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Creative Destruction: Transforming the
Legal Profession into the Legal-Services
               Industry




              Timothy D. LaBadie, J.D., M.B.A. Candidate

      Industry Analysis – Atkinson Graduate School of Management

                          December 7, 2011

                    Rob Wiltbank & Sean Campbell
The recession forced corporate America to look hard for savings, and the people who were being
paid hundreds of dollars an hour to nitpick were an obvious target. Some lawyering requires exceptional
skills and deserves high pay. But law firms were often charging stiff rates for routine work done by
trainees. Clients are right to demand better value for money. Law firms can increasingly oblige them
with the help of technology and globalization. —The Economisti

         Clients say they want their lawyers to provide excellent service, at competitive and predictable
prices, in a timely and professional manner, and all of this is true. But what clients most want from their
lawyers, what they’re really purchasing, is peace of mind. When a client buys a legal product or service,
he or she is buying reliability, security and assurance — in a word, trustworthiness. –Jordan Furlongii



Roadmap: This report is intended for two main audiences. First, attorneys who want to understand how
the legal industry is changing (or, the New Normal), to understand client needs better, and to increase
their competitive advantage. Second, for a general business audience and clients who want to know how
they can get more value for their legal spend.

What the report is not about: it’s not about marginal changes (e.g., “You can use an iPad to stay in touch
and communicate with clients, use it in depositions, in court, and so forth.”). Rather, its focus is on
fundamental, structural changes facing the legal industry.

Nor is the report directed at readers or “lawyers who have incredible lack of interest in changing legal
marketplace.”iii, or those who do not believe the legal industry is changing or are generally resistant to it.
Many have good reasons for doing so. Attorneys coming into the latter part of their practice naturally are
habituated to the old model. But younger attorneys and those who find themselves in “mid-practice”
should find the report more salient.

This report will argue that legal industry is fundamentally changing because of changes in three broad
categories: (client) demand, technology, and globalization. The paper will proceed by analyzing the
trends in each of these three categories.



    I.    Key Findings and Trends
    1. Demand (The Client)
          a. Corporate clients are continuing to insist on cheaper legal services from law firms and in-
             house legal departments, while simultaneously insisting on higher value. Corporate
             clients are still less-than-satisfied with many of their law-firm suppliers. Hence, it is still
             decidedly a buyer’s market.
          b. The most popular way to achieve these dual goals (higher quality at lower cost) when
             corporate clients choose to continue using law firms are through alternative-fee
             agreements (AFAs).
          c. There is a strong corollary trend of moving work previously done by law firms in house,
             or limiting work given to a few select, preferred firms because businesses can control
             costs more easily this way and many law firms have been proven slow to innovate.
d. Corporate clients are increasingly unwilling to pay first- and second-year associates
               historic billing rates.
    2. Globalization (Supply Side)
          a. Perhaps the most important, most profound trend is the rise of legal process outsourcers
               (LPOs), which are increasingly taking the bread-and-butter work away from many law
               firms, such as e-discovery, document review, contract drafting, patent filings, legal
               research, etc.
          b. Contract or adjunct attorneys are increasingly being used by in-house legal and law firms.
    3. Technology
          a. Individual clients and small businesses are underserved. These markets are being
               penetrated by many internet providers, such as LegalZoom and RocketLawyer.
          b. The internet is also offering new ways for lawyers to market themselves through
               crowdsourcing websites (i.e., sites that allow users and potential clients to receive
               answers to legal questions from numerous attorneys, such as LawPivot and Quora) and,
               to a lesser extent, social media (LinkedIn, Facebook, Twitter, YouTube, blogs, etc.).
          c. Cloud-based and virtual practice constitutes other emerging trends, which allow attorneys
               to simultaneously cut costs and communicate with clients more effectively (increase
               quality). It is transforming the face of law practice, and smart firms have been using
               these tools to deliver better results to clients.

    II.      Industry Background:

The Old Normal: The 1980s Called—It Wants Its Business Model Back

   To understand the current trends in the legal industry and the structural changes taking place (the new
normal) it is necessary to sketch what the old normal looked like, especially for those who are less than
familiar with the industry.

    The legal industry earned great profits and grew rapidly during the latter half of the 20th century,
going from a mere 0.4% of America’s GDP in 1978 to 1.8% in 2003, thus growing four times faster than
the economy as a whole.iv By 2000 this translated into the typical U.S. law-firm lawyer making
$191,000, compared with a mere $64,000 for all Canadian lawyers and $90,000 for Australians during the
same timeframe.v Barriers to entry (occupational licensing rules, ABA accreditation of law schools, and
rules against non-lawyers investing in, or owning, businesses that do legal work) also helped to limit the
supply of lawyers and retard competition in the legal sector. vi These barriers, when coupled with an
almost ever-present revenue growth, resulted in a gilded age, at least from the profession’s point of view.

     But things were even sweeter for law-firm partners1. The old law-firm model is often described as
pyramid-like: relatively few partners at the top, with many associates (i.e., generally younger attorneys) at
the bottom. Partly because law schools have not emphasized practical training, associates had to learn on
the job—and thus on the client’s dime. vii Strikingly, it typically takes an associate 10,000 hours on the
job before he or she rises to mere competency or proficiency. So partners would have associates do the
more menial legal work (reviewing documents, drafting routine contracts, due diligence, etc.), and would

1
  I.e., attorneys that own equity in the firm. Under U.S. rules, nonlawyers are not allowed to own or manage a law
firm, which includes companies that offer legal services and advice.
bill the client anywhere from $100-300 per hour for the associate’s work, while paying the associate a
small fraction of that rate. How could a firm not make profits? The essence of the model was summed up
aptly by a law professor, John Heinz:

        A senior partner in a large Chicago firm told me that, until a few months ago, hiring more
        associates and more paralegals was, “like printing money.” A larger number of subordinates per
        partner provides “leverage” for the partner’s assets. The firms bill the clients considerably more
        than the firms pay for the time of these employees. viii

         Business clients were the first to get savvy, albeit probably belatedly. ix No wonder by 2010, and
after they themselves were being squeezed by the recession, almost half of law firms reported that
corporate clients refused to pay them for work done by their first- or second-year associates!x Large
business and corporate clients were only half of the legal “hemisphere”, though.xi The other half consists
of individual and small-business clients, many of whom cannot afford to hire a private attorney,
especially because of stagnating real wages. xii In fact, two legal-industry economists have recently
concluded, after controlling for a range of factors that would explain higher wages for U.S. lawyers, that
out of the $170b spent on American lawyers annually, about $64 billion is an “unearned premium”
produced by market distortions, with another $10 billion in annual “deadweight loss”—lost or wasted
economic activity.xiii Hence, it is no wonder that the legal industry has been rife for change, innovation,
and competition from new entrants in both hemispheres of the legal profession: for both arguably over-
served large business and corporate clients, as well as under-served individuals and small businesses.

The Recession as a Tipping Point for the Industry

    The change seems well underway. Since the 2008 recession, many law firms have seen revenues and
profits falling significantly.xiv Thus the recession has been described as a tipping point, where hitherto
“fake pressure became real pressure” with respect to clients’ demand for change in how law firms operate
and serve them.xv Further, most industry observers attribute the falling profits to creative destruction
forces, and which are the focal points of this report, namely: (1) changing client tastes and preferences,
or buyer power; (2) globalization (largely in the form of outsourcing), and (3) technological
change.xvi

    No, It’s the Economy, Stupid

     As mentioned above, many lawyers are reluctant to the changing legal landscape, holding out hope
that the economic rebound will restore the profession to business as usual. Given the lucrative last few
decades, it is not difficult to understand why some attorneys take this position.

    But this is probably wishful thinking. Though the vast majority of industry experts disagree with this
rosy prognosis, there are good empirical reasons for thinking the changes are fundamental, and not merely
cyclical. First, in-house attorneys—as opposed to law firm attorneys—are seeing salary increases;
companies are lifting salary freezes, and cash bonus levels are approaching pre-recession levels, yet many
law firms (i.e., external legal suppliers) are not seeing a rebound in work.xvii Second, clients were
displeased with the majority of legal services offered by law firms even at the height of the economic
boom. In 2006, about 70% of large business clients reported that they were unhappy with their primary
law firm, and 50% reported they planned to switch firms for substantive matters in the future.xviii Thus,
the “recession as tipping point for structural change” in the industry seems a much stronger hypothesis
than that that legal business will return to business as usual once the economy picks up again (See also
Appendix A: Porter’s Five Forces analysis).

       III.     The New Normal: Changes in (Client) Demand: A Client’s Market

Summary of Trends in Demand: Cost-cutting, Alternate-fee arrangements (ADAs), Refusal to pay
(train) young associates, A move to In-House, and Greater Value Demanded from Firms.

     Imagine you as a law-firm owner-partner hire a new associate. She has graduated from the top 10%
of her class, was a law review member, and was a decorated moot court member. In short, she has
sterling credentials. In the first few months, she works on various matters and performs well, even on the
less-glamorous, but necessary, menial tasks such as reviewing discovery2 documents. You pay her
competitively ($60 hour). And she performs well on these matters. You then learn that much of the
document review she has actually outsourced to a smart worker (but nonlawyer) with a mere bachelor’s
degree, whom she has paid $15/hour. She has effectively made a 300% profit margin. This is pretty
much sums up the old law-firm business model. She has merely followed the old law-firm model—she
has “leveraged”.

   WTF!? This is the position in which corporate clients found themselves vis-à-vis law firms.
Needless to say, they are no longer willing to pay for this.

Corporate Law Departments under Huge Pressure to Cut Legal Costs—Trickling Down to External Law
Firms

     Since business clients have become more sophisticated and knowledgeable about lawyering, they are
demanding that firms cut costs, yet insisting on higher value. Why is there so much pressure to cut legal
spend? First, as companies have faced increasing competition, and thus pressure to cut costs themselves,
this has trickled down to corporate legal departments and law firms. xix Second, as mentioned above,
corporations were already displeased with most of their legal suppliers before the downturn. The Great
Recession merely put law firms on the front firing line. Third, business people almost universally view
lawyers as a mere expenses, rather than as revenue generators, so paying high fees for most legal matters
does not make sense from a ROI point of view. Fourth, law firms are frankly quite pricey; from 1998 and
2009, large law firms’ hourly rates increased by more than 65%.xx

     Consequently, most chief legal counsel consider legal-spend cost control as the number-one priority
in the next year according to Altman Weil, a leading legal consulting firm.xxi Further, corporate counsel
considered the most important metrics for evaluating the effectiveness and efficiency of outside counsel
as (1) “legal fees spent on outside counsel” (79%) and (2) “total legal spend as percentage of annual
revenues” (70%).xxii The metric of predictability in legal billing is a close second to cost-consciousness
for business clients; two-thirds of corporate legal departments analyze past billing to predict and manage
future costs, and 90% discuss specifics of new project budgets with outside counsel according to a 2011
survey.xxiii



2
    I.e., gathering and exchanging evidence, often documents, between litigants prior to trial.
These factors have understandably led to probably the biggest trends in client demand—alternative-
fee agreements (AFAs) and keeping legal work in-house, thus lowering demand for external law firms.

AFAs

     AFAs are particularly popular for mid-level legal work, or where good enough is good enough. In
contrast, businesses are more willing to use the billable hour for important, high-profile, or bet-the-
company matters. They are also more willing to use a billable-hour basis with niche firms with rare,
specialized expertise.xxiv Companies have increased their use of AFAs from 77% to 84% since 2009;
though the amount of AFAs remains relatively low at 11% to 14%.xxv Interestingly, online bidding and
reverse auctions (in which buyers-clients post a job, and sellers-firms would bid) are only used by about
4% of corporations, which could provide substantial cost savings to corporate clients. xxvi So it is unclear
why this approach has not been more popular. Although the immediate goal is to reduce costs,
corporations seem to have a broader, long-term goal of incentivizing law firms to improve their
efficiency.xxvii

     Further, in 2010 almost half of law firms reported that corporate clients have refused to pay for work
done by first- or second-year associates. xxviii As a result, some firms have changed their training
programs, and not allowing associates to bill at all. This is useful both as a marketing tool (“We won’t
ask you to pay for on-the-job training for our employees”), but also useful to help associates focus on
getting up to speed as soon as possible, rather than being distracted on mere billings.xxix Call it a “first
things first” kind of approach.

The Trend to Keep Corporate Legal Work In-House: Damn it, We’ll Do it Ourselves

        Some companies are cutting out some or all of their outside counsel and law firms, opting to
capture efficiency gains through in-house counsel instead. The savings can be striking. One survey
reported that the total cost of in-house lawyers were 46% cheaper on average than the top law firms used;
even though 80% reported that their company’s legal needs are increasing.xxx And 60% of businesses
surveyed reported that they decreased outside spending on law firms. In the last three years, only about
13% of legal departments said they planned to increase spending on outside counsel. xxxi These are dismal
numbers for law-firm attorneys. The upshot is that, legal work is picking up again, but not much of it is
returning to law firms. The economy is recovering, but traditional law firms are not.

          How responsive have most firms been in responding to the new normal in client demand?
Generally, corporate clients are still not pleased. While virtually all corporations are putting heavy
pressure on law firms to cut costs, they exert at best only moderate pressure for firms to change the way
they deliver their services, though the trend is getting stronger.xxxii Relatedly, most corporations believe
that law firms are not serious about changing their service-delivery model to provide greater value to
clients. 3 And only 45% of general counsel surveyed mostly or wholly agreed that their external lawyers
were recognized as “essential partners” in delivering financial value; the term “necessary evil” cropped up
in several interviews. In sum, many, perhaps most, law firms are viewed as an “unwelcome, albeit
necessary, cost” by corporate clients and counsel. xxxiii

3
  I.e., scoring a median of 3 on a scale of 1 to 10 for 2009, 2010, and 2011. 0 = not at all serious. 10 = doing
everything they can. The mean however is slowly ticking upwards the last three years, 3.4, 3.7, and 4.7 respectively.
Id.
What do corporate clients chiefly value? In answering this question, a good starting point is the
Association of Corporate Counsel’s (ACC’s) major initiative, the ACC Value Challenge”, which offers
guidelines, metrics, and best practices for law firms to cut costs while increasing value added.4 A
minority of firms are emulating the ACC guidelines (See e.g., Appendix C for list of firms and case
studies that are, including the firm Clearspire). Further, there is ample room for innovative marketing
approaches. For example, only 35% of in-house counsel formally evaluates outside counsel’s
performance on a regular basis, and only 17% report those results to counsel. xxxiv So firms that create a
convenient and meaningful evaluation process with their corporate clients will stand out, and this will also
help to build long-term relationships, which over time, competing firms will find hard to imitate.
Strikingly, corporate counsel rated “spending time to understand our business” as the single most
important marketing strategy for law firms looking to secure their business.xxxv

      All in all, what clients currently emphasize and value, or the new normal, is summarized in
Appendix B: Changes in the Legal Industry's Value Canvas.

      IV.      The New Normal: Globalization and Global Competition - Outsourcing Menial Legal
               Work by both legal departments and law firms, Offshoring, and Contract attorneys

First Thing We Do, Let’s Cut Out the Lawyers

         Perhaps the biggest and most transformative trend facing the legal industry is outsourcing legal
services to non-law firms, or legal service providers (LPOs). Although outsourcing legal services is still
relatively small at $1b a year (out of $180b spent each year annually on attorneys), it is growing at 20-
30% a year (or $200-300m per year).xxxvi Impressive growth, to say the least. Businesses are pressuring
law firms to outsource more and more menial work that their associates used to bill out at hundred-dollar
rates—such as e-discovery, document review, due diligence, and legal research.xxxvii This has largely
been led by in-house counsel: 13% of corporate legal departments themselves have taken the initiative,
outsourced e-discovery, document review, due diligence and legal research work that they said they
would have given to law firms in the past.xxxviii Additionally, some corporate legal departments are
“offshoring” legal work abroad, to India for example. In 2011, about 10% of corporate legal departments
offshored legal work, and about 90% expected this to increase or to stay the same next year.xxxix

         More efficient work by outsourcers has not only saved a lot of cash for business clients, but on
litigation matters as well. Litigation costs have rose markedly during the last decade. In large part, this is
due to the monumental inefficiency of discovery. On average, and depressingly, it takes about 1,000
pages of produced documents in discovery to yield one page worthy of being used at trial. In 2008, the
average number of pages produced in discovery was almost 5 million, while only about 4,800 pages were
marked for use at trial. xl This corresponds to a miniscule utility or “hit” rate of .1% for produced
documents.xli These dismal numbers are crying out for six sigma, and some larger firms are already
implementing the discipline long used by businesses.xlii For example, general counsel for Cisco, Mark
Chandler, reported in 2007 that there was no quality difference between using “armies of associates” to
conduct document review and a more automated, data-mining driven system used by outsourcing
vendors—but that there is a huge cost difference. xliii


4
    See: http://www.acc.com/ValueChallenge/resources/avcresources.cfm?rs_aud=420.
Cheaper Law Firm Substitutes: Leading Legal Process Outsourcers – Pangea3 and Novus Law

         Pangea3, the world’s biggest LPO, was acquired by Thomson Reuters, the largest legal-systems
and information company in 2010.xliv Although based in Mumbai, India with 650 employees, the
company has recently opened a Dallas, Texas office to better serve the U.S. market for legal matters that
require a U.S. presence.xlv It applies six-sigma principles to a wide array of legal services, including those
that hitherto were the bread-and-butter work of law firms and younger associates, including:

               Corporate work (contract drafting, M&A due diligence, etc.),
               Litigation (review, organize, and catalogue documents pertinent to litigation, expert and
                lay witness background reports, etc.),
               Intellectual-property work (draft patent applications, patent research, etc.),
               General legal research.xlvi

         Pangea3 garners world-class clients. American Express, GE, Sony, Yahoo! and Netflix have
already started using Pangea3 for basic legal work. xlvii Law firms are catching on, too. Currently, 25% of
Pangea3’s business comes from law firms.xlviii Another leading outsourcer, Novus Law, which
specializes in document review for complex litigation and due diligence, has seen its revenues double
yearly.xlix Novus’s approach uses cheap offshore labor and operational efficiencies to snatch up
businesses that also used to hire law firms at a much higher price. l Further, some corporations are
creating their own in-house LPO infrastructure. GE, for example, has their in-house lawyers supervise
other legal staff and attorneys in India, thus cutting costs dramatically.li

         Another complementary trend is that both law firms and corporate legal are increasingly using
contract or adjunct attorneys, thus further managing costs.lii This trend doesn’t seem to be going
anywhere any time soon either. In 2010, 55% of law firms reported that their firm had used contract
lawyers, up from 44% in 2009.liii This allows firms to cut down their fixed costs, and gives them more
flexibility to hire specific expertise needed for certain projects, thus cutting their fixed costs.

For Lawyers: The Silver Lining of Outsourcing

         Much of the work done by LPOs is, as admitted by most attorneys, miserable drudgery. The
blessing of LPOs is that it can allow attorneys to hone more prized skills, and for them to follow the
marketing maxim, “Do what you do best, and outsource all the rest.” It simply does not make economic
sense for lawyers to consistently do work that does not require a law degree, no more than it makes sense
for a lawyer to type up his or her own dictation. That said, the LPO substitute will divert a hitherto huge
revenue channel for many firms.

         Smaller firms, however, may be the biggest beneficiaries of LPOs. First, it allows smaller outfits
and boutique firms to better compete with “big law”, who, as a tactical ploy, would inundate and
overwhelm the little guy with a flood of documents. Utilizing a supplier like Pangea3 could obviate that
small-firm disadvantage, and level the playing field. Second, LPOs can transform fixed costs into
variable ones. Firms need not take the risk of paying staff round the year, reducing profit, and
necessitating layoffs when times get tough. If combined with virtual office space (see next section,
below), it could result in a truly lean or low fixed-cost business—the holy grail of most business models.
Indeed, the bare bones of lawyering is essentially a very low-cost service—as opposed to manufacturing,
which requires large investments in land, equipment, machinery, and inventory. Smart firms are taking
advantage of this (see e.g., Clearspire and Axiom Law, in Appendix C: New Law-Firm Model Case
Studies and Firms).

    V.       The New Normal in Technology – “Get my Computer on the Phone.”

         Technology is transforming professional-services work in general, allowing mere laymen or
amateurs to do what professionals did before. liv Think: TurboTax meets the legal world. Now, it is
possible for technology to do the work that, in the past, only lawyers or paralegals could do. For a large
section of underserved middle- and lower-class consumers this is welcome, and long overdue. For at least
the past two decades, there has been a trend in self-representation (or pro-se work), as many people
cannot afford to hire an attorney. lv

        Technology is simultaneously offering major opportunities and threats, especially to smaller-
firms. Probably the most drastic, disruptive change in technology will be caused by internet-based
substitutes for law firms.

Technology that Competes Directly with Law Firms – The Online Disruptors

        LegalZoom.com. The site allows online, cheap legal services, such as routine business
         formation/incorporation, patent applications, and simple wills. A consumer can pay $75-100 for
         a simple will, as opposed to paying a traditional attorney $500-$1,000, for example. Since its
         formation about 10 years ago, Legalzoom.com has served over 2m clients. It is earning over
         $100m in revenue annually, and is profitable.”lvi Several prominent venture-capital firms just
         infused $66m into the company, and it looks to be preparing for an IPO.lvii It thus seems that
         LegalZoom will grow as a potent displacing force.
        RocketLawyer.com is a fast follower of LegalZoom. It allows online “clients” to fill out, store,
         and share legal forms on the web. It has 70k users a day, and has doubled its revenue for four
         years straight, earning over $10 million in 2011. As with LegalZoom, Rocket Lawyer provides
         online legal forms, from wills to business incorporation documents, which regular folks can fill
         out and store and share on the Web. For $20 a month, consumers can also have their documents
         reviewed by a real lawyer and receive legal advice at no additional cost.”lviii Google Ventures
         invested $18.5m in the startup 2011.lix
        CyberSettle.com and LawEscrow.com (settle your legal case online services). These sites offer
         confidential and round-the-clock dispute resolutions settlement services online. If a case does not
         settle, they then provide online facilitators to move disputes toward settlement. Cybersettle
         boasts it has handled over 200k transactions in the past 10 years, totaling about $1.6b in
         settlements in bodily injury and other insurance claims.lx Its users also include insurance
         professionals and attorneys, especially for smaller cases.

          These are serious threats to firms, especially smaller ones. How can attorneys counteract this
threat? Essentially what these websites offer are unbundled legal services, or “an agreement with a client
to provide only a portion of the services, such as a consultation or document preparation, as an alternative
to full representation.” Law firms need to better market themselves as offering unbundled, and hence
more affordable legal services—most people are unaware that law firms can offer unbundled legal
services. Although 70% of persons are completely unaware of unbundled services, about 66% said they
would be very likely or somewhat likely to use them.lxi The unbundled option was, unsurprisingly,
especially attractive for households making less than $50k per year.lxii Yet about half of solo practitioners
and small firms (with two to nine lawyers) reported offering unbundled legal services, and only 25% of
lawyers in a California study reported that they did not offer any unbundled services.lxiii Thus lawyers
could do much better in making middle- and lower-class segments aware of this option.lxiv

Online Technology that Augments Law Firm Practice

        Other web-based technology is also complementing and augmenting law practice, allowing
attorneys to reach more potential clients and market themselves more effectively.

         Take LawPivot.com and Schpoonkle.com, which are crowdsourcing sites where lawyers respond
to legal questions, thus drumming up potential business. LawPivot, for example, focuses on mostly on
startups.lxv Users can ask questions publicly or privately. They can then post jobs such as contract
review, business incorporation advice. Clients can then mark whether the advice was helpful or not.
Moreover, it links directly to the lawyer if the user wishes to hire the attorney.

        The websites offer a good deal of information, allowing users to test-drive potential attorneys.
Take a typical example:

User: “I am a daycare director and want to know if I can copyright a handbook that I have put together?”
Attorney: “Yes you can mark it as copyright, with the "c" in the circle. However if you did it as part of
your job, it is probably ‘work-for hire’ and as such it may belong to your employer.”

         The site also conveniently cross-links to Facebook, LinkedIn, Twitter, Google +, and other social
media, allowing clients and attorneys to further research and communicate with one another. Lastly, it
assists clients to link up with lawyers within a fixed price range or budget.

Social Media and Marketing – Probably Won’t Get You to a Retainer Agreement, but Clients Want to See
It

          Social media (Facebook, LinkedIn, blogging, YouTube, Twitter, etc.) has garnered a lot of
attention in the legal press. Empirically, its effectiveness as a marketing tool for bringing in clients seems
slight, however. Only about 10-12% of attorneys reported actually retaining a client using various social
media.lxvi As with most any business, personal referrals still matter the most, and are far-and-away the
most potent way of marketing and getting clients in the door. About 80% of people looking for an
attorney for a personal matter said they would rely on either the advice of a personal acquaintance (46%)
or an attorney they have already known or used before (34%).lxvii Only 7% would search online and 8%
would look in the yellow pages or other printed directory. lxviii This is a big change from the late 1980s
and early 90s, when yellow pages or print directories were used anywhere from 13-34% of prospective
clients,lxix though those with incomes below $15,000 were most likely to still use the yellow pages.lxx

         The primacy of personal referrals holds true for corporate and large business clients as well. The
three strategies that received the corporate legal’s top rating were (1) personal contacts, (2) free training
programs and (23) written material demonstrating legal expertise. However, even the highest-ranking
activity rated only 6.7 on a 0 to 10 scale (0= no effect and 10 = extremely positive effect), while a number
of other standard marketing efforts scored very poorly.”lxxi
Technology for Law Practice – Cloud Computing

        How much does the typical small or medium-sized firm spend on technology? About 55% of
firms spend 2-4% of revenue per year on technology, which is still down considerably since the
recession.lxxii Just under half reported spending $8k-17k per attorney.lxxiii Increasingly, tech funds are
being spent on a growing and important trend—cloud computinglxxiv (e.g., Dropbox, Salesforce.com).
Thirty-three percent of firms indicated they are implementing a cloud strategy, up from 17% in 2010 and
9% in 2009.lxxv So this is a rapidly growing trend. Firms are attracted to cloud computing because of
browser access from anywhere (as 70% reported), round-the-clock availability (55%), and the low costs
and predictability of monthly cloud-based expenses (49%).lxxvi

         Cloud computing in conjunction with virtual-office technology offers a range of benefits, even
accounting for security concerns. First, the cloud facilitates more of a paperless office, and large gains in
efficiency. Consider the waste each year when attorneys and staff moving to grab physical copies of files,
or as often happens, cannot locate the file and has to go on a search expedition to find a file or document.
Second, the cloud allows for easy backup when hardware goes on the fritz, and can provide duplicate
copies, thus cutting down on malpractice risk if documents are lost or destroyed. Third, it cuts down on
paper and office-supply costs. This seems to be an incipient, but strong trend: about 15% of attorneys
now operate a virtual-type law office, based on cloud technology.lxxvii

        There is a plethora of practice technologies available. The reader is directed to Appendix D:
Further Law-Practice Technology Resources. Given the glut of emerging technologies, perhaps the best
way to describe how technology is changing the practice of law is by way of illustration.

A Day in the Life of the Tech-leveraging Lawyer

         After seeing his kids off to school, an attorney, Jim, sits in his home office, receiving emails from
his paralegal, who, as he does, often works from home. They are finalizing the drafting of an important
complaint. The client retained Jim just yesterday, and it turns out the statute of limitations will run by the
end of the week, so the he wants to get it filed today. Although the paralegal did not see the request from
Jim to draft the complaint until early this morning, she finished the initial draft within half an hour, a
fraction of the time it used to take, by using a document-automation software, HotDocs.

         Jim posts the revision to a Google Docs-like program because he wants his associate to take a
look at a provision of the complaint (the associate recently did some research on a nuanced area of law
implicated in the complaint). They collaborate inside of the “virtual” office made possible by cloud
technology. The team discusses it, makes corrections, and finalizes it for filing. As with most matters,
the client instantly receives an online copy of the final pleading, an plain-language explanation of what it
means in their terms, and a bill. No postage is incurred unless the client insists on a hard copy of the
document, as indicated in a client-intake questionnaire.

         After fairly typical rest of the morning working at home (talking to clients on the phone or via
video conferencing, emailing, and drafting letters), Jim meets with a potential new client at rented space
or shared space, offering the high-end type of accommodations without the fixed cost of doing so. Jim
talks to the prospective client in nonlegal terms whenever possible, emphasizing the problem and the
client’s options in plain language. A law clerk and second-year associate tag along to the meeting to
observe and to learn more about how real-world law practice is done—something they lacked in their
law=-chool educations. The client is not billed for their presence; the point is to train and apprentice
them. The young attorneys value this pragmatic approach and the opportunities for mentorship. As a
result, the firm has a good retention record, low turnover, and has little trouble attracting new talent.

         As Jim returns home, he receives client feedback on work she has done on a recent business
matter. He then spends the afternoon finalizing client bills, some of which are AFAs, and some are
billable-hour basis, depending on the client’s needs and the type of legal matter involved.

         While working on another case, he remembers a colleague of his who worked on a similar project
or issue several years ago. He searches his cloud database, organized by practice area and cross-tagged
with legal issues, and finds it within seconds. He reads the memo, and finds it somewhat useful overall,
but the real utility is that it only took him a few minutes to locate it. Things would be different if he had
to take more than say 10-15 minutes to look for it, or had to wait hours or days for a call back from his
colleague, who likely would not remember much of the specifics anyhow.

         Jim drives home, and is reminded by his iPhone that he needs to dictate a one-page letter to
opposing counsel. He does so in the car via Dragon Dictate (DD), which he can (1) either send to his
assistant to type or (2) the DD application will transcribe the audio for him, which he can then read or
send.

         Upon arriving home, Jim meets with his a consultant regarding the production of a software
program that will allow the firm to determine whether potential clients are eligible for expungements of
their criminal record. The statutes determining the conditions under which certain crimes are eligible are
tangled and complex, often taking an associate or paralegal an hour or so to determine. He has seen
similar software used for complex statutory schemes with export controls and certain statute-of-limitation
statutes. Cutting down 30-45 minutes of research to a matter of minutes or seconds would allow a high-
volume but lower-margin stream of revenue, allowing the firm to undercut the $500-1,000 charged by
competing firms. Big business opportunity. Further, if the software works, this could open the door to
more lucrative rates should the client wish Jim to represent them at a hearing in court. Of course, clients
are made aware that they can bundle in-court advocacy or proceed after the necessary filings and
determination by themselves if they wish.



    VI.     The New, New Normal? Things for Law Firms to Pay Attention to and Keep on the
            Radar Screen going Forward

         This report has described the structural, fundamental changes taking place in the legal industry.
Put differently, it has described the forces of creative destruction in the form of changing demand, forces
of globalization (esp., outsourcing and offshoring), and technological change. Yet there is another classic
creative destruction dynamic to consider: deregulation.

        The U.S. has not seen much deregulation, nor any major changes to legal ethics rules and other
laws that define the boundaries and nature of the legal industry. But other countries, notably the U.K.,
have. Deregulation would further disrupt the legal market. Therefore, lawyers and business people alike
should keep abreast of any developments. But the most important thing to keep an eye on the short and
medium term is any change in the existing rules of law-firm ownership.

Wal-Mart Legal???

        Presently U.S. law firms must be “fiscally and managerially separate” from firms that have non-
lawyer investors.”lxxviii “Law firm” is broadly defined as any business that offers services or legal advice.
This rule has long been questioned. But just this year, the U.K.’s Legal Services Act took effect, allowing
nonlawyers to invest in and share in management responsibilities of law firm companies. This is a major
development, as the U.K. is the second biggest legal market behind the U.S. American attorneys should
pay attention to several aspects of this development in the U.K.:

          First, British firms will have a comparative advantage over U.S. firms, as they can raise large
amounts of cash from capital markets and public investors. This will allow them to capture other
comparative advantages, such as: to more easily expand into foreign markets, the ability to hire
consultants and experts, to develop and implement new technology quicker, to be able to absorb greater
risk, etc., etc.lxxix It is likely that this will trigger a “race to the bottom” dynamic, in which the U.S. will
be forced to follow suit in order to compete globally. lxxx The question seems to be when rather than if this
will happen.

          Second, as a consequence of this liberalization, the U.K. has been termed the world’s legal
laboratory. Though it is still early, analysts have predicted that various innovations in legal service
delivery are underway in Britain, including being able to access routine legal services via kiosks; one-
stop-shopping professional firms whereby clients can have their accounting, legal, and financial needs
taken care of; and legal clinics in shopping centers, akin to Wal-Mart’s proposal to offer medical clinics
in its stores. Hence, American lawyers should pay attention to how legal services are being offered in the
U.K. to anticipate further changes in the future, and how it might impact practice in the U.S.
Appendix A: Porter’s Five Forces – Legal Industry
Appendix B: Changes in the Legal Industry’s Value Canvas
Appendix C: New-Law Firm Model Case Studies and Firms

1. Axiom Law, D.C.lxxxi
2. Clearspire – To comply with ethical rules on law firm ownership, Clearspire has a dual structure.
    One entity has salaried, employee lawyers, and the other focuses on rainmaking and business
    support for the attorneys. Clearspire also institutes fixed fees that reward attorneys if the project
    is completed faster or cheaper than promised, the lawyer receives a third of the savings. Clients
    report that the firm charges a fraction of what traditional firms have charged for just-as-good
    work.lxxxii
3. Law Pivot
4. Novus Law
5. Paragon in San Francisco
6. FSB Legal in Atlanta,
7. Outside GC in Boston and
8. Philips & Reiter in Houston
9. Morgan, Lewis & Bockius
10. Slater & Gordon (Australian law firm) who launched an IPO in 2007.
11. The Blackstone Group (publicly traded while still retaining partnership status).
12. Delegatus Inc.: Reinventing Legal Services
13. Fenwick & West LLP: FLEX by Fenwick
14. Aliunde LLC: Expedited RFPs for Legal Matters
15. Waller Lansden Dortch & Davis, LLP: Schola2Juris – Reinventing Student Recruiting
16. Stokes & Stokes, Ltd., aka http://www.halfpricelawyers.com.lxxxiii
Appendix D: Further Law-Practice Technology Resources

       ABA Legal Technology Survey, which costs $1,550 to $1,800 for members and non-members5
        for the six-volume set covering:

        * Vol. 1: Technology Basics

        * Vol. 2: Law Office Technology

        * Vol. 3: Litigation and Courtroom Technology

        * Vol. 4: Web and Communication Technology

        * Vol. 5: Online Research

        * Vol. 6: Mobile Lawyers

       ABA’s Law Practice Magazine > 2011 SEPTEMBER / OCTOBER 2011 | VIRTUAL
        PRACTICE ISSUE.
        (http://www.americanbar.org/publications/law_practice_magazine/2011/september_october.html)
        . Stephanie L. Kimbro, Virtual Law Practice: How to Deliver Legal Services Online.




5
 The volumes can also be purchased for $350 singly
(http://apps.americanbar.org/abastore/index.cfm?fm=Product.AddToCart&pid=2680106PDF).
Appendix E: Sources, References, and Endnotes

i
   “The price of legal services: How to curb your legal bills.” May 5, 2011.
(http://www.economist.com/node/18651204).
ii
    Slaw Magazine. Your Client is Not Your Enemy. Dec. 21, 2010. (http://www.slaw.ca/2010/12/21/your-client-is-
not-your-enemy/).
iii
    ABA Journal: Lawyers Have Incredible Lack of Interest in Changing Legal Marketplace
. http://www.abajournal.com/news/article/incredible_lack_of_interest_in_the_changing_legal_marketplace/
iv
    Law firms: A less gilded future | The Economist (http://www.economist.com/node/18651114).
v
    Barriers to Entry in the Legal Profession: Not enough lawyers? Economist, Sept.3, 2011.
(http://www.economist.com/node/21528280).
vi
    (http://www.economist.com/node/21528280).
vii
     “What They Don’t Teach Law Students: Lawyering”. New York Times. David Segal. Nov. 19, 2011.
(http://www.nytimes.com/2011/11/20/business/after-law-school-associates-learn-to-be-
lawyers.html?_r=3&sq=law%20school&st=cse&adxnnl=1&scp=2&adxnnlx=1323234875-
wBNqF6kxumkQivjI1himlg).
viii
     “When Law Firms Fail.” John P. Heinz. Suffolk University Law Review. 2010. P. 71.
ix
    Law firms: A less gilded future | The Economist (http://www.economist.com/node/18651114).
x
    Law Firm Leaders Survey (Lexis), infra.
xi
    (Heinz, p. 78).
xii
     http://www.brookings.edu/opinions/2011/0729_deregulate_lawyers_winston_crandall.aspx).
xiii
     Barriers to entry in the legal profession: Not enough lawyers? The Economist. Sept. 3, 2011.
(http://www.economist.com/node/21528280).
xiv
     (http://www.abajournal.com/magazine/article/paradigm_shift/
xv
     Alternative law firms: Bargain briefs | The Economist. Aug. 13 2011.
(http://www.economist.com/node/21525907).
xvi
     Ibid.
xvii
      HBR Consulting on Lawyer Compensation, 2011, “In-House Counsel Pay is Improving” Press Release.
(http://hbrconsulting.com/downloads/HLDS_2011_Press_Release%20_Compensation_110811.pdf)
xviii
       Legalmarketingblog.com, citing BTI Consulting survey. March 5, 2006
(http://www.legalmarketingblog.com/marketing-tips-325-bti-survey-693-of-large-clients-unhappy-with-primary-
law-firm.html).
xix
     The New Normal. What Aspects of Legal Services Are Most Likely to Get Standardized? Posted Aug 1, 2011. By
Paul Lippe.
(http://www.abajournal.com/legalrebels/article/what_aspects_of_legal_services_are_most_likely_to_get_standar
dized/)
xx
     Offshoring your lawyer: Outsourcing can cut your legal bills. Dec 16th 2010 | NEW YORK | from the print edition
(http://www.economist.com/node/17733545).
xxi
     Altman Weil, infra. P. ii.
xxii
      Id., at p. 17. Other primary metrics reported were Number of lawyers per $B of revenue (47%), Ratio of fully
loaded inside budget to
outside counsel spend (35%), ratio of paralegals to lawyers (15%), and ratio of support staff to lawyers (11%). Note
the last two measure a degree of leverage, though associates to lawyers is lacking. Law firms should likewise track
these metrics as an operating measure and marketing data. See page 18 of the report for “quality and
satisfaction”, financial, and other metrics that a firm might use (http://www.altmanweil.com/CLO2011/).
xxiii
       Altman. P. 10.
xxiv
       HBR Consulting Law Department Survey, 2011, Press Release on Outside versus Inside Legal Spend Survey,
2011. P. 1. (http://www.hbrconsulting.com/downloads/HLDS_2011_Press_%20Release_111007.pdf) Infra, supra.
Note: this consulting firm has conducted surveys for the past 25 years. THe full survey is available at
(http://hbrconsulting.com/lawdepartmentsurvey.html) at $3,500 to $4,500, depending on
membership/participation status.
xxv
      Altman Weil, p. 14. The amount of non-billable hours refers to the mean. Median rates for 2009, 2010, and
2011 are 7%, 10%, and 10%, respectively.
xxvi
       Id., p. 15.
xxvii
        Top Ten Tips for Leveraging Cutting-Edge Legal Research Technology to Control Legal Costs and Drive Client
Value. ACC Website. May 5, 2011. Thomson Reuters. No. 6.
(http://www.acc.com/legalresources/publications/topten/Technology-for-Controling-Costs.cfm).
xxviii
        Law Firm Leaders Survey (Lexis), infra.
xxix
       “What They Don’t Teach Law Students: Lawyering”. New York Times. David Segal. Nov. 19, 2011.
(http://www.nytimes.com/2011/11/20/business/after-law-school-associates-learn-to-be-
lawyers.html?_r=3&sq=law%20school&st=cse&adxnnl=1&scp=2&adxnnlx=1323234875-
wBNqF6kxumkQivjI1himlg).
xxx
      Corporate Legal Department Spend Increases 6% as Clients Boost In-House Capabilities
Posted Oct 11, 2011.
(http://www.abajournal.com/news/article/corporate_legal_spend_increases_6_as_clients_boost_in-
house_capabilities/). Specifically, the survey found: “219 survey participants, of which 70 percent have revenues
at or above the Fortune 500 level, the median fully-loaded inside hourly cost per lawyer is approximately 46%
below the median average hourly rate of the company’s top three billing firms.”
xxxi
       Altman Weil, p. 9. Comparing CLO surveys from 2009, 2010, and 2011.
xxxii
        Altman, at 12. The average (mean) pressure for law firms to change their underlying value proposition for
legal-services delivery from corporations in 2009, 2010, and 2011 were 5.5., 5.3, and 6.4 respectively.
xxxiii
        “General Counsel: Vague About Value” Report. Nabarro. p. 17.
(http://www.nabarro.com/downloads/gc_report_2011-2.pdf)
xxxiv
        Altman Weil CLO Survey, supra. P. ii.
xxxv
        Altman Weil CLO Survey, p. 17.
xxxvi
        Offshoring your lawyer: Outsourcing can cut your legal bills. Dec 16th 2010 | NEW YORK | from the print
edition (http://www.economist.com/node/17733545).
xxxvii
         Altman weil, p. 8. Supra/infra.
xxxviii
         Id., p. ii.
xxxix
        2011 Chief Legal Officer Survey. Altman Weil, p. i. (http://www.altmanweil.com/CLO2011/).
xl
    A Toolkit For Change: How The Federal Civil Rules Advisory Committee Can Fix A Civil Justice System “In Serious
Need Of Repair” Topic: Civil Justice Reform. By Daniel E. Troy, Senior Vice President and General Counsel at
GlaxoSmithKline, and John O’Tuel, senior counsel at GlaxoSmithKline. Legal Backgrounder, May 21, 2010, 4 pages.
Washingtion Legal Foundation.org. http://www.wlf.org/publishing/publication_detail.asp?id=2167.
xli
     Ibid.
xlii
        Maura R. Grossman & Gordon V. Cormack. Technology-Assisted Review in E-Discovery Can Be More Effective
and More Efficient Than Exhaustive Manual Review. XVII RICH. J.L. & TECH. 11 (2011).
http://jolt.richmond.edu/v17i3/article11.pdf. See Also: Six Sigma Solutions. Seyfarth Shaw, LLP.
(http://www.pwc.com/en_US/us/general-counsel-forum/assets/gcf-chicago-082008.pdf).
xliii
       “Using Technology to Cut Legal Costs”. The National Law Journal. April 19, 2007.
(http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1176887059469).
xliv
       (http://www.pangea3.com/thomson-reuters-acquires-pangea3.html).
xlv
      (http://www.pangea3.com/pangea3-opens-major-us-location.html).
xlvi
       See http://www.pangea3.com/legal-outsourcing-services.html).
xlvii
        Offshoring your lawyer: Outsourcing can cut your legal bills. The Economist. Dec 16th 2010.
(http://www.economist.com/node/17733545).
xlviii
        Ibid.
xlix
      Ibid.
l
   http://www.abajournal.com/magazine/article/paradigm_shift/).
li
   Ibid.
lii
     See ABA Journal. “Make or Buy in the Age of the Free-Agent Lawyer.” Mike Evers. Oct 26, 2011. (advising on
best practices for using and integrating contract/adjunct attorneys).
liii
     Law Firm Leaders Survey 2010, ALM Media, LLC. Dec. 2010. Accessed via Lexis-Nexis.
liv
     The Economist | Schumpeter: Angst for the educated. Sept. 3, 2011.
(http://www.economist.com/node/21528226?frsc=dg%7Cb)
lv
     “Perspectives on Finding Personal Legal Services: The results of a public opinion poll.” 2011. ABA. p. 17
http://www.in.gov/judiciary/probono/survey-report.pdf).
lvi
     http://kowalskiandassociatesblog.com/2011/08/11/are-law-firms-going-to-be-replaced-by-internet-based-
providers-of-legal-services/
lvii
      Kleiner Perkins invests in LegalZoom — IPO on the horizon? May 3, 2011. Anthony Ha.
(http://venturebeat.com/2011/05/03/kleiner-perkins-legalzoom/).
lviii
       http://kowalskiandassociatesblog.com/2011/08/11/are-law-firms-going-to-be-replaced-by-internet-based-
providers-of-legal-services/
lix
     (http://www.forbes.com/sites/danielfisher/2011/08/11/google-jumps-into-online-law-business-with-rocket-
lawyer/).
lx
     See http://www.cybersettle.com/pub/home/about.aspx.
lxi
     “Perspectives on Finding Personal Legal Services: The results of a public opinion poll.” 2011. ABA. pp. 19-20.
(http://www.in.gov/judiciary/probono/survey-report.pdf).
lxii
      Ibid.
lxiii
       Id., p. 17.
lxiv
       Id., p. 21.
lxv
      Alternative law firms: Bargain briefs | The Economist. Aug. 13 2011.
(http://www.economist.com/node/21525907).
lxvi
      “Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011.
(http://www.americanbar.org/newsletter/publications/youraba/201110article01.html).
lxvii
        Perspectives on Finding Personal Legal Services: The results of a public opinion poll. 2011. ABA. p. 8.
(http://www.in.gov/judiciary/probono/survey-report.pdf).
lxviii
         Ibid.
lxix
       Id., p. 9.
lxx
      Id., 10.
lxxi
       Altman Weil, at ii.
lxxii
        (2011 ILTA/InsideLegal Technology Purchasing Survey. Page 1, 2.
http://insidelegal.typepad.com/files/ILTAInsideLegalTechnologyPurchasingSurvey2011.pdf).
lxxiii
         Ibid.
lxxiv
       “Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011.
(http://www.americanbar.org/newsletter/publications/youraba/201110article01.html).
lxxv
        Id. p. 1.
lxxvi
         “Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011.
(http://www.americanbar.org/newsletter/publications/youraba/201110article01.html).
lxxvii
          How to Integrate a Virtual Law Office. Findlaw.com. Stephanie Rabiner. November 3, 2011.
(http://blogs.findlaw.com/technologist/2011/11/how-to-integrate-a-virtual-law-office.html).
lxxviii
          See ABA Comm. on Ethics and Prof. Responsibility, Formal Op. 96-401 (1996); ABA Comm. on
Ethics and Prof. Responsibility, Formal Op. 94-388 (1994).
lxxix
         John P. Heinz. “When Law Firms Fail.” P. 77.
lxxx
       John P. Heinz. “When Law Firms Fail.” P. 77.
lxxxi
         Alternative Law Firms: Bargain briefs. (http://www.economist.com/node/21525907); see also
“Nonconventional law practice makes inroads in D.C. market” - The Washington Post. Sept. 11, 2011.
(http://www.washingtonpost.com/business/capitalbusiness/alternative-model-law-firm-makes-push-into-
washington/2011/09/07/gIQAjLmqKK_story.html).
lxxxii
          Alternative law firms: Bargain briefs | The Economist. Aug. 13, 2011.
(http://www.economist.com/node/21525907). See also www.clearspire.com.
lxxxiii
    ABA article at:
http://www.abajournal.com/magazine/article/half_off_nevada_lawyer_bets_on_discount_model/#clarification).

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Transforming Legal Profession To Legal Services (Legal Industry Analysis)

  • 1. Creative Destruction: Transforming the Legal Profession into the Legal-Services Industry Timothy D. LaBadie, J.D., M.B.A. Candidate Industry Analysis – Atkinson Graduate School of Management December 7, 2011 Rob Wiltbank & Sean Campbell
  • 2. The recession forced corporate America to look hard for savings, and the people who were being paid hundreds of dollars an hour to nitpick were an obvious target. Some lawyering requires exceptional skills and deserves high pay. But law firms were often charging stiff rates for routine work done by trainees. Clients are right to demand better value for money. Law firms can increasingly oblige them with the help of technology and globalization. —The Economisti Clients say they want their lawyers to provide excellent service, at competitive and predictable prices, in a timely and professional manner, and all of this is true. But what clients most want from their lawyers, what they’re really purchasing, is peace of mind. When a client buys a legal product or service, he or she is buying reliability, security and assurance — in a word, trustworthiness. –Jordan Furlongii Roadmap: This report is intended for two main audiences. First, attorneys who want to understand how the legal industry is changing (or, the New Normal), to understand client needs better, and to increase their competitive advantage. Second, for a general business audience and clients who want to know how they can get more value for their legal spend. What the report is not about: it’s not about marginal changes (e.g., “You can use an iPad to stay in touch and communicate with clients, use it in depositions, in court, and so forth.”). Rather, its focus is on fundamental, structural changes facing the legal industry. Nor is the report directed at readers or “lawyers who have incredible lack of interest in changing legal marketplace.”iii, or those who do not believe the legal industry is changing or are generally resistant to it. Many have good reasons for doing so. Attorneys coming into the latter part of their practice naturally are habituated to the old model. But younger attorneys and those who find themselves in “mid-practice” should find the report more salient. This report will argue that legal industry is fundamentally changing because of changes in three broad categories: (client) demand, technology, and globalization. The paper will proceed by analyzing the trends in each of these three categories. I. Key Findings and Trends 1. Demand (The Client) a. Corporate clients are continuing to insist on cheaper legal services from law firms and in- house legal departments, while simultaneously insisting on higher value. Corporate clients are still less-than-satisfied with many of their law-firm suppliers. Hence, it is still decidedly a buyer’s market. b. The most popular way to achieve these dual goals (higher quality at lower cost) when corporate clients choose to continue using law firms are through alternative-fee agreements (AFAs). c. There is a strong corollary trend of moving work previously done by law firms in house, or limiting work given to a few select, preferred firms because businesses can control costs more easily this way and many law firms have been proven slow to innovate.
  • 3. d. Corporate clients are increasingly unwilling to pay first- and second-year associates historic billing rates. 2. Globalization (Supply Side) a. Perhaps the most important, most profound trend is the rise of legal process outsourcers (LPOs), which are increasingly taking the bread-and-butter work away from many law firms, such as e-discovery, document review, contract drafting, patent filings, legal research, etc. b. Contract or adjunct attorneys are increasingly being used by in-house legal and law firms. 3. Technology a. Individual clients and small businesses are underserved. These markets are being penetrated by many internet providers, such as LegalZoom and RocketLawyer. b. The internet is also offering new ways for lawyers to market themselves through crowdsourcing websites (i.e., sites that allow users and potential clients to receive answers to legal questions from numerous attorneys, such as LawPivot and Quora) and, to a lesser extent, social media (LinkedIn, Facebook, Twitter, YouTube, blogs, etc.). c. Cloud-based and virtual practice constitutes other emerging trends, which allow attorneys to simultaneously cut costs and communicate with clients more effectively (increase quality). It is transforming the face of law practice, and smart firms have been using these tools to deliver better results to clients. II. Industry Background: The Old Normal: The 1980s Called—It Wants Its Business Model Back To understand the current trends in the legal industry and the structural changes taking place (the new normal) it is necessary to sketch what the old normal looked like, especially for those who are less than familiar with the industry. The legal industry earned great profits and grew rapidly during the latter half of the 20th century, going from a mere 0.4% of America’s GDP in 1978 to 1.8% in 2003, thus growing four times faster than the economy as a whole.iv By 2000 this translated into the typical U.S. law-firm lawyer making $191,000, compared with a mere $64,000 for all Canadian lawyers and $90,000 for Australians during the same timeframe.v Barriers to entry (occupational licensing rules, ABA accreditation of law schools, and rules against non-lawyers investing in, or owning, businesses that do legal work) also helped to limit the supply of lawyers and retard competition in the legal sector. vi These barriers, when coupled with an almost ever-present revenue growth, resulted in a gilded age, at least from the profession’s point of view. But things were even sweeter for law-firm partners1. The old law-firm model is often described as pyramid-like: relatively few partners at the top, with many associates (i.e., generally younger attorneys) at the bottom. Partly because law schools have not emphasized practical training, associates had to learn on the job—and thus on the client’s dime. vii Strikingly, it typically takes an associate 10,000 hours on the job before he or she rises to mere competency or proficiency. So partners would have associates do the more menial legal work (reviewing documents, drafting routine contracts, due diligence, etc.), and would 1 I.e., attorneys that own equity in the firm. Under U.S. rules, nonlawyers are not allowed to own or manage a law firm, which includes companies that offer legal services and advice.
  • 4. bill the client anywhere from $100-300 per hour for the associate’s work, while paying the associate a small fraction of that rate. How could a firm not make profits? The essence of the model was summed up aptly by a law professor, John Heinz: A senior partner in a large Chicago firm told me that, until a few months ago, hiring more associates and more paralegals was, “like printing money.” A larger number of subordinates per partner provides “leverage” for the partner’s assets. The firms bill the clients considerably more than the firms pay for the time of these employees. viii Business clients were the first to get savvy, albeit probably belatedly. ix No wonder by 2010, and after they themselves were being squeezed by the recession, almost half of law firms reported that corporate clients refused to pay them for work done by their first- or second-year associates!x Large business and corporate clients were only half of the legal “hemisphere”, though.xi The other half consists of individual and small-business clients, many of whom cannot afford to hire a private attorney, especially because of stagnating real wages. xii In fact, two legal-industry economists have recently concluded, after controlling for a range of factors that would explain higher wages for U.S. lawyers, that out of the $170b spent on American lawyers annually, about $64 billion is an “unearned premium” produced by market distortions, with another $10 billion in annual “deadweight loss”—lost or wasted economic activity.xiii Hence, it is no wonder that the legal industry has been rife for change, innovation, and competition from new entrants in both hemispheres of the legal profession: for both arguably over- served large business and corporate clients, as well as under-served individuals and small businesses. The Recession as a Tipping Point for the Industry The change seems well underway. Since the 2008 recession, many law firms have seen revenues and profits falling significantly.xiv Thus the recession has been described as a tipping point, where hitherto “fake pressure became real pressure” with respect to clients’ demand for change in how law firms operate and serve them.xv Further, most industry observers attribute the falling profits to creative destruction forces, and which are the focal points of this report, namely: (1) changing client tastes and preferences, or buyer power; (2) globalization (largely in the form of outsourcing), and (3) technological change.xvi No, It’s the Economy, Stupid As mentioned above, many lawyers are reluctant to the changing legal landscape, holding out hope that the economic rebound will restore the profession to business as usual. Given the lucrative last few decades, it is not difficult to understand why some attorneys take this position. But this is probably wishful thinking. Though the vast majority of industry experts disagree with this rosy prognosis, there are good empirical reasons for thinking the changes are fundamental, and not merely cyclical. First, in-house attorneys—as opposed to law firm attorneys—are seeing salary increases; companies are lifting salary freezes, and cash bonus levels are approaching pre-recession levels, yet many law firms (i.e., external legal suppliers) are not seeing a rebound in work.xvii Second, clients were displeased with the majority of legal services offered by law firms even at the height of the economic boom. In 2006, about 70% of large business clients reported that they were unhappy with their primary law firm, and 50% reported they planned to switch firms for substantive matters in the future.xviii Thus,
  • 5. the “recession as tipping point for structural change” in the industry seems a much stronger hypothesis than that that legal business will return to business as usual once the economy picks up again (See also Appendix A: Porter’s Five Forces analysis). III. The New Normal: Changes in (Client) Demand: A Client’s Market Summary of Trends in Demand: Cost-cutting, Alternate-fee arrangements (ADAs), Refusal to pay (train) young associates, A move to In-House, and Greater Value Demanded from Firms. Imagine you as a law-firm owner-partner hire a new associate. She has graduated from the top 10% of her class, was a law review member, and was a decorated moot court member. In short, she has sterling credentials. In the first few months, she works on various matters and performs well, even on the less-glamorous, but necessary, menial tasks such as reviewing discovery2 documents. You pay her competitively ($60 hour). And she performs well on these matters. You then learn that much of the document review she has actually outsourced to a smart worker (but nonlawyer) with a mere bachelor’s degree, whom she has paid $15/hour. She has effectively made a 300% profit margin. This is pretty much sums up the old law-firm business model. She has merely followed the old law-firm model—she has “leveraged”. WTF!? This is the position in which corporate clients found themselves vis-à-vis law firms. Needless to say, they are no longer willing to pay for this. Corporate Law Departments under Huge Pressure to Cut Legal Costs—Trickling Down to External Law Firms Since business clients have become more sophisticated and knowledgeable about lawyering, they are demanding that firms cut costs, yet insisting on higher value. Why is there so much pressure to cut legal spend? First, as companies have faced increasing competition, and thus pressure to cut costs themselves, this has trickled down to corporate legal departments and law firms. xix Second, as mentioned above, corporations were already displeased with most of their legal suppliers before the downturn. The Great Recession merely put law firms on the front firing line. Third, business people almost universally view lawyers as a mere expenses, rather than as revenue generators, so paying high fees for most legal matters does not make sense from a ROI point of view. Fourth, law firms are frankly quite pricey; from 1998 and 2009, large law firms’ hourly rates increased by more than 65%.xx Consequently, most chief legal counsel consider legal-spend cost control as the number-one priority in the next year according to Altman Weil, a leading legal consulting firm.xxi Further, corporate counsel considered the most important metrics for evaluating the effectiveness and efficiency of outside counsel as (1) “legal fees spent on outside counsel” (79%) and (2) “total legal spend as percentage of annual revenues” (70%).xxii The metric of predictability in legal billing is a close second to cost-consciousness for business clients; two-thirds of corporate legal departments analyze past billing to predict and manage future costs, and 90% discuss specifics of new project budgets with outside counsel according to a 2011 survey.xxiii 2 I.e., gathering and exchanging evidence, often documents, between litigants prior to trial.
  • 6. These factors have understandably led to probably the biggest trends in client demand—alternative- fee agreements (AFAs) and keeping legal work in-house, thus lowering demand for external law firms. AFAs AFAs are particularly popular for mid-level legal work, or where good enough is good enough. In contrast, businesses are more willing to use the billable hour for important, high-profile, or bet-the- company matters. They are also more willing to use a billable-hour basis with niche firms with rare, specialized expertise.xxiv Companies have increased their use of AFAs from 77% to 84% since 2009; though the amount of AFAs remains relatively low at 11% to 14%.xxv Interestingly, online bidding and reverse auctions (in which buyers-clients post a job, and sellers-firms would bid) are only used by about 4% of corporations, which could provide substantial cost savings to corporate clients. xxvi So it is unclear why this approach has not been more popular. Although the immediate goal is to reduce costs, corporations seem to have a broader, long-term goal of incentivizing law firms to improve their efficiency.xxvii Further, in 2010 almost half of law firms reported that corporate clients have refused to pay for work done by first- or second-year associates. xxviii As a result, some firms have changed their training programs, and not allowing associates to bill at all. This is useful both as a marketing tool (“We won’t ask you to pay for on-the-job training for our employees”), but also useful to help associates focus on getting up to speed as soon as possible, rather than being distracted on mere billings.xxix Call it a “first things first” kind of approach. The Trend to Keep Corporate Legal Work In-House: Damn it, We’ll Do it Ourselves Some companies are cutting out some or all of their outside counsel and law firms, opting to capture efficiency gains through in-house counsel instead. The savings can be striking. One survey reported that the total cost of in-house lawyers were 46% cheaper on average than the top law firms used; even though 80% reported that their company’s legal needs are increasing.xxx And 60% of businesses surveyed reported that they decreased outside spending on law firms. In the last three years, only about 13% of legal departments said they planned to increase spending on outside counsel. xxxi These are dismal numbers for law-firm attorneys. The upshot is that, legal work is picking up again, but not much of it is returning to law firms. The economy is recovering, but traditional law firms are not. How responsive have most firms been in responding to the new normal in client demand? Generally, corporate clients are still not pleased. While virtually all corporations are putting heavy pressure on law firms to cut costs, they exert at best only moderate pressure for firms to change the way they deliver their services, though the trend is getting stronger.xxxii Relatedly, most corporations believe that law firms are not serious about changing their service-delivery model to provide greater value to clients. 3 And only 45% of general counsel surveyed mostly or wholly agreed that their external lawyers were recognized as “essential partners” in delivering financial value; the term “necessary evil” cropped up in several interviews. In sum, many, perhaps most, law firms are viewed as an “unwelcome, albeit necessary, cost” by corporate clients and counsel. xxxiii 3 I.e., scoring a median of 3 on a scale of 1 to 10 for 2009, 2010, and 2011. 0 = not at all serious. 10 = doing everything they can. The mean however is slowly ticking upwards the last three years, 3.4, 3.7, and 4.7 respectively. Id.
  • 7. What do corporate clients chiefly value? In answering this question, a good starting point is the Association of Corporate Counsel’s (ACC’s) major initiative, the ACC Value Challenge”, which offers guidelines, metrics, and best practices for law firms to cut costs while increasing value added.4 A minority of firms are emulating the ACC guidelines (See e.g., Appendix C for list of firms and case studies that are, including the firm Clearspire). Further, there is ample room for innovative marketing approaches. For example, only 35% of in-house counsel formally evaluates outside counsel’s performance on a regular basis, and only 17% report those results to counsel. xxxiv So firms that create a convenient and meaningful evaluation process with their corporate clients will stand out, and this will also help to build long-term relationships, which over time, competing firms will find hard to imitate. Strikingly, corporate counsel rated “spending time to understand our business” as the single most important marketing strategy for law firms looking to secure their business.xxxv All in all, what clients currently emphasize and value, or the new normal, is summarized in Appendix B: Changes in the Legal Industry's Value Canvas. IV. The New Normal: Globalization and Global Competition - Outsourcing Menial Legal Work by both legal departments and law firms, Offshoring, and Contract attorneys First Thing We Do, Let’s Cut Out the Lawyers Perhaps the biggest and most transformative trend facing the legal industry is outsourcing legal services to non-law firms, or legal service providers (LPOs). Although outsourcing legal services is still relatively small at $1b a year (out of $180b spent each year annually on attorneys), it is growing at 20- 30% a year (or $200-300m per year).xxxvi Impressive growth, to say the least. Businesses are pressuring law firms to outsource more and more menial work that their associates used to bill out at hundred-dollar rates—such as e-discovery, document review, due diligence, and legal research.xxxvii This has largely been led by in-house counsel: 13% of corporate legal departments themselves have taken the initiative, outsourced e-discovery, document review, due diligence and legal research work that they said they would have given to law firms in the past.xxxviii Additionally, some corporate legal departments are “offshoring” legal work abroad, to India for example. In 2011, about 10% of corporate legal departments offshored legal work, and about 90% expected this to increase or to stay the same next year.xxxix More efficient work by outsourcers has not only saved a lot of cash for business clients, but on litigation matters as well. Litigation costs have rose markedly during the last decade. In large part, this is due to the monumental inefficiency of discovery. On average, and depressingly, it takes about 1,000 pages of produced documents in discovery to yield one page worthy of being used at trial. In 2008, the average number of pages produced in discovery was almost 5 million, while only about 4,800 pages were marked for use at trial. xl This corresponds to a miniscule utility or “hit” rate of .1% for produced documents.xli These dismal numbers are crying out for six sigma, and some larger firms are already implementing the discipline long used by businesses.xlii For example, general counsel for Cisco, Mark Chandler, reported in 2007 that there was no quality difference between using “armies of associates” to conduct document review and a more automated, data-mining driven system used by outsourcing vendors—but that there is a huge cost difference. xliii 4 See: http://www.acc.com/ValueChallenge/resources/avcresources.cfm?rs_aud=420.
  • 8. Cheaper Law Firm Substitutes: Leading Legal Process Outsourcers – Pangea3 and Novus Law Pangea3, the world’s biggest LPO, was acquired by Thomson Reuters, the largest legal-systems and information company in 2010.xliv Although based in Mumbai, India with 650 employees, the company has recently opened a Dallas, Texas office to better serve the U.S. market for legal matters that require a U.S. presence.xlv It applies six-sigma principles to a wide array of legal services, including those that hitherto were the bread-and-butter work of law firms and younger associates, including:  Corporate work (contract drafting, M&A due diligence, etc.),  Litigation (review, organize, and catalogue documents pertinent to litigation, expert and lay witness background reports, etc.),  Intellectual-property work (draft patent applications, patent research, etc.),  General legal research.xlvi Pangea3 garners world-class clients. American Express, GE, Sony, Yahoo! and Netflix have already started using Pangea3 for basic legal work. xlvii Law firms are catching on, too. Currently, 25% of Pangea3’s business comes from law firms.xlviii Another leading outsourcer, Novus Law, which specializes in document review for complex litigation and due diligence, has seen its revenues double yearly.xlix Novus’s approach uses cheap offshore labor and operational efficiencies to snatch up businesses that also used to hire law firms at a much higher price. l Further, some corporations are creating their own in-house LPO infrastructure. GE, for example, has their in-house lawyers supervise other legal staff and attorneys in India, thus cutting costs dramatically.li Another complementary trend is that both law firms and corporate legal are increasingly using contract or adjunct attorneys, thus further managing costs.lii This trend doesn’t seem to be going anywhere any time soon either. In 2010, 55% of law firms reported that their firm had used contract lawyers, up from 44% in 2009.liii This allows firms to cut down their fixed costs, and gives them more flexibility to hire specific expertise needed for certain projects, thus cutting their fixed costs. For Lawyers: The Silver Lining of Outsourcing Much of the work done by LPOs is, as admitted by most attorneys, miserable drudgery. The blessing of LPOs is that it can allow attorneys to hone more prized skills, and for them to follow the marketing maxim, “Do what you do best, and outsource all the rest.” It simply does not make economic sense for lawyers to consistently do work that does not require a law degree, no more than it makes sense for a lawyer to type up his or her own dictation. That said, the LPO substitute will divert a hitherto huge revenue channel for many firms. Smaller firms, however, may be the biggest beneficiaries of LPOs. First, it allows smaller outfits and boutique firms to better compete with “big law”, who, as a tactical ploy, would inundate and overwhelm the little guy with a flood of documents. Utilizing a supplier like Pangea3 could obviate that small-firm disadvantage, and level the playing field. Second, LPOs can transform fixed costs into variable ones. Firms need not take the risk of paying staff round the year, reducing profit, and necessitating layoffs when times get tough. If combined with virtual office space (see next section, below), it could result in a truly lean or low fixed-cost business—the holy grail of most business models. Indeed, the bare bones of lawyering is essentially a very low-cost service—as opposed to manufacturing,
  • 9. which requires large investments in land, equipment, machinery, and inventory. Smart firms are taking advantage of this (see e.g., Clearspire and Axiom Law, in Appendix C: New Law-Firm Model Case Studies and Firms). V. The New Normal in Technology – “Get my Computer on the Phone.” Technology is transforming professional-services work in general, allowing mere laymen or amateurs to do what professionals did before. liv Think: TurboTax meets the legal world. Now, it is possible for technology to do the work that, in the past, only lawyers or paralegals could do. For a large section of underserved middle- and lower-class consumers this is welcome, and long overdue. For at least the past two decades, there has been a trend in self-representation (or pro-se work), as many people cannot afford to hire an attorney. lv Technology is simultaneously offering major opportunities and threats, especially to smaller- firms. Probably the most drastic, disruptive change in technology will be caused by internet-based substitutes for law firms. Technology that Competes Directly with Law Firms – The Online Disruptors  LegalZoom.com. The site allows online, cheap legal services, such as routine business formation/incorporation, patent applications, and simple wills. A consumer can pay $75-100 for a simple will, as opposed to paying a traditional attorney $500-$1,000, for example. Since its formation about 10 years ago, Legalzoom.com has served over 2m clients. It is earning over $100m in revenue annually, and is profitable.”lvi Several prominent venture-capital firms just infused $66m into the company, and it looks to be preparing for an IPO.lvii It thus seems that LegalZoom will grow as a potent displacing force.  RocketLawyer.com is a fast follower of LegalZoom. It allows online “clients” to fill out, store, and share legal forms on the web. It has 70k users a day, and has doubled its revenue for four years straight, earning over $10 million in 2011. As with LegalZoom, Rocket Lawyer provides online legal forms, from wills to business incorporation documents, which regular folks can fill out and store and share on the Web. For $20 a month, consumers can also have their documents reviewed by a real lawyer and receive legal advice at no additional cost.”lviii Google Ventures invested $18.5m in the startup 2011.lix  CyberSettle.com and LawEscrow.com (settle your legal case online services). These sites offer confidential and round-the-clock dispute resolutions settlement services online. If a case does not settle, they then provide online facilitators to move disputes toward settlement. Cybersettle boasts it has handled over 200k transactions in the past 10 years, totaling about $1.6b in settlements in bodily injury and other insurance claims.lx Its users also include insurance professionals and attorneys, especially for smaller cases. These are serious threats to firms, especially smaller ones. How can attorneys counteract this threat? Essentially what these websites offer are unbundled legal services, or “an agreement with a client to provide only a portion of the services, such as a consultation or document preparation, as an alternative to full representation.” Law firms need to better market themselves as offering unbundled, and hence more affordable legal services—most people are unaware that law firms can offer unbundled legal services. Although 70% of persons are completely unaware of unbundled services, about 66% said they
  • 10. would be very likely or somewhat likely to use them.lxi The unbundled option was, unsurprisingly, especially attractive for households making less than $50k per year.lxii Yet about half of solo practitioners and small firms (with two to nine lawyers) reported offering unbundled legal services, and only 25% of lawyers in a California study reported that they did not offer any unbundled services.lxiii Thus lawyers could do much better in making middle- and lower-class segments aware of this option.lxiv Online Technology that Augments Law Firm Practice Other web-based technology is also complementing and augmenting law practice, allowing attorneys to reach more potential clients and market themselves more effectively. Take LawPivot.com and Schpoonkle.com, which are crowdsourcing sites where lawyers respond to legal questions, thus drumming up potential business. LawPivot, for example, focuses on mostly on startups.lxv Users can ask questions publicly or privately. They can then post jobs such as contract review, business incorporation advice. Clients can then mark whether the advice was helpful or not. Moreover, it links directly to the lawyer if the user wishes to hire the attorney. The websites offer a good deal of information, allowing users to test-drive potential attorneys. Take a typical example: User: “I am a daycare director and want to know if I can copyright a handbook that I have put together?” Attorney: “Yes you can mark it as copyright, with the "c" in the circle. However if you did it as part of your job, it is probably ‘work-for hire’ and as such it may belong to your employer.” The site also conveniently cross-links to Facebook, LinkedIn, Twitter, Google +, and other social media, allowing clients and attorneys to further research and communicate with one another. Lastly, it assists clients to link up with lawyers within a fixed price range or budget. Social Media and Marketing – Probably Won’t Get You to a Retainer Agreement, but Clients Want to See It Social media (Facebook, LinkedIn, blogging, YouTube, Twitter, etc.) has garnered a lot of attention in the legal press. Empirically, its effectiveness as a marketing tool for bringing in clients seems slight, however. Only about 10-12% of attorneys reported actually retaining a client using various social media.lxvi As with most any business, personal referrals still matter the most, and are far-and-away the most potent way of marketing and getting clients in the door. About 80% of people looking for an attorney for a personal matter said they would rely on either the advice of a personal acquaintance (46%) or an attorney they have already known or used before (34%).lxvii Only 7% would search online and 8% would look in the yellow pages or other printed directory. lxviii This is a big change from the late 1980s and early 90s, when yellow pages or print directories were used anywhere from 13-34% of prospective clients,lxix though those with incomes below $15,000 were most likely to still use the yellow pages.lxx The primacy of personal referrals holds true for corporate and large business clients as well. The three strategies that received the corporate legal’s top rating were (1) personal contacts, (2) free training programs and (23) written material demonstrating legal expertise. However, even the highest-ranking activity rated only 6.7 on a 0 to 10 scale (0= no effect and 10 = extremely positive effect), while a number of other standard marketing efforts scored very poorly.”lxxi
  • 11. Technology for Law Practice – Cloud Computing How much does the typical small or medium-sized firm spend on technology? About 55% of firms spend 2-4% of revenue per year on technology, which is still down considerably since the recession.lxxii Just under half reported spending $8k-17k per attorney.lxxiii Increasingly, tech funds are being spent on a growing and important trend—cloud computinglxxiv (e.g., Dropbox, Salesforce.com). Thirty-three percent of firms indicated they are implementing a cloud strategy, up from 17% in 2010 and 9% in 2009.lxxv So this is a rapidly growing trend. Firms are attracted to cloud computing because of browser access from anywhere (as 70% reported), round-the-clock availability (55%), and the low costs and predictability of monthly cloud-based expenses (49%).lxxvi Cloud computing in conjunction with virtual-office technology offers a range of benefits, even accounting for security concerns. First, the cloud facilitates more of a paperless office, and large gains in efficiency. Consider the waste each year when attorneys and staff moving to grab physical copies of files, or as often happens, cannot locate the file and has to go on a search expedition to find a file or document. Second, the cloud allows for easy backup when hardware goes on the fritz, and can provide duplicate copies, thus cutting down on malpractice risk if documents are lost or destroyed. Third, it cuts down on paper and office-supply costs. This seems to be an incipient, but strong trend: about 15% of attorneys now operate a virtual-type law office, based on cloud technology.lxxvii There is a plethora of practice technologies available. The reader is directed to Appendix D: Further Law-Practice Technology Resources. Given the glut of emerging technologies, perhaps the best way to describe how technology is changing the practice of law is by way of illustration. A Day in the Life of the Tech-leveraging Lawyer After seeing his kids off to school, an attorney, Jim, sits in his home office, receiving emails from his paralegal, who, as he does, often works from home. They are finalizing the drafting of an important complaint. The client retained Jim just yesterday, and it turns out the statute of limitations will run by the end of the week, so the he wants to get it filed today. Although the paralegal did not see the request from Jim to draft the complaint until early this morning, she finished the initial draft within half an hour, a fraction of the time it used to take, by using a document-automation software, HotDocs. Jim posts the revision to a Google Docs-like program because he wants his associate to take a look at a provision of the complaint (the associate recently did some research on a nuanced area of law implicated in the complaint). They collaborate inside of the “virtual” office made possible by cloud technology. The team discusses it, makes corrections, and finalizes it for filing. As with most matters, the client instantly receives an online copy of the final pleading, an plain-language explanation of what it means in their terms, and a bill. No postage is incurred unless the client insists on a hard copy of the document, as indicated in a client-intake questionnaire. After fairly typical rest of the morning working at home (talking to clients on the phone or via video conferencing, emailing, and drafting letters), Jim meets with a potential new client at rented space or shared space, offering the high-end type of accommodations without the fixed cost of doing so. Jim talks to the prospective client in nonlegal terms whenever possible, emphasizing the problem and the client’s options in plain language. A law clerk and second-year associate tag along to the meeting to
  • 12. observe and to learn more about how real-world law practice is done—something they lacked in their law=-chool educations. The client is not billed for their presence; the point is to train and apprentice them. The young attorneys value this pragmatic approach and the opportunities for mentorship. As a result, the firm has a good retention record, low turnover, and has little trouble attracting new talent. As Jim returns home, he receives client feedback on work she has done on a recent business matter. He then spends the afternoon finalizing client bills, some of which are AFAs, and some are billable-hour basis, depending on the client’s needs and the type of legal matter involved. While working on another case, he remembers a colleague of his who worked on a similar project or issue several years ago. He searches his cloud database, organized by practice area and cross-tagged with legal issues, and finds it within seconds. He reads the memo, and finds it somewhat useful overall, but the real utility is that it only took him a few minutes to locate it. Things would be different if he had to take more than say 10-15 minutes to look for it, or had to wait hours or days for a call back from his colleague, who likely would not remember much of the specifics anyhow. Jim drives home, and is reminded by his iPhone that he needs to dictate a one-page letter to opposing counsel. He does so in the car via Dragon Dictate (DD), which he can (1) either send to his assistant to type or (2) the DD application will transcribe the audio for him, which he can then read or send. Upon arriving home, Jim meets with his a consultant regarding the production of a software program that will allow the firm to determine whether potential clients are eligible for expungements of their criminal record. The statutes determining the conditions under which certain crimes are eligible are tangled and complex, often taking an associate or paralegal an hour or so to determine. He has seen similar software used for complex statutory schemes with export controls and certain statute-of-limitation statutes. Cutting down 30-45 minutes of research to a matter of minutes or seconds would allow a high- volume but lower-margin stream of revenue, allowing the firm to undercut the $500-1,000 charged by competing firms. Big business opportunity. Further, if the software works, this could open the door to more lucrative rates should the client wish Jim to represent them at a hearing in court. Of course, clients are made aware that they can bundle in-court advocacy or proceed after the necessary filings and determination by themselves if they wish. VI. The New, New Normal? Things for Law Firms to Pay Attention to and Keep on the Radar Screen going Forward This report has described the structural, fundamental changes taking place in the legal industry. Put differently, it has described the forces of creative destruction in the form of changing demand, forces of globalization (esp., outsourcing and offshoring), and technological change. Yet there is another classic creative destruction dynamic to consider: deregulation. The U.S. has not seen much deregulation, nor any major changes to legal ethics rules and other laws that define the boundaries and nature of the legal industry. But other countries, notably the U.K., have. Deregulation would further disrupt the legal market. Therefore, lawyers and business people alike
  • 13. should keep abreast of any developments. But the most important thing to keep an eye on the short and medium term is any change in the existing rules of law-firm ownership. Wal-Mart Legal??? Presently U.S. law firms must be “fiscally and managerially separate” from firms that have non- lawyer investors.”lxxviii “Law firm” is broadly defined as any business that offers services or legal advice. This rule has long been questioned. But just this year, the U.K.’s Legal Services Act took effect, allowing nonlawyers to invest in and share in management responsibilities of law firm companies. This is a major development, as the U.K. is the second biggest legal market behind the U.S. American attorneys should pay attention to several aspects of this development in the U.K.: First, British firms will have a comparative advantage over U.S. firms, as they can raise large amounts of cash from capital markets and public investors. This will allow them to capture other comparative advantages, such as: to more easily expand into foreign markets, the ability to hire consultants and experts, to develop and implement new technology quicker, to be able to absorb greater risk, etc., etc.lxxix It is likely that this will trigger a “race to the bottom” dynamic, in which the U.S. will be forced to follow suit in order to compete globally. lxxx The question seems to be when rather than if this will happen. Second, as a consequence of this liberalization, the U.K. has been termed the world’s legal laboratory. Though it is still early, analysts have predicted that various innovations in legal service delivery are underway in Britain, including being able to access routine legal services via kiosks; one- stop-shopping professional firms whereby clients can have their accounting, legal, and financial needs taken care of; and legal clinics in shopping centers, akin to Wal-Mart’s proposal to offer medical clinics in its stores. Hence, American lawyers should pay attention to how legal services are being offered in the U.K. to anticipate further changes in the future, and how it might impact practice in the U.S.
  • 14. Appendix A: Porter’s Five Forces – Legal Industry
  • 15. Appendix B: Changes in the Legal Industry’s Value Canvas
  • 16. Appendix C: New-Law Firm Model Case Studies and Firms 1. Axiom Law, D.C.lxxxi 2. Clearspire – To comply with ethical rules on law firm ownership, Clearspire has a dual structure. One entity has salaried, employee lawyers, and the other focuses on rainmaking and business support for the attorneys. Clearspire also institutes fixed fees that reward attorneys if the project is completed faster or cheaper than promised, the lawyer receives a third of the savings. Clients report that the firm charges a fraction of what traditional firms have charged for just-as-good work.lxxxii 3. Law Pivot 4. Novus Law 5. Paragon in San Francisco 6. FSB Legal in Atlanta, 7. Outside GC in Boston and 8. Philips & Reiter in Houston 9. Morgan, Lewis & Bockius 10. Slater & Gordon (Australian law firm) who launched an IPO in 2007. 11. The Blackstone Group (publicly traded while still retaining partnership status). 12. Delegatus Inc.: Reinventing Legal Services 13. Fenwick & West LLP: FLEX by Fenwick 14. Aliunde LLC: Expedited RFPs for Legal Matters 15. Waller Lansden Dortch & Davis, LLP: Schola2Juris – Reinventing Student Recruiting 16. Stokes & Stokes, Ltd., aka http://www.halfpricelawyers.com.lxxxiii
  • 17. Appendix D: Further Law-Practice Technology Resources  ABA Legal Technology Survey, which costs $1,550 to $1,800 for members and non-members5 for the six-volume set covering: * Vol. 1: Technology Basics * Vol. 2: Law Office Technology * Vol. 3: Litigation and Courtroom Technology * Vol. 4: Web and Communication Technology * Vol. 5: Online Research * Vol. 6: Mobile Lawyers  ABA’s Law Practice Magazine > 2011 SEPTEMBER / OCTOBER 2011 | VIRTUAL PRACTICE ISSUE. (http://www.americanbar.org/publications/law_practice_magazine/2011/september_october.html) . Stephanie L. Kimbro, Virtual Law Practice: How to Deliver Legal Services Online. 5 The volumes can also be purchased for $350 singly (http://apps.americanbar.org/abastore/index.cfm?fm=Product.AddToCart&pid=2680106PDF).
  • 18. Appendix E: Sources, References, and Endnotes i “The price of legal services: How to curb your legal bills.” May 5, 2011. (http://www.economist.com/node/18651204). ii Slaw Magazine. Your Client is Not Your Enemy. Dec. 21, 2010. (http://www.slaw.ca/2010/12/21/your-client-is- not-your-enemy/). iii ABA Journal: Lawyers Have Incredible Lack of Interest in Changing Legal Marketplace . http://www.abajournal.com/news/article/incredible_lack_of_interest_in_the_changing_legal_marketplace/ iv Law firms: A less gilded future | The Economist (http://www.economist.com/node/18651114). v Barriers to Entry in the Legal Profession: Not enough lawyers? Economist, Sept.3, 2011. (http://www.economist.com/node/21528280). vi (http://www.economist.com/node/21528280). vii “What They Don’t Teach Law Students: Lawyering”. New York Times. David Segal. Nov. 19, 2011. (http://www.nytimes.com/2011/11/20/business/after-law-school-associates-learn-to-be- lawyers.html?_r=3&sq=law%20school&st=cse&adxnnl=1&scp=2&adxnnlx=1323234875- wBNqF6kxumkQivjI1himlg). viii “When Law Firms Fail.” John P. Heinz. Suffolk University Law Review. 2010. P. 71. ix Law firms: A less gilded future | The Economist (http://www.economist.com/node/18651114). x Law Firm Leaders Survey (Lexis), infra. xi (Heinz, p. 78). xii http://www.brookings.edu/opinions/2011/0729_deregulate_lawyers_winston_crandall.aspx). xiii Barriers to entry in the legal profession: Not enough lawyers? The Economist. Sept. 3, 2011. (http://www.economist.com/node/21528280). xiv (http://www.abajournal.com/magazine/article/paradigm_shift/ xv Alternative law firms: Bargain briefs | The Economist. Aug. 13 2011. (http://www.economist.com/node/21525907). xvi Ibid. xvii HBR Consulting on Lawyer Compensation, 2011, “In-House Counsel Pay is Improving” Press Release. (http://hbrconsulting.com/downloads/HLDS_2011_Press_Release%20_Compensation_110811.pdf) xviii Legalmarketingblog.com, citing BTI Consulting survey. March 5, 2006 (http://www.legalmarketingblog.com/marketing-tips-325-bti-survey-693-of-large-clients-unhappy-with-primary- law-firm.html). xix The New Normal. What Aspects of Legal Services Are Most Likely to Get Standardized? Posted Aug 1, 2011. By Paul Lippe. (http://www.abajournal.com/legalrebels/article/what_aspects_of_legal_services_are_most_likely_to_get_standar dized/) xx Offshoring your lawyer: Outsourcing can cut your legal bills. Dec 16th 2010 | NEW YORK | from the print edition (http://www.economist.com/node/17733545). xxi Altman Weil, infra. P. ii. xxii Id., at p. 17. Other primary metrics reported were Number of lawyers per $B of revenue (47%), Ratio of fully loaded inside budget to outside counsel spend (35%), ratio of paralegals to lawyers (15%), and ratio of support staff to lawyers (11%). Note the last two measure a degree of leverage, though associates to lawyers is lacking. Law firms should likewise track these metrics as an operating measure and marketing data. See page 18 of the report for “quality and satisfaction”, financial, and other metrics that a firm might use (http://www.altmanweil.com/CLO2011/). xxiii Altman. P. 10. xxiv HBR Consulting Law Department Survey, 2011, Press Release on Outside versus Inside Legal Spend Survey, 2011. P. 1. (http://www.hbrconsulting.com/downloads/HLDS_2011_Press_%20Release_111007.pdf) Infra, supra. Note: this consulting firm has conducted surveys for the past 25 years. THe full survey is available at
  • 19. (http://hbrconsulting.com/lawdepartmentsurvey.html) at $3,500 to $4,500, depending on membership/participation status. xxv Altman Weil, p. 14. The amount of non-billable hours refers to the mean. Median rates for 2009, 2010, and 2011 are 7%, 10%, and 10%, respectively. xxvi Id., p. 15. xxvii Top Ten Tips for Leveraging Cutting-Edge Legal Research Technology to Control Legal Costs and Drive Client Value. ACC Website. May 5, 2011. Thomson Reuters. No. 6. (http://www.acc.com/legalresources/publications/topten/Technology-for-Controling-Costs.cfm). xxviii Law Firm Leaders Survey (Lexis), infra. xxix “What They Don’t Teach Law Students: Lawyering”. New York Times. David Segal. Nov. 19, 2011. (http://www.nytimes.com/2011/11/20/business/after-law-school-associates-learn-to-be- lawyers.html?_r=3&sq=law%20school&st=cse&adxnnl=1&scp=2&adxnnlx=1323234875- wBNqF6kxumkQivjI1himlg). xxx Corporate Legal Department Spend Increases 6% as Clients Boost In-House Capabilities Posted Oct 11, 2011. (http://www.abajournal.com/news/article/corporate_legal_spend_increases_6_as_clients_boost_in- house_capabilities/). Specifically, the survey found: “219 survey participants, of which 70 percent have revenues at or above the Fortune 500 level, the median fully-loaded inside hourly cost per lawyer is approximately 46% below the median average hourly rate of the company’s top three billing firms.” xxxi Altman Weil, p. 9. Comparing CLO surveys from 2009, 2010, and 2011. xxxii Altman, at 12. The average (mean) pressure for law firms to change their underlying value proposition for legal-services delivery from corporations in 2009, 2010, and 2011 were 5.5., 5.3, and 6.4 respectively. xxxiii “General Counsel: Vague About Value” Report. Nabarro. p. 17. (http://www.nabarro.com/downloads/gc_report_2011-2.pdf) xxxiv Altman Weil CLO Survey, supra. P. ii. xxxv Altman Weil CLO Survey, p. 17. xxxvi Offshoring your lawyer: Outsourcing can cut your legal bills. Dec 16th 2010 | NEW YORK | from the print edition (http://www.economist.com/node/17733545). xxxvii Altman weil, p. 8. Supra/infra. xxxviii Id., p. ii. xxxix 2011 Chief Legal Officer Survey. Altman Weil, p. i. (http://www.altmanweil.com/CLO2011/). xl A Toolkit For Change: How The Federal Civil Rules Advisory Committee Can Fix A Civil Justice System “In Serious Need Of Repair” Topic: Civil Justice Reform. By Daniel E. Troy, Senior Vice President and General Counsel at GlaxoSmithKline, and John O’Tuel, senior counsel at GlaxoSmithKline. Legal Backgrounder, May 21, 2010, 4 pages. Washingtion Legal Foundation.org. http://www.wlf.org/publishing/publication_detail.asp?id=2167. xli Ibid. xlii Maura R. Grossman & Gordon V. Cormack. Technology-Assisted Review in E-Discovery Can Be More Effective and More Efficient Than Exhaustive Manual Review. XVII RICH. J.L. & TECH. 11 (2011). http://jolt.richmond.edu/v17i3/article11.pdf. See Also: Six Sigma Solutions. Seyfarth Shaw, LLP. (http://www.pwc.com/en_US/us/general-counsel-forum/assets/gcf-chicago-082008.pdf). xliii “Using Technology to Cut Legal Costs”. The National Law Journal. April 19, 2007. (http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1176887059469). xliv (http://www.pangea3.com/thomson-reuters-acquires-pangea3.html). xlv (http://www.pangea3.com/pangea3-opens-major-us-location.html). xlvi See http://www.pangea3.com/legal-outsourcing-services.html). xlvii Offshoring your lawyer: Outsourcing can cut your legal bills. The Economist. Dec 16th 2010. (http://www.economist.com/node/17733545). xlviii Ibid. xlix Ibid. l http://www.abajournal.com/magazine/article/paradigm_shift/). li Ibid.
  • 20. lii See ABA Journal. “Make or Buy in the Age of the Free-Agent Lawyer.” Mike Evers. Oct 26, 2011. (advising on best practices for using and integrating contract/adjunct attorneys). liii Law Firm Leaders Survey 2010, ALM Media, LLC. Dec. 2010. Accessed via Lexis-Nexis. liv The Economist | Schumpeter: Angst for the educated. Sept. 3, 2011. (http://www.economist.com/node/21528226?frsc=dg%7Cb) lv “Perspectives on Finding Personal Legal Services: The results of a public opinion poll.” 2011. ABA. p. 17 http://www.in.gov/judiciary/probono/survey-report.pdf). lvi http://kowalskiandassociatesblog.com/2011/08/11/are-law-firms-going-to-be-replaced-by-internet-based- providers-of-legal-services/ lvii Kleiner Perkins invests in LegalZoom — IPO on the horizon? May 3, 2011. Anthony Ha. (http://venturebeat.com/2011/05/03/kleiner-perkins-legalzoom/). lviii http://kowalskiandassociatesblog.com/2011/08/11/are-law-firms-going-to-be-replaced-by-internet-based- providers-of-legal-services/ lix (http://www.forbes.com/sites/danielfisher/2011/08/11/google-jumps-into-online-law-business-with-rocket- lawyer/). lx See http://www.cybersettle.com/pub/home/about.aspx. lxi “Perspectives on Finding Personal Legal Services: The results of a public opinion poll.” 2011. ABA. pp. 19-20. (http://www.in.gov/judiciary/probono/survey-report.pdf). lxii Ibid. lxiii Id., p. 17. lxiv Id., p. 21. lxv Alternative law firms: Bargain briefs | The Economist. Aug. 13 2011. (http://www.economist.com/node/21525907). lxvi “Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011. (http://www.americanbar.org/newsletter/publications/youraba/201110article01.html). lxvii Perspectives on Finding Personal Legal Services: The results of a public opinion poll. 2011. ABA. p. 8. (http://www.in.gov/judiciary/probono/survey-report.pdf). lxviii Ibid. lxix Id., p. 9. lxx Id., 10. lxxi Altman Weil, at ii. lxxii (2011 ILTA/InsideLegal Technology Purchasing Survey. Page 1, 2. http://insidelegal.typepad.com/files/ILTAInsideLegalTechnologyPurchasingSurvey2011.pdf). lxxiii Ibid. lxxiv “Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011. (http://www.americanbar.org/newsletter/publications/youraba/201110article01.html). lxxv Id. p. 1. lxxvi “Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011. (http://www.americanbar.org/newsletter/publications/youraba/201110article01.html). lxxvii How to Integrate a Virtual Law Office. Findlaw.com. Stephanie Rabiner. November 3, 2011. (http://blogs.findlaw.com/technologist/2011/11/how-to-integrate-a-virtual-law-office.html). lxxviii See ABA Comm. on Ethics and Prof. Responsibility, Formal Op. 96-401 (1996); ABA Comm. on Ethics and Prof. Responsibility, Formal Op. 94-388 (1994). lxxix John P. Heinz. “When Law Firms Fail.” P. 77. lxxx John P. Heinz. “When Law Firms Fail.” P. 77. lxxxi Alternative Law Firms: Bargain briefs. (http://www.economist.com/node/21525907); see also “Nonconventional law practice makes inroads in D.C. market” - The Washington Post. Sept. 11, 2011. (http://www.washingtonpost.com/business/capitalbusiness/alternative-model-law-firm-makes-push-into- washington/2011/09/07/gIQAjLmqKK_story.html). lxxxii Alternative law firms: Bargain briefs | The Economist. Aug. 13, 2011. (http://www.economist.com/node/21525907). See also www.clearspire.com.
  • 21. lxxxiii ABA article at: http://www.abajournal.com/magazine/article/half_off_nevada_lawyer_bets_on_discount_model/#clarification).