.

Be the Solution, Not Lunch

The alternative is clear. Lawyers could decide that serving clients holds a higher value than fighting to preserve an inefficient way of solving problems. By adopting modern practices, lawyers can deliver legal services faster, with higher quality, at lower cost, and with outcomes better matched to client needs. By bringing technology and other areas of expertise into the mix, lawyers could provide superior solutions to the alternatives now available. In the end, that is what will cause clients to stop eating lawyers, not outdated monopoly-protecting laws. The choice is clear for lawyers, be the solution or be lunch.

One of my daughters is a carpenter (with an honors degree in Classics). Imagine how comfortable you would feel if she was going to build your house but did not know how to properly use a hammer, or the more modern compressor and nail gun. How would you feel if the surgeon hired to remove your appendix only knows how to use a few of the instruments on the surgical prep tray and is not familiar with the scalpel?

Ridiculous, you think. Carpenters must be skilled with hammers and surgeons must know how to use scalpels. Yet, the most basic tool of a legal practice is the computer and very few attorneys know how to use one well. Ask about programs beyond basic word process software (knowledge management, contact software, research tools) and the familiarity level plummets. Non of Lucifer’s tools for these scriveners; a quill will do quite well.

The American Bar Association, no fan itself of technology, recently updated the model rules of professional responsibility to explicitly address lawyer competency with technology. The ABA added the phrase “including the benefits and risks associated with relevant technology” to Comment 8 (Maintaining Competence) for Model Rule 1.1 Competence. As of December 23, 2015, 20 states had adopted the the update.

Once again, the ABA guided us to the incredibly obvious, when the merely obvious would have done nicely. Imagine any other profession or, for that matter, job where the official guidance had to say “hey folks, there is something called ‘technology’ out there and we think you should know about it.” What message do lawyers send to clients when they must say in their professional rules that technological competency is required?

If lawyers must be directed to understand “relevant technology,” do w we trust them to guide society on on the interplay of technology, humans, and law? How can individuals weakened by the idea of trying hours of tedium for seconds of computer time help us govern a hybrid world of silicon and carbon companions?

At the Edge of Thought

While lawyers contemplate the meaning of six-minute increments and other inanities (more on two of them in a bit), those not in a  “learned profession” focus on understanding the world in the Information Age. Edge is one world where these thinkers congregate. Edge was launched in 1996 as an online successor to The Reality Club.

The Reality Club was an informal gathering of intellectuals who met from 1981 to 1996 in Chinese restaurants, artist lofts, investment banking firms, ballrooms, museums, living rooms and elsewhere. Reality Club members presented their work with the understanding that they will be challenged. The hallmark of The Reality Club has been rigorous and sometimes impolite (but not ad hominem) discourse. The motto of the Club was inspired by the late artist-philosopher James Lee Byars: “To arrive at the edge of the world’s knowledge, seek out the most complex and sophisticated minds, put them in a room together, and have them ask each other the questions they are asking themselves.” 

Go to the Edge site and discover the persons involved in the conversations, and you will find some of the most interesting and creative thinkers in a broad range of fields. Reading their essays and watching the video interviews, you feel like the fly on the wall at a 17th or 18th century salon.

Each year, John Brockman, publisher and editor of Edge, poses questions for the year, solicits answers from a broad spectrum of people, and compiles their answers into a book. It is a nice marketing gimmick, but most of the essays are very interesting.

For 2016, those questions are “What do you consider the most interesting recent [scientific] news? What makes it important?” In his post, Everything Is Computation, Joscha Bach, a cognitive scientist working for the MIT Media Lab and the Harvard Program for Evolutionary Dynamics, gives his answer:

These days see a tremendous number of significant scientific news, and it is hard to say which one has the highest significance. Climate models indicate that we are past crucial tipping points and are irrevocably headed for a new, difficult age for our civilization. Mark Van Raamsdonk expands on the work of Brian Swingle and Juan Maldacena, and demonstrates how we can abolish the idea of spacetime in favor of a discrete tensor network, thus opening the way for a unified theory of physics. Bruce Conklin, George Church and others have given us CRISPR, a technology that holds the promise for simple and ubiquitous gene editing. Deep Learning starts to tell us how hierarchies of interconnected feature detectors can autonomously form a model of the world, learn to solve problems, and recognize speech, images and video.

It is perhaps equally important to notice where we lack progress: sociology fails to teach us how societies work, philosophy seems to have become barren and infertile, the economical sciences seem to be ill-equipped to inform our economic and fiscal policies, psychology does not comprehend the logic of our psyche, and neuroscience tells us where things happen in the brain, but largely not what they are.

In my view, the 20th century’s most important addition to understanding the world is not positivist science, computer technology, spaceflight, or the foundational theories of physics. It is the notion of computation. Computation, at its core, and as informally described as possible, is very simple: every observation yields a set of discernible differences.

*  *  *

Climate science, molecular genetics, and AI are computational sciences. Sociology, psychology, and neuroscience are not: they still seem to be confused by the apparent dichotomy between mechanism (rigid, moving parts) and the objects of their study. They are looking for social, behavioral, chemical, neural regularities, where they should be looking for computational ones.

Trying to Lead the Parade from Behind

Quite frequently, I complain that lawyers obsess about petty issues that do not matter to clients and, truthfully, should not matter to anyone. I argue that this focus on the petty fills time that would be better spent focusing on important issues.

I will highlight two examples. The first topic involves the period, “the full pause with which the utterance of a sentence closes.” [1]

It is hard to think of a more mundane part of legal writing than the period. But the period has provoked quite some controversy in the legal community. Imagine writing a sentence and at the end of the sentence you use the short form of a case name. The rule, according to those who tell us how to cite, is to italicize the case name. Controversy has erupted over the period following the italicized name: should the period also be italicized or not? To put the issue in perspective, look at the following picture of two periods each in 12 point font:

Screen Shot 2016-01-24 at 1.40.55 PM

Which is italicized and which isn’t? You probably can’t tell without the help of a magnifying glass. The following picture, with the font set at 200 points, should help:

Screen Shot 2016-01-24 at 1.40.43 PM

The second topic is the use of boldface in fonts. When we want a sentence in boldface we highlight the words and the spaces in between the words and select “bold.” The controversy in this case is over the spaces between the words: should those spaces be in boldface or regular face font? The following two sentences show both options. Can you tell which one has spaces in boldface and which one does not?

Screen Shot 2016-01-24 at 1.40.20 PM

Now think as a client. Would it concern you that someone wants to charge you hundreds of dollars an hour for their services focuses on these issues? Does it bother you that lawyers spend time pouring through a 1.4 pound book with over 500 pages trying to decide the proper way to point lawyers to source materials?

Keep these follies in you mind as we move back to technology and the law.

Back to Bach’s thesis. He contends that social sciences focus on regularities. Instead, he argues, they should focus on differences. For example, lawyers look for patterns among court decisions and use those patterns to infer rules. Lawyers like to find regularities, in laws and facts. Distinguishing means finding regularities lawyers prefer over the ones they found. But, in an era of one-to-one marketing and targeted gene therapy, aren’t there more differences than regularities? What does this mean for the law?

My purpose is to point again at the enormous challenge lawyers face as they  move deeper into the 21st century. Perpetuating late 19th and early 20th century systems, while thinking about law, practicing law, and learning how our rapidly evolving world interacts with law does not gain lawyers trust or credibility. If you think my characterization of the legal industry is harsh, read what Judge Richard Posner has to say (bold added):

“But why should a judge use “arguendo” in an opinion instead of “for the sake of argument”; or “contra proferentem” instead of “[construing a document] against the author”; or “eisudem generic” (usually given its medieval Latin spelling “ejusdem generic”—in law that counts for being up to date) rather than its English translation, which is “of the same kind”?

Lawyers still quibble about the UCC’s mailbox rule while McKinsey & Co. forecasts 1 trillion connected devices by 2025.

Enough! What should lawyers do?

1. Think first about customers and users of legal services, not about the needs of lawyers.

2. Think global and future, not local and past.

3. Leapfrog technological competence and aim for fluency.

4. Make efficiency a routine part of delivering legal services, not an exception considered “upon request.”

5. Embrace collaboration. You cannot do it all, so do what you should do and share the rest.

For those still wondering, lawyers are their own greatest existential risk.

[1] Merriam-Websters Collegiate Dictionary, 10th edition (2001), p. 861.

 

DontForgetClientsThe legal industry favors navel gazing. But, I’m sure if we looked hard at other professional service providers, we would find the same thing. Accountants probably spend an inordinate amount of time focusing on the challenges of being accounts, consultants focus on consultants, and engineers focus on engineers. Even so, there is a downside to navel gazing when we fail to pick our heads up and look around. We are spending a bit too much time looking at ourselves right now and not considering how our clients’ needs for legal services will change as forces like technology affect them.

We all know the legal industry is changing. Many believe the changes are structural; some hope they aren’t. The changes range from small, incremental tweaks to our business models and legal service delivery methods, to fairly significant shifts where work flows in directions unheard of ten or even five years ago. At this point, clearly the consensus favors the structural change view.

Discussions about structural changes focus on the impact on lawyers, law firms, and law departments. Law firms, the story begins, are under siege. Law departments are the combatants who are pulling work away from the firms and bringing it in house or sending it to LPOs. A few law firms remain above the fray, but most see these changes chipping away at the walls of law firm fortresses.

For lawyers, the story continues, this does not lead anywhere good. At best, lawyers will see their practices shrink, incomes decline, and futures become uncertain. As with the descriptions of many disasters, what has happened in the past (firms folding, unemployment among practicing lawyers, difficulty getting jobs for graduating lawyers), is mere prelude to a darker future.

Richard Susskind, recently joined by his son Daniel, has done a nice job explaining how the relentless march of technology will overrun lawyers’ weak defenses. As hardware becomes more powerful – some predictions say we will have a desktop computer with the computational power of the human brain by 2020 – and software develops to take advantage of that power, more of what lawyers and other professionals do will shift from person to machine. The question we face is not if, but when. As the Susskinds conclude:

Looking to the longer therm, then, the future of legal services is unlikely to look like John Grisham or Rumple of the Bailey. More probably, our research suggests that traditional lawyers will in large part be replaced by advanced systems, or by less costly workers supported by technology or standard processes, or by lay people armed with online self-help tools’.[1]

Clients’ Needs Also Are Changing

Lost in this discussion are clients. I don’t mean that we forget that lawyers have clients or that clients pay lawyers to provide services. Rather, I think we forget that at the same time the legal industry is shifting, our clients are shifting. We describe a fluid future on the lawyer side and a static future on the client side. We tell lawyers they can be taken over by computers, but we don’t discuss what clients will need given that what clients do also will be changed by computers.

Clients legal needs, both in substance and in delivery model, will not remain static while the legal industry changes. The changes impacting the legal industry, technology included, are having similar impacts on clients and especially on their knowledge workers. Employees in finance, marketing, logistics, human resources, and all the other substantive areas touched by clients are seeing their roles change.

Today’s financial analyst will find that many of the Excel spreadsheet calculations she does will be done tomorrow by an artificial intelligence program. It will not only run the calculations, but also modify the algorithm controlling the calculations to improve the usefulness of the outputs. Human resource specialists who used their judgment to evaluate candidates will find their roles diminished, as software runs psychometric analyses on candidates and compares the results to models highlighting the characteristics of job candidates most likely to make them successful. While the role of humans will diminish in certain areas, the question remains whether human roles in other areas will expand. “Are humans underrated?” is the question Geoff Colvin asked in his book by the same name published this year.

A Dynamic Future

As the legal and client universes evolve, what a client needs or wants from a lawyer will evolve. We tend to think of a client asking a lawyer for a contract and the lawyer preparing the contract. But in a world where the contract is a smart contract communicated between computers for the client and its counter-party, is the client really asking the lawyer for a contract? Or, is the client asking the lawyer for guidance on a strategic level and the contract is simply something two computers work out once they are given instructions by their respective owners?

We shouldn’t define what a lawyer does by the snapshot of what we see today. A lawyer’s tasks were different 200 years ago and undoubtedly they will be different in the future. But those tasks don’t define the role of “lawyer.” Put differently, strip away the tasks of drafting a contract or writing legal briefs and we haven’t stripped away lawyering. Richard and Daniel Susskind attempt to define the professions (including lawyer) in their recent book, but acknowledge the following “mouthful” is the best they get:

In acknowledgment of and in return for their expertise, experience, and judgement, which they are expected to apply in delivering affordable, accessible, up-to-date, reassuring, and reliable services, and on the understanding that they will curate and update their knowledge and methods, train their members, set and enforce standards for the quality of their work, and that they will only admit appropriately qualified individuals into their ranks, and that they will always act honestly, in good faith, putting the interests of clients ahead of their own, we (society) place our trust in the professions in granting them exclusivity over a wide range of socially significant services and activities, by paying them a fair wage, by conferring upon them independence, autonomy, rights of self-determination, and by according them respect and status.

Clearly, lawyers are not defined by a simple set of tasks. But lawyers don’t fit within an easy definition of “profession,” so we benefit more by looking to what clients need and what will be done to serve those needs than by trying to fit things into pigeonholes.

If we don’t define lawyers by a discrete set of tasks they do today, then we should be able to imagine a future where the demand for lawyers has increased. The Susskinds attempt to avoid this trap, but because they don’t also look at the client side of the equation, still end up thinking too narrowly.

Once freed from the tyranny of the task, lawyers could spend more time contemplating the increasingly complex interactions of peoples, cultures, and technologies and how to structure them to operate together smoothly. That may take more lawyers to do, with the lawyers integrated into society in many more places than today, much closer to the point of those interactions. Asking and answering these complex interaction questions takes us far beyond tasks into a prescriptive, ethical, and moral world where there will be many possibilities and no absolute answers.

Why more lawyers? If lawyers become better at forecasting interactions, perhaps by working in teams and using techniques we are learning from superforecasting studies, we may be better served having teams of lawyers distributed throughout society forecasting risks and working interactively to mitigate or avoid them. The role of lawyer will co-evolve with client needs and could become much more of a counselor role using knowledge from many disciplines, then its current, narrower and more technical role.

The next step in our lawyer-client evolution could be pairings on each side of the hash, interacting in complex ways. The lawyer (person plus computer) interacts with the client (person plus computer). That four-way relationship adds some interesting dimensions to legal services delivery.

There will be times when the lawyer and client do not want their computers involved. The person lawyer will want to speak directly to the person client and decide, without intervention, what roles their computers will play in the legal services equation. Some predict there will be computers who will do the same – the computers will interact and “decide” to what extent people need to be involved in the legal services delivery equation. (For those who enjoy scary futures, read Nick Bostrom’s thoughts on the existential risk to humans of powerful computers.) At some point along each evolutionary line of computer use, the question “I know a computer can do it, but should a computer do it” becomes relevant.

The Future Belongs to Those Who Can See It

As much as lawyers like to think they are good at predicting the future of contracts, lawsuits, and other complicated human relationships, history has taught us that lawyers are not accurate forecasters. If they were, we would have eradicated litigation years ago. Throw some computers into the mix, and we have no reason to believe that lawyers will do much better at forecasting the interplay of people and computers on each side of the lawyer-client relationship. As the developing disciplines of superforecasting and cognitive psychology are teaching  us, we should be vary wary of accepting our own predictions.

The march of computers is relentless and it will impact all of us in ways we can’t imagine. The same is true in our world of legal services and client needs. While we can and should keep a weather eye on what is happening as computers evolve and incorporate what they can do into the practice of law, there is a better use for much of our time than handwringing about what might be.

Lawyers should focus on streamlining their practices, and making those practices nimble, flexible, and adaptive. We can’t accurately predict tomorrow, but we can prepare to handle what tomorrow brings. Tomorrow will bring not only a changed legal industry, but changed clients. We should not forget that our role is not to provide the best legal services, but to provide the best legal services our clients’ need.

[1] Susskind, Richard and Daniel Susskind. The Future of the Professions. (2015), at note 171 (quoting Susskind, Richard. The End of Lawyers? (2008), 2.)

AnUnyieldingProfRecently, a well-known individual in the legal profession, a person who has been a driving force for positive change, decided to take at least a year off. According to her message, she isn’t just taking a year off from the battle for change, she is stepping away from the industry for a year.

Many of her reasons for doing so are excellent — family, personal time, reflection and meditation, and re-connecting with artistic and creative interests. There is, however, one thing she mentioned that I found disturbing:

I was originally motivated in my work by the idea that I could make an impact on the legal profession, educate lawyers to use technology to improve the delivery of legal services, and that I could help increase access to justice. At the core, I wanted to help people who couldn’t afford a traditional lawyer to get the help they needed. After fighting up-hill battles, winning a small handful of victories, and still seeing the pace of adoption and attitude change go at a snail’s pace, I’ve decided to stop trying, at least for awhile. I’m not helpful to anyone (lawyers or the people in our country who deserve legal assistance) when I’m in a state of cynicism and burnout.

As an isolated comment from one person, it is something we can understand and should not give undue weight. Unfortunately, it is not isolated. I hear this comment often, so often that it has become a regular part of discussions I have with people who are looking to make a change in the legal industry. If burnout is high among lawyers, then burnout among those who are fighting to improve the profession and industry is reaching epidemic levels.

Idealists Hit the Wall

The discussions I have start on a high plane. The person who approached me has an idea, has developed an interesting software package, wants to start a new business, or simply wants to improve the world where they currently work. He or she started down the path of introducing change in the legal industry, when they hit the wall.

The wall is the reaction of lawyers to any force attempting to change the status quo. Jeff Carr calls it “massive passive resistance,” but unfortunately much of the resistance isn’t passive. The resistance also isn’t isolated to one area within the industry. It starts in education, extends into law firms, and from there reaches out into all corners of the industry. It is so wide-spread and so virulent that you might think it is organized; something on the level of a campaign to right some great societal wrong.

For many lawyers, the wall is a visceral reaction to the intrusion of the modern world into their cloistered guild. Lawyers have successfully ignored wave after wave of innovation that swept through clients and society. The introduction of Frederick Winslow Taylor’s scientific method in the early 1900s, project management in the mid-1900s, and process improvement in the late 1900s did not even scratch the surface of the legal industry, though they dramatically changed how the corporate world functions.

Even the introduction of the personal computer, which some thought would revolutionize law practices, has been of only casual interest to lawyers. Wander the halls of law firms and you can find most lawyers using their computers as glorified typewriters, still religiously starting paragraphs with five spaces and adding two spaces after the period at the end of a sentence.

The Problem Really Is With Those Opposing Change

Given the massive resistance that has continued over such a long time, one might think the problem lies not with the naysayers, but with those of us who challenge them. Perhaps the problem isn’t that lawyers won’t listen; perhaps the problem lies with the message. Can it really be that 1.1 million lawyers in the U.S. are wrong and that the few of us in excess of that number are correct?

While it might be easy to think that way, it would be wrong. We have developed a substantial body of literature over the years that speaks to the many problems in the legal industry. The historical books include The American Legal Profession in Crisis, The Lawyer Bubble, The Vanishing American Lawyer, The Betrayed Profession, The Destruction of Young Lawyers, and The Lost Lawyer.

More recently we have Deborah L. Rhode’s books Lawyers as Leaders and The Trouble with Lawyers and Benjamin H. Barton’s book Glass Half Full. Add to those, the series of books from Richard Susskind on the existential risk to lawyers, including The End of Lawyers?, Tomorrow’s Lawyers, and most recently (co-written with his son Daniel Susskind) The Future of the Professions.

This body of literature, and the many blog posts, law review articles, white papers, and trade show presentations that bulk it up, does not alone suggest the change agents are right and the resistors are wrong. But, when added to the $8 billion of services corporate clients have yanked from large law firms, the decline in jobs for law graduates, the low enrollment rates at law schools, and the rise of individuals from outside the guild who are pushing aside lawyers to serve clients, it suggests there is more to the message than the mid-life angst of some malcontents.

Interesting, But Now What

So what now? We have lost, at least for a year, another colleague in the battle to reform a centuries old and creaking profession. We will be jealous of her freedom to enjoy life without the constant throbbing ache from banging her head against the wall. Reports so far indicate that 2016 will be another successful year for most of the 200 largest law firms in the U.S. This will lead to another round of articles, posts, and presentations in 2016 telling us that prognostications of doom and gloom for the legal industry were far off the mark, the sun did come out tomorrow, and that by staying the course our wise elders have once again proved that stability is best for the legal industry.

Despite out best efforts and Hadoop-ensconsed data sets, we can’t predict tomorrow. We know what we know, don’t know what we don’t know, and guess a lot about the things we know we don’t know. But this is the rub and we can’t avoid it. Technology advances every day and there is no turning back. Even if we wanted to stop or just slow it, we can’t. Somewhere in some garage, a teenager is writing the algorithms for an amazing new artificial intelligence system that will blow away what the experts are doing. He will do it not because he expects to get rich from it or even knows what it ultimately will do; he will do it because it will be absolutely the coolest thing he and his friends have ever seen. And then he will turn it loose on the world.

The moment will come when technology takes one more step and that is the step that pulls most of the work off lawyers’ desks. Ten years ago, eDiscovery wasn’t much of a thing and today lawyers get in the way of the eDiscovery technology. If lawyers continue to fight technology, continue to fight against using simple tools to get rid of all the junk they do that adds value to nothing and no one, and continue to fight against the idea that everyone should have access to justice not just the one-percenters, then change will arrive to find a legal industry composed of some multi-millionaires and lower middle-class functionaries struggling to get by. The middle will be gone replaced for better or worse by technology and the choice to work with a human will be gone.

I don’t think fighting the future is futile. I also don’t think it is our privilege to enjoy the present to the hilt and let others deal with the future. Doing so means hundreds of millions continue suffering the ills that lack of access to justice could prevent. It means anyone wanting to access the Federal courts will face a record backlog of cases and have to wait, in many cases more than three years, to get their legal problems resolved. It means that the U.S. may struggle to hold its rank of 66th out of 99 countries on access to civil justice, penalizing millions of citizens for no good reason.

So what now? Lawyers need to embrace technology. Not all lawyers need to code for the future. But learning how to use the basic technology that sits on their desks and that they carry in their pockets would be a start. They need to learn how to share space with technology. Let the technology do what it can do; and let the humans do what they can do. If the day comes when technology can do all that humans can do, you won’t be worrying about your legal practice so don’t let it worry you now.

Stop looking for clients who will pay you to work until 2 a.m. and concentrate on the clients who will pay you to leave at 6 p.m. because you did more for them at better quality and lower cost than the poor soul who stayed. Don’t ask what technology will take away from you; ask what it can do for you. General Shinseki said, “If you dislike change, you’re going to dislike irrelevance even more.” For lawyers, perhaps the saying should be, “If you dislike irrelevance, you’re going to like obsolescence even more.”

SuperchickensThe legal industry is going through extensive change and whether lawyers will survive as a profession resembling anything from the past isn’t clear. Many dismiss comments suggesting that the number of lawyers will drastically shrink, perhaps to near-extinction. As one colleague noted recently, lawyers’ belief that the profession will go on forever seems to speak more of hubris than logic. There is no law of nature that says lawyers must exist. History is filled with professions that have disappeared as time and technology have overtaken what they offered. Lawyers are susceptible to that same fate.

Yet, lawyers can adapt and survive. Just as there is no law guaranteeing lawyers’ survival, there is no law requiring their extinction. Lawyers are smart, well educated, and capable of finding ways to change with the world. This is the path many of us promote.

The challenge is the barrier that stands between where lawyers are today and a promising future. This barrier is lawyers’ intransigence in the face of overwhelming evidence that they must change how they practice law. Many professions expired because change was not an option. The individuals within the profession could choose to do something else, but the profession itself did not offer anything distinctive. The legal profession has the option; but does it have the will to survive?

Defining a Lawyer

For the legal profession to continue, lawyers must find what they do that is distinctive. Lawyers are not alone in this quest. Jobs we thought could not be sent offshore or otherwise replaced are now on the verge of being eliminated. Truck driving is one example. We can’t send truck-driving jobs to another country; the drivers must be here. But, the idea of replacing a truck driver with a computer seemed outlandish not too long ago. Today, Daimler is testing self-driving semitrucks in Nevada. In the United States, there are 2.9 million truck drivers and it is the number one job held by men. It also is a job at risk.

Other knowledge workers are on the same quest as lawyers to find out what makes them distinctive. Early attempts at robotic surgeries had some challenges. But now, technologists are teaching robots to perform cancer surgery—without doctors. If computers can do diagnoses and perform surgeries as well as doctors (or better), what makes doctors distinctive?

This idea of distinctiveness is driving much of the discussion about the future of jobs. The focus, however, has been on what makes a person distinctive in performing a job versus a computer performing the job. We are now starting to take the distinctiveness discussion in a different direction. Rather than trying to figure out what separates a person from a computer in a job, we are asking what separates a person from a computer. We are asking the more fundamental question of what is it that makes us human? Put another way, if computers can do what people can do, then how do people add value?

Framed this way, we get an interesting answer. People add value through delivering things that we want to get from people, not computers. There are things that computers may be able to do—and may be able to do better than people—but which we as people will not accept from computers. As one lawyer recently said to me, “let’s see a computer hug a client the way I do.”

As Geoff Colvin, senior editor at large for Fortune Magazine, puts it:

We want to work with other people in solving problems, tell them stories and hear stories from them, create new ideas with them, because if we didn’t do those things on the savanna 100,000 years ago, we died. The evidence is clear that the most effective groups are those whose members most strongly possess the most essentially, deeply human abilities—empathy above all, social sensitivity, storytelling, collaborating, solving problems together, building relationships. We developed these abilities of interaction with other people, not machines, not even emotion-sensing, emotion-expressing machines.

Put simply, people are better people than computers can ever be, because our affinity for our species is stronger than our affinity for something else.

Avoiding the Superchicken

This brings us to the lesson superchickens can teach us. Recently, I wrote about hierarchies in the legal industry and how they are counterproductive. Steve Poor hit on a similar theme in his Rethink the Practice post, “Lawyers Are Not Transformers.” The ideas that lawyers can do it all and that hierarchical structures still work well have run into solid evidence showing otherwise.

Lawyers are trained in a system designed to produce stars. As I wrote, the hierarchical system is focused on producing individuals who excel, and who work to excel, above all others. These individuals want to be the best student, the best associate, and the best partner. In academia, they want to publish the most papers and make tenure faster than their peers. In government and corporations, they want to be leaders. We often hear lawyers described as competitive. It is this competition to climb to the top of the pyramid that is driven into us early in our academic careers and then carried through into our working lives.

But, research and our clients are now telling us that our pursuit of that star status is counterproductive. In this TEDtalk, Margaret Heffernan, an international businesswoman and writer, explains how our drive to be the superchicken—the star in any setting—makes us less successful and less productive than those who are more collaborative than star.

Click on picture to view Margaret Heffernan's TEDtalk.
Click on picture to view Margaret Heffernan’s TEDtalk.

As Heffernan explains, the most successful groups and organizations don’t have superchickens. They are filled with people who are empathetic, collaborative, possess social intelligence, and work well at group problem solving. In other words, success today and in the future will be defined by things people are very good at doing, and like doing with other people not with computers.

The Path for Lawyers

Where does all this leave lawyers? Lawyers have focused on analytical skills. But, try as they might, lawyers will not be able to sustain a lead over computers when it comes to these skills. A computer can process more information, faster, and more accurately, than any person. As the volume of materials relevant to law explodes, and as those materials become available through networked systems (e.g. Internet), computers will beat people every time.

To the logical lawyer mind, the news that people will prefer people even when computers can perform tasks better than people, could be confusing. Why wouldn’t clients prefer the best even if that meant computers over people? In a rational economic world, people should choose computers if they perform better than people even when doing so has downsides.

In recent decades, we have learned through behavioral economics that people employ many rules (heuristics) and biases in their lives. These heuristics and biases frequently lead to irrational behavior. Even more confusing, while the behavior may be irrational, it also is predictable. People will consistently do the irrational thing.

It is these heuristics and biases that operate against lawyers performing as well as computers on analytical tasks. They also will allow computers to eventually perform better even on things like reading emotions. But, heuristics and biases will drive people to prefer other people to computers, despite computers outperforming people. In simple terms, by understanding and exploiting the heuristics and biases of people, lawyers can find ways that clients will prefer them to computers.

When it comes to soft skills, even the best computer will never be a human. People will prefer people when it comes to certain things. Knowing that gives lawyers an edge.

For lawyers, this means the future holds a hybrid world. Lawyers must learn to use computers for what computers can do best. Lawyers should not attempt to beat computers at their game and worrying about this issue is a waste of time. As Harvard professor William H. Bossert puts it: “If you’re afraid that you might be replaced by a computer, then you probably can be—and should be.”

However, lawyers also should not worry about computers becoming better people than lawyers. Even the best computer with the ability to sense and understand emotions as well as (or better than) a person, still will not be a person.

 

* A special HT to Angela Gamalski (@angelagamalski) who alerted me to Margaret Heffernan’s TEDtalk.

 

In part 1 of this two-part post, I discussed the general concept of labor arbitrage and gave the example of the labor arbitrage model used in the shoe industry (one of many such examples). Today, I dive into the consequences of pursuing a labor arbitrage model and what those consequences may mean for the legal industry.

From Shoes to Legal Services

LabrVsLeanAha, the quick among you shout, legal services aren’t shoes. True, but the consequences still exist. The lawyers and other professionals being trained to provide legal services no longer sit in the UK or the US. Those people who are gaining knowledge and experience providing the services sit in Ireland, South Africa, India, and so on. Instead of training the next generation of UK and US lawyers, law firms and departments are training the next generation of lawyers in other countries (albeit, on UK and US law). As the baby boom generation of lawyers retires in the UK and US, their knowledge and experience will retire with them. It isn’t being replenished in the UK or US the way it has in generations past. The people who are learning it live elsewhere. Assuming no change in the labor arbitrage model, twenty years from now the experts in certain areas of UK and US law may reside in one of these lower labor cost countries.

Labor Arbitrage Isn’t Consequence Free

Labor outsourcing eventually runs into problems. First, the cost of labor in the lower cost markets eventually rises. It may be possible to shift to a new, lower cost market, but even that strategy has limits. Second, as technology improves, certain operations move from labor to technology. Overall, labor arbitrage has a finite life.

We saw these shifts in shoe making. Shoe companies are working to move to lower cost markets. But, after more than a decade of work they have barely moved the needle. China still dominates the market for shoe making. Technology is improving and may move faster than companies can move manufacturing to lower cost markets.

The craft of shoe making is evolving as new techniques and equipment come on board. Some shoes today are made with lower labor inputs and the trend to decrease labor and increase technology will continue.

Those same shifts will happen in law. The opportunities to move work to lower cost labor markets is limited, given language barriers, training requirements, differences in law philosophies, and the need for certain types of law services to remain in the host jurisdiction (e.g., certain types of dispute resolution). The balance point of labor to technology will vary, but the shift is here to stay.

As technology plays a bigger role, those entities outsourcing legal services will face problems. They will no longer have abundant trained lawyers with extensive experience in certain areas of law. They will have sold that knowledge offshore. They also won’t have core knowledge in technology. They will be dependent on others to produce services for clients. In other words, those firms and departments will become sales and marketing organizations much as shoe companies have become sales and marketing organizations.

For lawyers, the danger is clear. If you don’t own the knowledge and experience of legal services you make it easier for your clients to go elsewhere. Clients will want to go to the solution providers not those who market solutions provided by others. As a client, when you live in a global economy and source other products and services from around the world, sourcing solutions to legal problems from outside the UK or US is not a scary thought. There will be localized work that can’t be outsourced (boots for the U.S. military are still made in the U.S.), but that localized work will be a small portion of the overall legal services clients need.

Avoiding Labor Arbitrage Consequences

There is, of course, a way to avoid these consequences. It is less expensive, less resource intensive, and less risky than moving your knowledge and skills offshore. It also benefits from a long track record of proven success. Given all these benefits, why don’t companies go this other way? Because just as with weight loss and other habits that are hard to break, lawyers will gravitate towards taking a pill (labor arbitrage) over putting in the work (reducing calorie input, increasing calorie output).

Lean thinking and other operational excellence methodologies succeed where labor arbitrage eventually fails, because they build lasting cultures of reducing costs, increasing quality and efficiency, and sustainable process philosophies. They also support another area critical to success: innovation.

Lean thinking in particular focuses on the root cause of a problem. High labor costs are the symptom, but inefficient legal service delivery is the root cause. As we know, the key driver in high invoices isn’t the hourly rate it is the number of hours billed. Using the lean thinking philosophy, we drive down the labor required to produce the service. We can continue driving down labor, by repeated application of lean tools. At some point, we can introduce simpler technology (e.g. document automation), and get greater efficiency gains than are possible through labor reduction. By combining lean with technology, we drive accelerated efficiency, higher quality, and controlled costs. Our constant immersion in the services helps us innovate. We look for the source of problems and design ways to avoid them. This is the move from labor-centric to value-centric.

Fixing the labor-centric legal service delivery model isn’t as quick and easy as simply moving work to a new location. But, few things that last are quick and easy. Lean thinking isn’t a cure for all that ails the legal profession. It is, however, a cure for many of the ills and a better alternative than outsourcing the profession.

In this two-part post, I’m going to look at the labor arbitrage trend in the legal industry and talk about some of the consequences in following this path.

LabrVsLeanSince I’m of Irish descent, the article saying Belfast is a boom market for the legal industry caught my eye. Many of the major UK firms have opened or are opening legal service centers in Belfast. Eversheds, Herbert Smith Freehills, and Allen & Overy all have offices in Belfast. Even Axiom, the lower cost alternative to law firm lawyers, will double its headcount in Belfast over the next five years. This trend is part of a movement to reduce legal costs by moving work for lawyers from high cost markets to lower cost markets. It also is great news for those in Belfast who want to purse careers in law.

In the US, we see many firms using legal process outsourcing to move work from high cost markets to lower cost markets. The firms aren’t opening service centers like their UK counterparts. Instead, they are sending work to lower cost third-party service providers. The US firms are making this shift because clients force them to, not because they want to. The number and variety of locations where law firms can send work is amazing compared to just a few years ago. India, South Africa, and Ireland all offer opportunities. Some LPO providers even offer to do the work in the US, in lower labor cost areas.

Any first year economics student recognizes that moving work from individuals who charge $500 an hour to individuals who charge $200 an hour gets you an immediate impact on the bottom line. In a business economy obsessed with performance results today and willing to not think about the consequences until tomorrow (if then), this labor arbitrage approach makes sense. At least it does if you don’t consider the consequences.

There Always are Consequences

There are unintended consequences to this labor arbitrage move. For those law firms and law departments in the game for the long haul, it is worth considering those consequences now. To find the consequences, we don’t have to look far. Many industries already have used the labor arbitrage approach and discovered, years later, the unanticipated downside of focusing primarily on labor costs.

This is the general pattern. At first, the firms employing labor arbitrage and their customers benefit from the move. Labor costs go down so the firms’ charges to clients go down or at least don’t go up as fast. Over time, however, the firms’ intellectual capital also moves from the headquarters to the lower cost markets. Labor costs plateau or even rise. But, because the firms have outsourced their intellectual capital, moving labor again is difficult. As technology comes into play, the firms find themselves in an interesting position. Instead of service providers they now are sales and marketing companies relying on third parties who are the real service providers and who own the knowledge and technology.

I’ll use one of my former industries as an example. Prior to 1980, companies selling shoes in the US also made shoes in the US. Around 1980, US shoe companies started shifting shoe manufacturing to China. Making shoes is labor intensive and more bespoke than commodity (sound familiar?). Chinese labor costs were a fraction of those in the US. Shoe companies benefitted from lower costs and so did US consumers. Eventually, the industry reached a point where less than 1% of the shoes bought in the US were made in the US. As part of the shift to China, shoe companies also switched from manufacturing shoes themselves to having third-parties do the manufacturing. By the dawn of the 21st century, US shoe companies had 80% to 100% of their shoes manufactured in China.

As shoe manufacturing expanded in China, shoe-making expertise moved to China. US shoe companies shut down their factories and turned over manufacturing to third parties. Those third-party manufacturers became the owners of shoe-making knowledge. US companies that designed and sold shoes relied heavily on the Chinese manufacturers. The Chinese manufacturers became more familiar with construction methods, manufacturing costs, and shoe-making techniques. In the US, those who manufactured shoes retired or moved on to other industries. US shoe companies became dependent on Chinese companies for shoe-making expertise.

Then, the next shoe dropped (sorry, I couldn’t resist). Labor costs in China rose and Chinese shoemakers started having trouble getting workers for the factories. The unlimited stream of low cost labor became limited as rural workers took jobs in Chinese factories that paid more than shoe manufacturers. Laborers found it better to work in a modern, air-conditioned factory making smartphones than in older factories making shoes.

US shoe companies did the logical thing – they went in search of the next pool of low cost labor. This time, however, the labor arbitrage move was more complicated. The US shoe makers no longer owned the shoe making knowledge. The Chinese manufacturers now had that knowledge. Getting that knowledge from Chinese manufacturers to manufacturers in Vietnam, Thailand, India, Pakistan, and other low-cost labor countries wasn’t easy. Since shoe making still had a lot of craft in it, developing a trained workforce tooktime. The problem was made more difficult because the manufacturing infrastructure – those companies making and supplying shoe components – all had moved to China.

Now, US shoe companies faced a more complicated challenge. Costs were rising in China and supply was shrinking as manufacturers left the industry for greener pastures. The US shoe companies were dependent on China for shoe-making knowledge, so they had to convince Chinese manufacturers to open factories in lower labor cost countries. There are costs to opening factories and training workers, so those costs had to be absorbed in the supply chain. It took time to train the workers and, with turnover, the factories were constantly fighting a battle to develop a skilled workforce. The materials needed to make the shoes weren’t readily available in those lower labor cost countries, so they had to be imported. Finally, since the countries with lower labor costs didn’t have the same labor supply as China (with the possible exception of India), this process of creating a shoe manufacturing industry had to be repeated in several countries.

Shoe companies have been tackling the challenge for many years and they are making progress. But, this second time around the hunt for labor arbitrage is more difficult and costly. It also shows how labor arbitrage may have reduced costs for a while, but did not succeed in fixing the overall problem. For shoes, the overall problem is the heavy reliance on bespoke production versus technology. Today, shoe designers and manufacturers are starting to play with technology, but they have a long way to go to get off their dependence on labor.

TheExcellenceJourneyPersonal change. To become a better lawyer, you must change. To succeed as a lawyer during the coming decade, you must change. To provide the services your clients want, not the services you want to provide, you must change. Change is about breaking down the habits you have today and building new habits. Lean thinking is about change, so we are breaking down old habits and building new ones when we implement lean. We help you along by using tools, like process maps and visual aids. One important aid to change is knowing what motivates you.

Understanding what motivates you requires self-awareness. But, lawyers are not known for their personal awareness or emotional intelligence. They score high on analytical behaviors. They can read books, cases, and articles and assemble an arsenal of facts in support of an argument. But when it comes to people, lawyers tend to have less awareness. This gap in lawyers has been around for a while. In 1955, Erwin Griswold, then Dean of Harvard Law School, state, “Many lawyers never do seem to understand that they are dealing with people and not solely with the impersonal law.”

The Value of Deliberate Practice

Let’s review what it takes to excel as a lawyer. Studies show that professionals tend to follow one of two tracks upon leaving school. Individuals in the first group, which makes up the vast majority of a profession, reach professional competence within a few years after leaving school. These individuals perform at average levels. These average performers gain experience throughout their careers, but experience doesn’t improve their performance levels. They practice, but not in ways that improves performance.

Individuals in the second group, who are a small minority of a profession, continue to improve performance throughout their careers. They reach professional competence and then continue improving until they leave professional life, and often afterwards. These are the stars of a profession.

It has been convenient for individuals in the first group to dismiss the performances of those in the second group by claiming those in the second group have innate talent. That is, they claim individuals in the second group excel because of innate talent, not some behavior. If nothing else, this explanation allows those in the first group to settle the cognitive dissonance around why they went to the same schools, studied the same subjects, and went to work at the same companies, but have consistently underperformed those in the second group. It is not some failing on the part of those in the first group. Rather, it is the mysterious innate talent possessed by those in the second group, which drives the differentiation.

Unfortunately for those in the first group, science doesn’t support the innate talent theory. Instead, it supports the deliberate practice theory. I have talked about deliberate practice before. It is quite different from just practicing. Those professionals who fall into the very successful group engage in deliberate practice.

The next natural question is why individuals in the second group engage in deliberate practice, while those in the first group just practice. It turns out that those in the second group have a cluster of five traits and those traits are what underlie perpetual learning and deliberate practice: “(1) reliance on ‘developed’ talents instead of ‘innate’ abilities; (2) openness to improvement and change; (3) humility, modesty and caution; (4) a belief that performance can be improved through effort and self-evaluation; and (5) active solicitation of feedback and criticism” See Randall Kiser. How Leading Lawyers Think: Expert Insights Into Judgment and Advocacy, p. 88.

Knowing What Motivates You

To put in the effort it takes for perpetual learning – for engaging in deliberate practice over an extended period – you should know what motivates you. Gretchen Rubin recently published an article in the Harvard Business Review that suggests when it comes to habits and aptitudes for changing them, everyone falls into one of four groups: Upholders, Questioners, Obligers, and Rebels. If you know which group you fit in to, you can understand what motivates you and what it will take for you to change your habits.

Since lawyers tend to dismiss people from outside the tribe who bring new thoughts to those in the tribe, I’ll point out that Rubin solidly fits into the tribe. A double-Yalie (undergraduate and law school), Rubin clerked for U.S. Supreme Court Justice Sandra Day O’Connor. She gets being a lawyer and being in the second group.

This is how Rubin describes the traits of individuals in each group (if you want to find out which of the four groups you fall into, you can take an online quiz here):

  1. Upholders. They “respond readily to both outer expectations and inner expectations. They’re self-directed and have little trouble meeting commitments, keeping resolutions, or meeting deadlines…”
  2. Questioners. They “question all expectations, and will meet an expectation only if they believe it’s justified—they’re motivated by reason, logic, and fairness. They decide for themselves whether a course of action is a good idea, and they resist doing anything that seems arbitrary or lacks sound purpose.”
  3. Obligers. They “respond readily to outer expectations but struggle to meet inner expectations. Obligers excel at meeting external demands and deadlines, so they make terrific colleagues, family members, and friends.”
  4. Rebels. They “resist all expectations, outer and inner alike. They choose to act from a sense of choice, of freedom. They resist control, even self-control, and enjoy flouting rules and expectations.”

The point isn’t that one group is preferable to another for lawyers. The point is that you should be self-aware. You should understand which group you most closely fit into and what that means when you try to change habits. If you are an Obliger, then external accountability will play a big role in how successful you are at changing habits. But, if you are a Rebel, external accountability won’t matter much.

The Self-Aware Lawyer Has The Tools To Excel

Lawyers need to change. To change, they must engage in perpetual learning and should engage in deliberate practice. When it comes to self-awareness and other traits that support perpetual learning, most lawyers fall short. Lawyers, contrary to their own beliefs, are not capable of doing everything well. Most lawyers probably would be shocked to find that they are average lawyers. However, all lawyers have the capacity to be better and most have the capacity to be significantly better. Achieving that success will not be due to some innate talent. It will be the result of knowing what it will take to motivate them to change their habits and then pursuing a path of learning – of deliberate practice – to move from where they start to a much higher performance plane. Lawyers who make the journey will be much better positioned to serve clients and co-exist with the growing role technology plays in the delivery of legal services.

musicscoreThe hook in the corporate law song of the legal industry has been, for the past five or more years, “more for less.” You all know the refrain, “I’m an in-house lawyer// my budget is fixed// I’ve got more than I can handle// my resource ask got nixed.” We then chant “more for less, more for less.” It’s been catchy and we have had a fun time with the tune, but at this point you would think the novelty would be wearing off. Since I still hear the tune, I am proposing we update the hook to “more for less, and now less but better.”

More For Less

It was easy to understand the story in the original version of the tune. Our hapless in-house lawyers had enjoyed many years of relatively good times. They never got all the funds or headcount they wanted or felt they reasonably needed to do the work of a law department, but they weren’t starving. Law department budgets grew larger, headcounts increased, and the legal industry enjoyed a peaceful existence. But nothing lasts, and those hapless in-house attorneys reached the point when the story turned dark and stormy.

Finance started pushing back on the relentless growth of legal costs. Times were tough and lawyers needed to pitch in to help the corporate family. In-house lawyers could no longer use resources to pursue their dreams in the big city. They had to tighten their belts and help out back at home. Budgets were frozen or, in those cases no one wants to think about, budgets were cut. Not trimmed, mind you, but cut. Tough times had arrived.

Those tough times led to the “more for less” hook in the tune, as other tough times have stimulated the creative arts (e.g., depression era photographs and posters, the collection of depression era songs). When you have a catchy hook such as “more for less,” everyone ends up humming the tune. It wasn’t just the in-house lawyers. Outside lawyers joined in, showing solidarity with their in-house counterparts. Tough times call for people to pull together and the legal industry is no exception. Outside lawyers linked arms with their in-house counterparts and told them, “we’ll help you get through this—we are in this together.” At times, we were almost deafened by the constant singing (though, as far as I am aware, no one recorded a downloadable ring tone for mobile phones).

Less But Better

The tough times may not have ended, but the pressure has eased. In the United States in 2014, most large law firms had a decent financial year. Things are not back to where they were before 2008, and will never go back to the roaring pre-recession days, but life is better and lawyers are no longer talking about having to hold on to their cars for four or even five years. High-fives are totally inappropriate, but smiles are showing up from time to time.

In-house lawyers are not immune from these more prosperous times. In 2014, large corporate law department budgets rose to almost pre-2008 levels. Hiring increased in those departments and it looks like we will see an increase again in 2015. Those departments took away almost $1 billion of legal work from the large law firms and that helped even the ledgers a bit, though still the outside lawyers came through 2014 just fine. The in-house lawyers are not ready to declare victory, but as with their outside counterparts the in-house lawyers once again believe there is a future.

Less But Better

The pundits who talk about the legal industry and its future (present company included) are still talking about rough times ahead. To the law firms, they say, be very wary of the current perception of prosperity. This may be a calm stretch in the stormy seas, but it certainly doesn’t mean the storm has passed. In fact, now is the time to double-down on those things it will take to survive, let alone prosper, in the future.

To the in-house lawyers, they say, don’t let up the pressure on outside lawyers. While you may want to take a breather and enjoy your budget strength, don’t get lulled into the same false sense of security your outside counterparts seem to think exists. You may be hiring today, but there will come a day in the not-too-distant future when the CEO will ask “why is my law department up 100 lawyers while my engineering group is down 50 engineers?” When that day comes, and it will come, you will find yourself cutting back on lawyers and wondering what to do next to trim your costs. Act now so that you are prepared when the does day come.

With these warnings in mind, we should ask if we get more for less, then what is next? That brings us to our new hook, “more for less, and now less but better.” When you learn to do more with less, you become proficient in using the resources that you have. This is part of the theory of constraints. If you operate without constraints, then you get sloppy and wasteful. Being careful isn’t your top priority. If you make too much food, then you worry less about throwing some out because you have enough resources to buy the food you need tomorrow. But, if your resources are constrained, you save the extra food and use it for a meal the next day. You can’t afford to be frivolous with your resources because it isn’t so easy to get more.

As lawyers, we have learned some discipline in the more for less times. Compliance and regulatory work demands continued to climb, but in-house lawyers still got the job done when their budgets didn’t climb. They still defended lawsuits, completed contracts, did training, and developed new policies despite the resource constraints. How? They cut out some fat. They spent less time on those things that weren’t important and they spent no time on the things with very low risk. They challenged outside lawyers to share in some of the pain and to a greater or lessor extent outside lawyers obliged.

We all have operated in the less world (though doing much more with less will be the next wave) for some time. So the next hill to climb while some take a breather is to make the less better. With waste taken out, we should be able to improve quality. We should have less variance from matter to matter. We should have fewer opportunities to make mistakes. We should have more visibility to the value, since there is less waste to push through to see the value.

Less but better also means that we pay more attention to what is left. When you strip away that which doesn’t need to be done, you can focus more on what does need to be done and make it better. You become more focused and you produce higher value. Recognizing that there are some limits, if you spent an entire day working on one important matter you would achieve more at higher value than if you spend the day jumping from one matter to the next, where many or most are of little value. During that day, you worked on “less” [um, fewer] things, but you should have done better on things you did. Accept that you must do more for less, but aspire to make the less better.

Deliver What Clients Want Using Fewer Resources

We will move through this period of relative calm and back into tough times. Not all will suffer, because the tough times will be for many in the legal industry even though outside the legal industry times may not be so tough. Technology will continue its inexorable advance into the practice of law, and more lawyers will face fewer things falling within their traditional skill sets. Many will not adapt, and they will suffer. Others who can adapt will take their place and the industry will move forward. But, happiness for some is not happiness for all. Once structural change starts in an industry, there is no going back and lawyers will find the same is true in the legal industry.

There are many ways to not only survive, but thrive in the times to come. Learning what clients really want and how to deliver what they really want is one of those ways. And, one of the keys to delivering what clients really want is to focus on less but better. The lawyers who can deliver better quality, better results, and better risk mitigation, with while using fewer resources will stand out from those peers. Those will be the lawyers singing happy tunes.