Last week we had two events that drew interest. The first, of course, was the NFL draft. Hundreds of players competed for a career that lasts on average 2.66 years (down from 4.99 years in 2008). The total number of NFL players hovers around 1,700. Around 25% of the players end each year injured or unable to play for another reason. For some who make the cut, the prize is an NFL career no matter how short. For others, it is the money.

The second, of course, was the annual release of The American Lawyer’s list of the 100 largest U.S.-based law firms, based on revenue. The average career of a lawyer is 10 times than that of the average NFL player. Many individual law firms have more than 1,700 lawyers and it is rare for a law firm to place a lawyer on the firm’s injured or unable to practice list. For some lawyers who make the cut into Big Law, the prize is the chance to make equity partner at a firm and, at the largest, receive annual pay in the millions. For others, the prize is the chance to pay off some college and law school loans.

The departure rates from the NFL and Big Law are high. The number who make it to the top earning echelon is small (the percent of equity partners compared to number of lawyers in the firms is now down to about 20%). Neither football nor law presents a high probability of making it to wealth and fame.

Many sports fans live for the draft and many lawyers live for the AmLaw 100. Neither event means much in the modern world. Many first round NFL picks flame out. Some law firms will disappear in a few years. What you do is more important than where you land on a list.

I find the AmLaw 100 list interesting because it reinforces my belief that the legal industry’s maturity level is around 100 years behind the rest of the world. Lawyers take pleasure in watching themselves and their industry live through events that for others happened long ago. We are living through an instance of Edmund Burke’s saying, “Those who don’t know history are destined to repeat it.” For those fond of movies, we are at the point where everything goes into slow motion. You see people, cars, buildings, and debris float gently through the air. You know there is a crash, but in slow motion it seems more like a complex ballet than a tragic and unnecessary event.

The Legal Industry Goes Where Others Have Gone Before

Looking at the arc of other industries will help us see the possible arc of the legal industry. Cast your mind back to the beginning of the 20th century.  We will start with the retail industry. Richard Warren Sears and Alvah Curtis Roebuck founded Sears, Roebuck & Company in 1886. It started as a watch company, issued its first catalog in 1888, and they gave it the name we know in 1893.

Kmart, joined with Sears, traces its roots to 1897, though most consider 1899 as the official start date. S.S. Kresge founded the company with his friend John McCrory. They operated stores under the S.S. Kresge banner until the 1960s, when the company opened the first Kmart store (beating Walmart by four months).

James Cash “J.C.” Penney opened his first store in 1902. By 1913, that store had grown into a small chain and the company took on the JCPenney name. At one time JCPenney was the yin to Sear’s yang. A large shopping mall thrived with Sears as the anchor tenant at one end and JCPenney at the other.

The late 19th century and start of the 20th century saw a retail landscape dominated by small, mom-and-pop dry goods stores and early groceries. The large retail stores that dominated the landscape by the 1950s and 1960s were just getting started.

Today, most of the large retail chains have died and the remaining few struggle. Some predict 2017 will pass all prior records for number of retail stores closing through bankruptcy. Many point to the rise of ecommerce as the new force killing off the old model. The remaking of the U.S. retail scene has many causes. But, the pattern of moving from a craft structure through consolidation to a few survivors is not unique to that industry.

Steel, aluminum, banking, and insurance, are some of the many industries that have followed a similar pattern. The automotive industry is another. At the turn of the 20th century, automobile making was still a cottage industry. There are high-end specialty care makers today, but for the rest of us there are a few companies that dominate the showrooms. If you want a service industry that went through the pattern, look at public accounting. If you want another service industry struggling to survive, look at journalism. According to Clayton Christenson, consulting is now following the arc of the legal industry.

A Peak At The Legal Industry’s Future

Let’s look at the arc of the legal industry during the prior 40 or 50 years. Once there was a large middle class of law firms. Now we see a few regional firms. The majority of those firms that sat in the middle either merged upstream or broke apart. The upstream mergers, marked by larger firms joining into much larger firms, continue the consolidation trend. The cottage industry of law is evolving into a proto-retail or automobile industry.

If we look at the current legal industry structure we see a faint image of the future. In articles, you read about industry “stratification.” In size, we have the verein firms. These are behemoths by historical legal industry standards. Compared to service entities outside the industry, they are small. The largest public accounting firms and consulting firms dwarf the largest law firm. The trend, however, is unmistakable. Some firms are positioning themselves to be the “Big 4” of the legal industry.

Below that size we have consolidation in the second tier. This tier runs deep and it will take years, perhaps decades, to sort through who will have staying power. Firms in the second tier will face greater challenges as the practice of law evolves. They must either find a niche or face extinction. Differentiation will be key to survival.

The emerging picture also shows us that we should distinguish between size and profits. Historically, we have linked size to profits. Equity partners at the largest firms made the most money. As the industry has evolved, the link has cracked. The largest firms are not the most profitable. That isn’t the same as saying partners in those firms struggle. But we know that being the biggest jewelry chain is not the same as being Harry Winston jewelers. As most service businesses have found, at some point you must choose. You can be the largest or you can be the most profitable, but being both seldom works.

In the background of our picture, there is a hazy structure. The vague outline is there, but we can’t quite make it out. It is the possibility of allowing those who are not licensed to practice law to own law firms. If or when this happens, the picture will change. In theory, law firms will emerge that can compete in size with other professional services firms.

As in the other industries, we will see many models for legal services providers as the industry evolves. That transformation is underway. The most remarkable element of the transformation is that lawyers held it off for so long.

The Legal Industry’s Adolescence

The wild card—the thing that could change the picture overnight (remember, the iPhone is barely 10 years old)—is technology. Retail, automobile, and other industries went through consolidation and transformation during immature technology periods. The legal industry is going through its adolescence in the midst of a great, technological upheaval. Amazon emerged from technology to disrupt the retail industry and Tesla emerged to disrupt the automobile industry. But, both industries had gone through adolescence long before the disruptors appeared. Not so for law.

Negotiating adolescence is tricky and will be so for the legal industry. Amidst the confusion about artificial intelligence, automation, and blockchains, we have new ideas such as self-completing contracts. We have to tease out what lawyers do from the routine task of getting it done.

Part of getting through he experience is having an idea what we want life to be like afterwards. What do we see as the roles of lawyers in society? What will those lawyers contribute that adds value? Adolescents go through a phase where they search for their role in the world. Lawyers have not faced that challenge before, but we face it now. Answering could be as tough as making it in the NFL. I look forward to seeing how we do.

Profit-CenterFour years ago, a person parking in the company parking lot dinged the door on my new  truck. He or she opened their car door too wide. At the time, I thought, “wow, I could file a lawsuit for damages and become the new profit center for my family.” Okay. I thought something else (which I will refrain from saying as this is a family blog). But, had I thought the “family profit center” idea it would have reflected a popular idea circulating in the legal industry. Consultants and some general counsel advocated turning law departments into profit centers. I thought this nonsense had died. But, I saw a new white paper on the topic so I guess we need to work harder to kill this bad idea.

Alchemy and the Law Department Profit Center

The white paper, whose author I will refrain from identifying, focused on some tired oldies with the profit center pitch. We can run through them.

1. Pursuing wrongdoers. Someone harms the company. The law department pursues the perpetrator. The recovery effort works. The company wins damages or secures a settlement payment. The recovery exceeds the law department’s costs. The net amount is profit to the company. The law department is a profit center.

Um, no. Ignore the risk (claims against your company), the disruption (document gathering, depositions), and the general distraction. The idea suggests: let the harm happen, wait as long as you can to let damages build, then recover. That strategy would optimize the company’s and law department’s profits. Abusing the legal system is different than running a business. Recoveries compensate for harm (no harm, no recovery, no profit). Sometimes they remind the wrongdoer that harming others does not pay. Better strategy: identify risks and prevent them lowering the company’s overall cost.

2. Improving efficiency. This is a strange notion. The idea is simple: reduce the company’s waste, which lowers cost, which increases profit. Whoever reduces waste becomes, ta da, a profit center.

Um, no. Strange as this may seem, doing your job does not convert you from a cost center to a profit center. Everyone in a company, even the lawyers, should work to reduce costs. One could construct a fiduciary argument that lawyers and other employees owe shareholders a duty to reduce costs. Profits increase as you lower costs. But, a lower cost law department remains a cost center. Better strategy: incorporate waste reduction as part of your organization’s ethos and focus on productivity.

3. Helping procurement do better. This idea builds off the waste reduction idea. Lawyers work with the procurement group. Lawyers can help procurement improve at what it does. As procurement does better, costs drop, profits increase and, ta da again, the law department becomes a profit center.

Um, no. This is a wacky notion. Lawyers doing their jobs turns the law department into a profit center? Part of the job of an in-house lawyer is to help other departments do their jobs, even procurement (unclear why they were singled out). Yes, procurement helps the company with major purchases, but every department buys things so the law department should help all departments improve their operations. Better strategy: look for ways to reduce friction through legal process improvement.

4. Turning IP into gold. This is an oldie, but a favorite. Every company has IP. Others must want your IP. Maintain an active licensing program run by the law department and the law department—you guessed it, ta da—turns into a profit center.

Um, no. Other departments took risks, invested in people, equipment, and materials leading to inventions. If what those departments created has value through licensing, they should benefit (minus the costs of the licensing program). The law department does not become a profit center by recovering those investments. And, what does it do as the pipeline runs dry? Better strategy: partner with all departments on ways to maximize asset efficiency.

Maybe those were bad ideas. Could a law department become a profit center? Sure. If the law department invests in people, equipment, or materials that lead to ideas it can license, it can become a profit center. Imagine a law department that develops a contract management program. It licenses the program to other companies. One could question whether that is the role of the law department and whether those investments should go to other departments. But, those are policy questions. The law department made the investment and if it recovers value in excess of the investment, the law department earned the profit.

Aim to be a Competitive Advantage

Where should a law department focus its time? A law department should focus on becoming a competitive advantage for its parent corporation. IT departments, human resources departments, finance departments, and other service departments should do the same thing.

What does being a “competitive advantage” mean? Start with basic law department functions. A law department should aim to reduce its spending per lawsuit dropping below competitive law departments. They should keep risk at an equivalent level or lower it. If company A’s cost per slip-and-fall lawsuit is $50,000 and it is $40,000 for company B, company A’s lawsuit costs put the company at a competitive disadvantage. It should bring its cost below $40,000. The cost includes expenses, settlements, and disruption costs (e.g., time of employees taken away from work). A law department wants the cost of its functions at or below the industry average. Even better, they should aim for the bottom quartile of the industry (on a risk-neutral evaluation). Getting to that competitive advantage by increasing risk is unacceptable.

With costs under control, the law department can focus on real drivers of competitive advantage. Doing things the same way and just as good (or bad) as everyone else does not provide a competitive advantage. If the industry average time to sign a new distributor agreement is 90 days, streamline processes so that your company can get them signed in 60 days. The 30 day saving translates into revenue, a competitive advantage. Do the terms and conditions of your contracts create greater friction than terms and conditions in competitor contracts? Simplify the terms and reduce friction. Make it easier to buy from your company.

Law departments that form relational structures with their legal services providers have advantages over departments pursuing transactional relationships. A transactional relationship is the structure we see today. Hire a firm for a matter and move on. Use RFPs to excess, bargain for the lowest price, and forego enduring relationships. Law firms have no incentive to invest in innovation for the client. The law firm will not spend resources finding ways to increase the client’s competitive advantage.

Relational structure clients look for enduring relationships. In a relational structure, the client and the law firm re-work processes to cross organizational borders. By integrating processes across borders, the client and firm achieve greater process improvement than either can achieve on its own. They work as one rather than as distinct entities. Both have incentives to invest in the future of the other. The law firm looks for ways to give the in-house law department that competitive advantage. The advantage could come from new ways of doing things, new things to do, and even new business opportunities for the company (such as new financial products).

The client benefits from innovation and the law department demonstrates greater value. The law department may drive new business, but at a minimum it reduces its drag on the existing business. No one tries to turn the law department into something other than a cost center. But, the law department focuses on becoming a competitive advantage.

Be Comfortable in Your Skin

The “law center as profit center” idea came out of law departments looking for ways to show they add value. They made a mistake; they thought value equalled profit. Get comfortable living in the “cost center” skin. But be wise. Spend money to avoid lawsuits rather than prosecute or defend lawsuits. Preventing lawsuits reduces cost and friction.

I have argued for the competitive advantage view without discussing certain challenges of becoming a profit center. But, I should mention them. First, profit centers approach challenges from a different viewpoint than risk management centers. Corporations need checks and balances. As a law department moves from risk management to profit, the incentives change. Is it in the best interest of the shareholders for law to make that move? Who watches the henhouse?

Second, as a profit center, the law department moves from service provider to competitor within the organization. It must demonstrate an equal or higher return on investment in the law department than other departments. As a service department, it should consider return on investment, but not as part of that competition. The ROI question is whether it uses the resources given it efficiently. Focusing on reducing antitrust risk may have a higher ROI than focusing on reducing contract risk. That information helps as the law department considers ways to spend its resources.

Law departments can and should demonstrate value to their parent corporations. Many metrics will do that. Showing the law department’s competitive advantage is consistent with risk management, cost management, and adding value. Leave the profit center concept to your clients.

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

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

A Bit of Astronomy

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

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

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

Back to Law Firms

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

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

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

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

Beware the White Dwarfs

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

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

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

Combatting Complacency

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Missing Feedback Loop

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

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

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

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

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

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

The Need For Theory and Strategy

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

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

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

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

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

Ad Hoc is a Choice, Not a Plan

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

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

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

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

With that preamble finished, here we go.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

B. Ratio of iOS to Android to Windows users.

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

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

One More Thing…

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

In Conclusion

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

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”?


Citi and Hildebrandt Consulting LLC 2017 Client Advisory.

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.

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

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

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

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

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

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

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

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

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

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

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

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

Computers Will Displace Many Lawyer Tasks

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

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

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

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

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

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

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

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

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

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

Lawyers Repeat Sins of the Past

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

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

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

Build Abilities Instead of Headcount

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

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

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

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

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

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

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

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

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

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

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

CallMeOne of the great privileges of doing what I do is having entrepreneurs call me to talk about their ideas. Many of the conversations I have are very interesting and enjoyable. The entrepreneurs are excited, they have thought long and hard about the problems they are trying to solve, and they are doing creative things with technology. After those calls, I have the feeling the legal industry really might change.

I do get some calls, however, that do not go as well. The callers want to tell me all about their tech, and then clearly want me to praise what they have done and tell them they are the next Zuckerberg. When I try to have a conversation with them, I hear “we have thought of that”, “we have solved those issues” or “we are quite familiar with the industry.” Even if all those statements are true, the point is they aren’t listening. In fact, in those calls the entrepreneur typically spends 80% of the time talking. Yuk.

This post is my guidance to all of those who want to talk with me about their ideas. Again, I feel very fortunate that you want to talk with me, so thank you. But, to make sure we both get a lot out of the conversation, I’d like to share with you why I am making some suggestions, my suggestions for what not to do, and my suggestions for how to make these calls worthwhile. Most of what I say applies not just to talking with me. It applies when you talk with anyone about your idea.

Where These Suggestions Come From

These suggestions come from several sources:

1. My experiences from when I was an entrepreneur.

2. My experiences teaching entrepreneurs (in many settings).

3. Reading what others recommend entrepreneurs should do during these calls (i.e., angel investors, venture capitalists, private equity investors).

4. Talking with others like me who get these calls.

I want to see every entrepreneur I talk to succeed. It is incredibly difficult to work as an entrepreneur and we need many more successful ones in our industry. So I am making these suggestions, because I think they will help me assist you.

What Not to Do

Before I get to my suggestions, let me suggest some things that you should avoid doing in a call with me or anyone else:

1. Talk down to me.

I may be the least intelligent person you will talk to this year. Don’t talk down to me, treat this call as an opportunity to learn how someone less knowledgeable than you views your product or service. Lawyer-entrepreneurs especially fall into this trap (the arrogant lawyer turned arrogant entrepreneur). If you have done your homework before the call, you should know enough about me to carry on a conversation at the right level.

2. Lecture me about the industry.

I want to know about the problem you are trying to solve and that should be a target customer problem. Telling me what you think the problems are in the legal industry doesn’t help either of us.

3. Try to impress me that you know it all (or have solved all the problems).

I know you don’t know it all and I know you haven’t solved all the problems. Trying to convince me otherwise is not a good use of your time. Besides, no matter what you think, you don’t know it all and you haven’t solved all the problems.

4. Name drop.

Some entrepreneurs try to impress me by telling me the names of the law firms, companies, or other advisors with whom they are talking. Don’t. First, your object should not be to impress me, but to find out what I think. Second, this isn’t a sales pitch. If you want to explain that your product has been tested in large law firms or corporations, you can do so without name dropping (“we have done beta tests in three AmLaw 100 firms to find out how our product works in that environment”).

My Suggestions to Entrepreneurs

Making these calls work well and serve a very useful purpose is not hard, but it requires a bit of planning and some discipline. Most of the work is necessary for all the calls you will do when you want to talk with people about your product or service.

1. Have a plan when you talk to me.

Most entrepreneurs do not have a plan when they call. Instead, they talk about their product followed by a “whadda ya think”? That isn’t a plan. Start by assuming that if you scheduled a 30 minute call, you only have 30 minutes. We may go longer because I have a lot of questions or thoughts, but assume that won’t be the case. Now, you need to plot out how to use those 30 minutes.[1]

2. Don’t just jump into the pitch.

This can be a very cultural thing. For example, if you go to China and just jump into your business conversation with a stranger, you may find whoever you are talking to isn’t that impressed with you. It is better to start with a minute or two of appropriate socializing. The same is true for these calls. Spend a minute or two talking with me about us, our industry, common friends, etc. This isn’t wasted time, it is time spent building a relationship and finding some common ground.

3. Make sure you know something about me.

I get many calls because people read my blog posts or articles or hear my presentations. But, surprising to me at least, often these people have not looked up my background (I’m on LinkedIn). Without knowing who I am, they waste time on the call talking about things they would not talk about if they new my background (“I know you work at a big firm, but you would think differently if you worked in-house”). Spend one or two minutes on the call making sure you are up-to-date with my background. An easy way to do this is to ask what type of things the person you are talking to is working on. Knowing who you are talking to gives you some perspective when you think about what they say.

2. Tell me a story.

Many entrepreneurs just launch into a presentation of all the features they have built into their product. In other words, they start off by trying to impress me with their solution. I want to hear the story that connects your idea with the problem. It doesn’t need to be a long story, but it should start with the problem. I am expecting a crisp, well-defined description of the problem from the perspective of your target customer. Again, this probably takes two minutes.

3. Give me the solution in a well-run demo.

This is where many entrepreneurs go off the rails. First, they have designed a lot of features into their product (which hasn’t been released or is just being released). Often, that is a danger sign because it means they are throwing on features without getting proper feedback about what their target customers want. Second, it means they are focused on the features, not the problem. They also have problems because the demo wasn’t polished and tested before they get me on the phone. Spending time trying to get the demo to work, find the files you need, or explain half-baked features isn’t a great use of time. The demo should take about 15 minutes.

4. Run some tests.

This is another place where entrepreneurs go off the rails. Try some tests on me. One thing to test is pricing—and tell don’t ask! It is much better to say “we plan to use a per seat pricing model starting at $250 per seat and then dropping the price at 50 seats and again at 100 seats” and asking me what I think, than to ask “what would you pay”? You can test other marketing ideas, but tell me what you plan to do and ask for a reaction. Spend about three minutes on your test.

5. Have a closing.

As I said, most entrepreneurs jump right into the demo, run out of steam at some point, and then ask for a reaction. They never get to important points and they don’t know how to close. After you run your tests, have a wrap up. Yes, you should thank me for my time, but you can do more. Ask for permission to follow up with me (ask, don’t tell). Also, ask for referrals. You want to keep building your network and not asking for a referral is a lost opportunity.

6. Document.

When you get off the call with me, make sure you finish documenting our conversation. Whether you agree with everything or nothing that I said, make a record of it. You will forget it soon after (you are an entrepreneur and have moved on to 50 other tasks). Your interview is part of your database that helps you shape what your are doing.

Calls with target customers and people familiar with the industry should add a tremendous amount of information to help guide you in developing your product or service. If you use them properly, you will find your product becomes more useful to those who buy it, you will spend less time developing features or following useless paths, and you will have a much higher “that was time well spent” feeling. Don’t just make the calls because that is what you are supposed to do, make them with a purpose and a plan. Thank you for listening, I hope to talk with you, and good luck!

[1] Ash Maurya gives some nice suggestions about how to conduct solution interviews in his book, Running Lean (p.103).

CanaryCoalMineHyperbole aside, the legal industry is going through change and not handling it particularly well. Each year we get another crop of surveys telling us what the industry looks like, and the game is to piece together the bits of data and try to tell a story. This year is no different. So, I’m going to piece together some data from four sources and see if they tell any story: Altman Weil2015 Chief Legal Officer Survey,” Citi Private Bank’s Law Firm GroupReport on Financial Performance,” Process Excellence Network “Special Report: Aligning Strategy With OPEX To Drive Sustainable, Enterprise-Wide Transformation,” New York TimesGraying Firms Wrestle With Making Room For Younger Lawyers.”

Altman Weil 2015 Chief Legal Officer Survey

The 2015 Survey doesn’t deliver any earth-shaking news, but then again it doesn’t have to. It confirms some trends that say a lot about where corporate law departments are headed.

CLOs say they are undertaking efficiency initiatives. The two biggest initiatives say a lot more about what they aren’t doing. CLOs cite implementing technology and reorganizing internal resources as the biggest and most valuable initiatives. For some reason, I can’t shake the visual image of an automated process for rearranging chairs on the Titanic.

When compared to the efficiency initiatives other areas within corporations have taken and maintained for years or even decades, the initiatives within law departments seem small and meager. The reason why appears when we look a bit further.

Law departments are achieving their cost savings largely through bringing in-house work performed by large law firms, down streaming work to paralegals and other paraprofessionals, and sending bits and pieces out to low cost legal service providers. Put simply, law departments are playing a very strong game of labor arbitrage.

Why have a $500 per hour lawyer do work when a $250 per hour in house lawyer can do it? And then, why not move work from that $250 per hour lawyer to a $150 per hour paralegal. Of course, the next step is to move the work outside to a contract lawyer or LPO. As long as the general counsel can push labor costs lower, she can stay ahead of the budget curve. Without a single step towards efficiency, the cost savings can be significant. As the Survey reports,

“Forty-two percent of law departments report shifting work from law firms to in-house lawyer staff, and 34% are shifting work from in-house lawyers to department paralegals and other paraprofessionals. Twenty-five percent of law departments report using contract or temporary lawyers and 15% outsourced to no-law firm vendors to control costs.”

The Survey goes on to state that 68% of law departments are receiving fee discounts, 60% are using alternative or fixed fee arrangements, 39% are reducing the amount of work sent to law firms, and 32% switched to lower priced law firms. A whopping 91% of law departments are either increasing staff (38%) or staying the same (53%). Put all this together, and you get more work being done by lower cost service providers combined with clamping down on the amount spent on high hourly rate outside lawyers.

Citi Private Bank’s Report

What are these law department changes doing to the law firms? According to Citi, demand for large law firm services has slowed and expenses have increased. Citi is projecting that 2015 revenue and profit growth will fall short of 2014. The slowing demand matches with what the general counsel are saying: law departments are sending less work to their high hourly rate outside lawyers (though M&A and big litigation remained strong at the beginning of the year). On the expense side, law firms have been shifting work from lower cost associates to higher cost senior attorneys driving up compensation costs.

Dig a little deeper, and the numbers yield a richer story. Almost all of the revenue growth at the firms comes from rate increases. On the expense side, much of it is driven by compensation, in large part due to heavier reliance on more senior lawyers. Other data supports this trend. For example, the annual National Law Journal survey of large firm staffing shows that these firms increasingly are built from senior attorneys (income partners, senior counsel, etc.) with the associate ranks shrinking.

Process Excellence Network Special Report

Every other year, the Process Excellence Network publishes a report on the “state of the industry.” PEX is a network of professionals who run operational excellence programs. Process excellence is the broad category that includes lean thinking, Six Sigma, and many other improvement disciplines. The PEX survey is the most extensive look at what is going on globally, crossing industries and departments.

The 3rd Biennial Report, published in 2013, showed an increase in process improvement use by law departments. However, the 4th Biennial Report just published shows a substantial decrease. Other departments showing substantial decreases include customer service, call/customer contact center, finance, general business operations, and IT. R&D, distribution, manufacturing, and procurement show increases.

Overall, it is clear that operational excellence remains extremely strong in organizations with almost 40% planning to increase their operational excellence staffs in the coming year and about 30% planning to increase their budgets (with another 51% seeing flat budgets). While individual areas are up or down, the strength of operational excellence remains impressive. The question, then, is why law departments would decrease their emphasis on process excellence? I’ll address that question in my story.

New York Times Graying Firms

Let’s start with the punchline, citing the Altman WeilLaw Firms in Transition Survey,” “at nearly two-thirds of the biggest law firms, partners who are 60 and older control at least one-quarter of the firm’s revenue.” Boomers rule. They have reacted to declines in spending by corporations by cutting costs. But, as every corporate manager knows, you can’t cost cut your way to success.

Many firms are trying various strategies to break out of the pack, but the simple fact remains that those who have the most concentrated control of business and, therefore, the most power are lawyers within five to ten years of retiring. If you just came off a major recession and are trying to rebuild your retirement nest egg, and if you have about five years to do so, would you take a risk and significantly change your legal service delivery model? Probably not and that is what the data shows. In fact, the Altman Weil Chief Legal Officer Survey shows that general counsel rate law firms 3 out of 10 at seriousness about changing their service delivery model.

My Take On The Story

At first glance, you might think the story is that lean thinking has peaked in the legal industry and now is on the decline. Perhaps it didn’t take or lawyers found it just didn’t work for what they do. While that would be an easy story to tell, I think it would be wrong. In fact, I’ll go a bit further and say we should look at the numbers coming out and see the canary in the coal mine. They tell us we are on a wrong path that, without change, will lead to some unpleasant times ahead.

This is the story I see. The legal profession demographics mirror the demographics generally in society. We are part way through the cycle of baby boomers retiring (or at least reaching retirement age) and we still have the remainder to work through the system, the ones born from 1956 through 1965.

These boomers and their colleagues control the legal universe, for the most part.

As the boomers move towards retirement, they have little interest in taking what they perceive as risky steps to change a 150-year-old legal service delivery model. Clients may not be sending as much work to large law firms, but the firms aren’t cratering (slow to no growth and gradually increasing expenses don’t put a firm on the edge of failure).

In corporate halls, the graying population is a bit less pronounced, but not absent. General counsel, as with executives generally, tend to be younger on average than equity partners controlling large books of business in law firms. Still, general counsel tend to come from the larger firms and share the same risk avoidance gene as their outside counterparts. If there is a way to get where they need to go which requires less risk, they will gravitate to that approach.

For general counsel, that path of less resistance has been to push hard on the labor arbitrage model and ease up on efficiency initiatives that require more work. Consider that the average tenure for a general counsel at a large company is around seven years, and you can see why a general counsel may look for ways to get a “quick fix” on costs and let the future take care of itself.

A general counsel can lower her costs quickly by taking the following steps: (1) keep more work in-house, (2) push work from lawyers to paralegals to free up lawyer time for the work kept in house, (3) bring on lawyers at a much lower cost than using outside lawyers, and (4) sending some work outside to very low cost providers (contract attorneys and LPOs).

Without touching an efficiency program, the general counsel can significantly drive down costs-for a short period.

Next, add in a dollop of technology. All the other departments in the corporation are trading labor for tech, so the general counsel won’t face much resistance (assuming the costs are manageable) going that route. Since most law departments, like most law firms, are well behind on the technology curve even relatively simple technology can give a department’s efficiency measures a nice boost.

Contrast that approach with a meaningful efficiency program using an operational excellence methodology. The law department employees will be against change, the approach – while common in other areas of the company – will look strange to in-house clients, and there will be some small or non-existent successes mixed in with the large wins. A process excellence program requires sustained effort. Finally, you won’t get support from your outside lawyers and many of your peers will wonder why you took this path instead of the easier labor arbitrage path.

Clearly, a general counsel might think twice before going to process improvement.

All this makes sense, but this is why I think this labor arbitrage trend does not bode well for anyone. After an initial reduction in costs (which may take a few years to fully bake in to the law department’s operating model), the law department will see the savings plateau. The law department’s headcount will have increased, and the CEO and CFO will start asking why the company has so many lawyers and other paraprofessionals. If you don’t think this will happen, check with your colleagues in IT and HR. They saw this happen many years ago.

The general counsel will be in a difficult position. She will need to increase productivity, but she won’t have the option of simply reducing hourly labor costs. One approach could be technology. But, having failed to embrace technology much earlier, the general counsel will be playing a game of catch up. In the meantime, the market will have moved ahead with combinations of technology and other service providers who can address the legal needs of corporations. Check with the Big Four accounting firms as this is where they are headed. Or, talk to the Bulgarian company I spoke to earlier this year. They already provide this type of service in Europe and are looking at entering the US market.

Law departments will start shedding lawyers. The timing won’t be pleasant for many of these lawyers, who will have reached the mid-point of their careers. Other companies won’t be hiring, leaving those newly disenfranchised lawyers with fewer job options. At the same time, many predict that once the baby boomers retire from the law firms, many firms will have difficulty continuing on. Millennials will have command of the workforce (75% of it by 2020) and won’t be interested in using high hourly rate outside counsel for legal work.

The combination of in-house downsizing and law firm splintering (as The New York Times called it), could be an ugly one-two punch.

We do have a canary in the coal mine. Instead of overlying on labor arbitrage, we could transition to more efficient law firm and law department operations using process excellence methodologies. This would reduce operating costs while at the same time allowing attorneys to re-tool their practices to more strategic focused, valued-added work. It will take more effort and foresight. But, combined with efforts such as legal predictive analytics, could yield much better outcomes for clients. Of course, then we would have to decide that practicing law is about our clients and not about us, another topic for another post.

From the Editor: SeytLines will be taking a holiday on November 26th. The next post will be on December 3rd.