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The Coming Invasion of the Body Snatchers: Are Offshore Law Firms Going to Invade the United States?


English: The United States Esperanto: Loko de ...

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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             December, 2011

 

They’re coming.

The coming months and the coming years will mark an increased invasion of foreign based law firms and other providers of legal services into the United States.  They will likely be coming from all corners of the world. And, they will be looking to snatch your business.

First, we have the acknowledged intention of UK based behemoth Herbert Smith (1,500 or so lawyers) to re-open a United States office, after an absence of two decades. The new office, expected to open within the year will be populated by both United States and foreign qualified lawyers. Jonathan Scott, a senior Herbert Smith lawyer announced that the new New York City office focused on dispute resolution, including international arbitration and investigations.  Following the Watergate era admonition to “follow the money,”   the premium fee yielding dispute resolution and internal investigation practices seem extremely likely areas for firms like Herbert Smith (and AmLaw 100 firms) to continue to exploit.  The issue, of course, is that as the supply of high end law firms having the capacity to deliver quality dispute resolution work and internal investigations on a global scale and the competition for this work  continues to grow, price competition will ineluctably come in to play.

The British invasion is not new, nor will it end soon. British Magic Circle firms have invaded and have taken an increasingly dominant role in the US market for almost two decades.  London, which seems hell bent on being the Imperial home for the lawyers to the world, has already sent formidable firms here, including Clifford Chance, Linklaters, Allen & Overy, Freshfield, and Lovell Hogan. The last British invasion on these shores began with the Beatles in 1963 and last I heard, Mick Jagger and Paul McCartney are still playing to sell out audiences. The point is that, based on my count, fewer than 20 of the UK’s 100 largest law firms have taken to the US stage at this writing.

As the market in the Euro Zone continues to stagnate, law firms in that market will likely look to the American market as new sources for revenue. One recent example is Ireland’s A&L Goodbody, which long had a single lawyer outpost in New York, announced just yesterday ambitious plans to open a Silicon valley branch and reinvigorate its New York operations.   The Germans may not be far behind.

From the other side of the globe, the real game changer may well be the announced merger of   China’s King & Wood and Australia’s Mallesons Stephen Jaques. As announced in The Asian Lawyer , “[t]he combined firm will number some 1,800 lawyers, and is positioning itself clearly as an alternative in the region to the large U.S. and U.K. firms that have traditionally dominated major cross-border deals.”  It matters little if the combined entity will soon open a US office (although my raw guess is that they eventually will), the combined firm will be competing directly with both AmLaw 100 and Golden Circle firms for core cross border work.

As I previously observed,  “the profession must be mindful of the Chinese business model, which seems to be the Chinese asking foreigners to come to China and perform a service or build a product, followed by the Chinese saying “let me see how you do that.” That in turn is followed by “teach us how to do that,” and ultimately “okay, we now know how to do that on our own, so you can leave and we will do so on our own.’”

The West has not only taught Chinese law firms how to practice law in the Western style, but, the West has also taught the Chinese to operate globally and on the global expanse. Indeed, the two largest law firms in China, Dacheng and Yingke, are preparing to open bases in London. The United States will not be far behind.   Broad & Bright, one of China’s leading law firms with 60 lawyers,  is set on moving to the West.  It is now in merger talks with 2,900 lawyer Clifford Chance.    Since you have by now read the Broad & Bright web site through the link above, you know that Broad & Bright has acted as counsel in China for some of the world’s largest corporations and on its surface, does not need Clifford Chance to funnel more work to its offices. Broad & Bright is one of those rare firms that can easily be a net exporter of legal services. Thus, should the Clifford Chance talks fail, it would not come as much of a surprise that Broad & Bright (or a similar sized and placed Chinese law firm will simply say “okay, we now know how to do this on our own and we don’t need a Western law firm to open our own international law firm.”

LPO’s, sometimes called “non-traditional law firms”  have watched their gross revenues increase almost ten-fold over the last five years, to an estimated $2,500,000,000 in 2012 with some estimating a doubling of that number by 2015.  As I have said in the past, it is a major mistake to simply think of LPO’s as limited resource providers of ancillary services to law firms and corporate legal departments. Rather, they are alternate providers of legal services, which can provide a full range of legal services to United States consumers of legal services at an enormous price advantage. The only areas in which these entities are precluded from competing directly with United States law firms are appearing in judicial proceedings, signing legal opinion letters or otherwise directly providing advice to a corporation on American law.  A number of LPO’s, particularly on the Indian sub-continent, have affiliations of one form or another with Indian law firms.

The thin barrier preventing LPO’s from grabbing even more slices of the legal spend pie will easily evaporate.   There are a variety of different means for those affiliates to establish or acquire a United States law firm.  Thus, an LPO could easily establish a very real law firm branch office in the United States, populated by US duly qualified lawyers which in term could make eviscerate the thin boundary which would give these offshore entities the ability to offer the full array of legal services – including appearing in judicial proceedings,  signing legal opinions and direct counseling,

LPO’s, owned by offshore entities and owned by either US investors or by US law firms are sprouting United States branch offices like weeds. Those US branch offices already have the infrastructure in place to function as full service law firms, often with technology already in place that is complete state of the art. And there are many a small or medium sized law firm that would presumably welcome the capital and assured revenue stream from a successful well capitalized offshore LPO to buttress its own sagging fortunes.

In 2011, United States law firms met the challenges of reduced legal spends and new competition through reducing headcounts,  merging to create more critical mass and consolidating back office and support funtions, or by shutting their doors. Professor Steve Harper avers that in 2011 there were a total of 43 law firm mergers. Those shutting their doors, often with disastrous consequence to the firm’s individual partners, include the splashy Howrey implosion, Florida based Yoss, LLP as well as Ruden McCloskey (which didn’t quite go down without a fight) , New York’s Snow Becker and Krause, Atlanta based Shapiro Fussell Wedge & Martin, Los Angeles based Silver & Freedman, Denver based Isaacson Rosenbaum,  foreclosure mills Steven Baum and David Stern and150 lawyer Austin based Clark Thomas & Winters.  And there are more than a few commentators who suggest that  Arnold & Porter’s acquisition of the remnants of Los Angeles based Howard Rice and Bryan Cave’s acquisition of Denver based rapidly shrinking Robert Holme & Owen largely staved off the closures of the acquired firms.  A similar suggestion arguably applies to McKenna long’s “acquisition” of Luce Forward, with the former plainly planning on doing a material house cleaning of the latter.

Well then, Ollie, that’s a fine mess we’re in.

Despite admonitions concerning the imprudence of predicting the future by such luminaries as John Kenneth Gailbraith (“the only purpose served in making predictions about the future is to lend credibility to astrology”) and Yogi Berra (“the future is hard to predict because it hasn’t happened yet”), I tremulously suggest that we are certainly likely to see the following over the coming months:

  • Continued merging of middle market law firms to create larger regional or super regional law firms.
  • Further reducing headcount and support staff.
  • Acquisitions by foreign law firms or alternative providers of domestic US based law firms.
  • Some US law firms meeting the invasion of foreign law firms and alternative legal service providers by counter-attacks, landing branches on foreign shores, despite the known risks attendant to that approach.
  • Enhanced collaboration, both vertically between the law firm and its important institutional clients, as well as horizontally with alternative providers of legal services as well as with law firms to which the client may have downsourced work to.
  • Increased price competition for premium work as well as increased commoditization of other lines of work.

We are in for some challenging times.  Most well managed law firms will continue to survive and thrive. Some law firms will inevitably appear on lists published next December of law firms that sadly didn’t make it.

© Jerome Kowalski, December, 2011.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

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Much Ado About Nothing: The ABA’s Ideas About Admitting Nonlawyers to Law Firm Partnerships; “Alternative Law Practice Structures”


Much Ado About Nothing: The ABA’s Ideas About Admitting Nonlawyers to Law Firm Partnerships; “Alternative Law Practice Structures”.

LPO’s Have Become Legal Project Outplacement Firms: They Are Outplacing Legal Work from Traditional Law Firms


हिन्दी: ताजमहल English: Taj Mahal, Agra, India...

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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             October, 2011

 

 The guild rules designed to govern the practice of law and create barriers to entry by unlicensed professionals have been completely trammeled.

As the legal spend continues to decline, competition for the ever diminishing budgets for outside counsel continues to fiercely escalate.  Today, we again address the stiff competition coming from offshore legal project outsourcing.  Frankly, United States law firms, the American Bar Association and regulatory agencies governing bar admissions and the unauthorized practice of law seem completely clueless as to what is actually happening in the marketplace.

The LPO industry is a growing behemoth.  Still barely in its infancy, LPO’s will likely reach revenues of $2,500,000.000 next year.  That may seem a pittance compared to he $180,000,000,000 revenues derived by law firms, but revenues for LPO’s continue to grow exponentially, while law firm revenues remain largely flat.

LPO’s initially entered the market by focusing on the processing end of legal work.  As Jeff Carr, general counsel of FMC Technologies, has frequently noted, legal work falls into one of four buckets:  Processing, counseling, advocacy and content.  LPO’s got their noses into the tent by offering to handle the processing component arguing, quite correctly, that US law firms were ill equipped to handle large volume processing efficiently, while LPO’s, staffed by low paid foreign lawyers and aided by state of the art technology, could perform these services at a small fraction of the price of large law firms, allowing these law firms to focus on the other more lucrative buckets, for which these firms were far better suited.

At the outset, LPO’s marketed their services to law firms, offering to serve as their subcontractors. Law firms, in turn, often simply “marked up” the fees charged by LPO’s, on the rubric that the firms were assuming some level of supervision and risk and, well, it was a pretty easy way to make a couple of extra bucks. In short order, sophisticated clients, dealing with sophisticated LPO’s,  entered into direct contracts with LPO’s, having general counsel use the services of LPO’s directly.  Corporations, the ultimate consumers of LPO services, used their economic prowess to extract favorable pricing from LPO’s and often then directed their outside law firms to utilize the services of LPO’s with which the corporate clients had favorable pricing arrangements.  These LPO’s were essentially “designated subcontractors.”

LPO’s are well capitalized and are investor owned. These two factors provide LPO’s with enormous advantages over law firms.  Their technology tends to be light years ahead of that typically  used by traditional law firms.  They are not bound by much of the expensive baggage weighing down traditional law firms, like expensive midtown office space or paying off outmoded technology  cquired years ago.  I have had the privilege of meeting and working with some of the world’s best LPO’s.  I’ve uniformly found the leaders of these LPO’s to be exceptionally bright and astute business leaders.

But, even as the ABA Ethics 20/20 Commission dawdles with merely tinkering Model Rule 1.1 of the Model Rules of Professional Conduct by making some minor revisions and expanding the Rule’s comments to provide the guild’s belated imprimatur to the LPO industry, the facts on the ground have created new realities.  Perhaps only an idealist might believe that the Model Rules are designed to do anything more than create artificial barriers to entry.  Any realist recognizes that free market forces rendered the attempt to be of no moment.

The fact is that LPO’s are working hard to get in to each of Jeff Carr’s four buckets. At a recent Global LPO Conference, much of the discussion by LPO leaders was about inroads they were making in these buckets.  One LPO leader chaired a panel in which he encouraged the industry to re-brand itself, since calling the industry Legal Process Outsourcers created the misimpression
that it was focused only on processing.  I, for one, view the industry as simply providers of legal services.  Period.

Another LPO leader boasted about serving as a processing outsourcer on multi-district related litigation in which the lead counsel and the corporate general counsel concluded that the time was ripe to file some 61 motions for summary judgment in related cases across the country.  Lead counsel estimated the cost of preparing these motions to be in the area of $1,500,000.   The LPO offered to prepare these motions for approximately $350,000.  The motions were in fact ultimately prepared in India and revised and edited by lead counsel; the client saved nearly $1,000,000.  Welcome to the advocacy bucket.

These alternate providers of legal services have for long been preparing routine corporate, real estate and financing documents.  Welcome to the content bucket.

And these providers of legal services have been providing basic and sometimes even advanced legal research to support both general counsel and outside counsel in their counseling functions.

The fact is that the only areas in which these providers of legal services are precluded from active participation are in connection with actual court appearances and signing legal opinions. The workaround here is rather obvious and likely inevitable.  All that an LPO needs to do is to establish a U.S. law firm, populated by duly admitted American lawyers, which will own the equity of the law firm (obviously to circumvent the bar against non-lawyer ownership of law firms), and have these captive law firms contract with the LPO to have the latter handle all of the firm’s “processing” requirements – inclusive of every one of the four items in the bucket, save for court appearances and the signing of legal opinions. Control over the nominal U.S. law firm would be maintained by the LPO, which will have the captive law firm sign a promissory note for the funds it has advanced to capitalize the firm. (After all it has sometimes been said, not completely in jest, that the largest owner of law firms is Citibank, the premiere lender to law firms, which has some 650 law firm clients and 38,000 lawyer clients).

My friend and professional colleague, Bruce MacEwen, writing as Adam Smith, Esq., recently noted that the LPO’s are “smart, stocked with top talent, well-funded, strategically astute, and not the least bit afraid to break some china.”   My only disagreement with Bruce is that these folks won’t be content to simply break some china.  I believe they are planning on walking away with the china closet.

At the end of the day, traditional law firms will need to consider developing their own LPO, aligning with an existing LPO or, perhaps finding some different lines of work.

One final cautionary important postscript:  LPO’s typically carry about $5,000,000 in E&O insurance. In a world where we already have one claim pending against a prominent law firm  redicated on errors allegedly committed by its LPO subcontractor in connection with a matter that may involve some $380,000,000, Quite clearly, LPO’s need to materially beef up their coverage, law firms and general counsel need to examine any LPO’s coverage and law traditional law firms should use their own expanded insurance coverage as an important marketing tool as they will increasingly compete toe to toe with these alternate providers of legal services.

In all events, as Paul Lippe of Legalonramp.com so cogently observed, non-traditional law firms may well eat the lunches of many traditional law firms and these traditional law firms must now take notice and action.

©
Jerome Kowalski, October, 2011.  All Rights Reserved.

Citibank’s 2011 Mid-Year Survey of Law Firms: Instead of Giving Its Customers New Toasters, Citi is Telling Many of its Law Firm Customers that They May Become Toast If They’re Not Careful


                                                           

                                                                                                      Jerome Kowalski

                                                                                                     Kowalski & Associates

                                                                                                      September, 2011

 

My, my, how things have changed.  When I was a kid, banks would induce prospective customers to open a new account by giving away a toaster to new customers. Today, Citibank is warning some of its law firm customers that they may be toast, or at least the may be seriously singed in the current economic climate.

I refer, of course, to the 2011 mid-year report by Citibank on the economic conditions of the profession.  Citibank’s law firm lending group, led by Dan DePietro, is uniquely suited to provide an in depth analysis of  the financial conditions of the profession, since it serves some 600 law firms and 58,000 lawyers in the United States and the UK, by far the leading lender to the profession. We start with the good news:  Says Citi “For the first half of 2011, revenue was up 3.7 percent across the industry. The increase was driven by strong inventory levels coming into 2011, increased rates, a 1.8 percent growth in demand and likely improvement in realization.”  The bad news:  Expenses are growing at a faster rate and the rate of increase in expenses is outstripping revenue growth.

As Citibank noted, one  portion of expense growth is attributable to those law firms which engaged in what many see as the  silliness of associate “Spring bonuses,” an artifice designed to stem the metastasis of associate attrition.   That carcinoma is far better treated by taking less expensive and more productive steps to assure associate job satisfaction and otherwise improving the quality of life for associates. Not a single lawyer left his or her firm because it wasn’t providing Spring bonuses.  Yet scores left within nanoseconds after  their Spring bonus check cleared.  Simply put, Spring bonuses do not get associates to stay a little bit longer.

Citi also reported that AmLaw 50 firms reported that realizations were beginning to return to pre-recessionary times.  Before we toss out the confetti, bear in mind that this refers only to AmLaw 50 firms; moreover, it does not address the real concern about a still stagnant economy, the continued volatility in the capital markets, the continuing fear of a double dip recession and the coming tsunami should the current turmoil in the Euro Zone erupt into utter chaos.  Add to those unknown factors, Citi notes that “headcount was flat,” and expenses continue to increase at a rate of 4.7%, which obviously exceeds the rate of revenue increase.  Citi put it to us straight: “the economy appears to be in for a protracted period of slow growth.”  Frankly, in light of the light of Citi’s
litany of gloomy statistics, even this mild bit of optimism strikes the informed reader as being unwarranted exuberance, unsupportable by economic realities.

Inexplicably, Citibank viewed it as a positive sign that many firms increased their “inventory” be retaining a larger portion of WIP (that is, for the uninitiated,  recorded but unbilled “work in progress”).  In reality, stale WIP may be theoretically billable, but rarely collectible.

There are other significant factors in the marketplace, not specifically addressed by Citibank which must further dampen any enthusiasm:  First, law firms have too long delayed making needed investments in infrastructure.  The need to make these investments is becoming increasingly crucial, indeed vital,  as alternate vendors of legal services continue to gain market share.  One of the only ways to meet this competition is through acquisition of state of the art technology.   Failure to meet this challenge, these alternate vendors will eat many law firms’ lunch within five years.

Citibank also foresees a period of significantly increased lateral movement, as  organic growth becomes more difficult to achieve, productive performers will jump ship from underperforming firms, and underperformers will be eased off the gangplanks.  I’m afraid Citi is missing part of the boat here in that it does not address the fact that taking on laterals requires substantial investment in ramp up and other expenses, while reduction in headcounts will reduce revenues (although there is always a short term illusory positive blip in ramp down).  In essence, Citibank is reporting that we may be in for a period of cannibalism as firms eat each other’s flesh.

The Citibank is silent with respect to one important feature of great interest to law firms; that is, how open will Citibank make its own coffers to law firms in a  market it characterizes as one “of
protracted slow growth,”  particularly as Citibank is likely to take a some form of haircut in the Howrey bankruptcy.

My own sense is that Citibank will undertake a greater degree of vigilance in reviewing its own existing credits and in extending new credits.  And, as it did in Howrey, where Citi loses confidence in the credibility of its borrowers, it will more quickly pull the plug.

Okay, so what’s the takeaway?

Here’s my views:

1.   In many respects Citibank is functioning very much like a typical consultant.  By that, I refer to the classical definition of a consultant:  Somebody who takes off your watch and then tells you what time it is.  There is little that Citibank has told us that we didn’t already know, but when somebody smart tells you something that should be obvious, the listener tends to stand up and pay attention.

2.  As we approach the fourth quarter, it is imperative for management to start planning for the coming storms and share with the partnership that management has taken a look at the sonar and  advise the partnership how the firm proposes to weather the inevitable storms.  The cruise ships of old always had two captains:  One who appeared in dress whites and instilled  confidence in the passengers; the second was a seasoned and wizened sailor who worked tirelessly at the helm to bring the ship to port. Law firm partners need to have the confidence that its ship of state has both on board and the captains need to enjoy the confidence of all stakeholders.

3.  In days of yore, pressure on profits resulted in simply billing existing clients more hours. These days are gone. General counsel, aided by purchasing agents and corporate project
managers are more likely than ever to put an early stop to inflated hours.  They also have alternate providers of legal services whispering into their ears, “we can do this better, quicker and cheaper.” Firms need to figure out how to do so as well.  This may require the firm to form a strategic partnership with an alternative provider of legal services or create its own subsidiary or affiliate. In all events, despite some great advances in technology, you still can’t produce a product at cost of $100 and sell it at $80 and then make up the difference in volume.

4.  Firms cannot delay infrastructure investment any longer.  That may require biting the bullet and investing firm profits in essential infrastructure and simply swallowing the dubious ignominy of a short term drop in PPP. If you take this route, issue a press release early on announcing that the firm has such a high degree of confidence in its own future, it is making a substantial investment in its  own future, foregoing short term PPP in favor of  long term growth and viability. Alternatively, private equity firms are prepared to invest in a state of the art legal processing law firm affiliate, but will obviously be a significant equity participant in the profits of that venture. The paradox of this essential new technological infrastructure is that it will result in the delivery of legal services at costs lower than currently prevail in BigLaw, but is made essential by the mounting competition of alternative providers of legal services.   The ethical rules precluding non lawyer ownership of law firms play no role here. (Professor Larry Ribstein of the University of Illinois School of Law very recently conducted a compelling online symposium on the de facto and de jure deregulation of the practice of law).  Indeed, Clearspire, a breathtaking new model law firm is built entirely a new model, owned in essence by non-lawyers. The result is that Clearspire offers an array of quality BigLaw legal services by BigLaw trained lawyers, primarily at fixed fees and bills at a fraction of BigLaw rates. An important warning here:  Do  not look to private equity as the safety net that will allow BigLaw to weather the coming storm.

5.   We know what many of the unknowns are.  Gaze carefully over the horizon and be mindful of oncoming unknown unknowns.  As Captain Smith of the Titanic said “We do not care  anything for the  heaviest storms in these big ships. It is fog that we fear. The big icebergs that drift into warmer water melt much more rapidly under water than on the surface, and sometimes a sharp, low reef  xtending two or three hundred feet beneath the sea is formed. If a vessel should run on one of these reefs half her bottom might be torn away.”  We may have survived the big storms, but if we permit the fog to cloud our vision, we might sink.

© Jerome Kowalski, September, 2011.  All rights reserved.

 

Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous speaker) on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

The Clock is Ticking: In Five Years, Traditional Law Firms May be Extinct. What Are You Doing to Avoid Being an Artifact?


English: Street clock in Globe, Arizona, USA F...

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                                                                                                Jerome Kowalski

                                                                                                Kowalski & Associates

                                                                                                September, 2011

We recently warned that traditional law firms were in danger of being replaced by Internet based providers of legal services, unregulated entities not owned or even having lawyers perform the legal services. We also addressed the issue of unregulated LPO’s, similarly not owned by lawyers and often heavily populated by lawyers not even being educated at an American law school and certainly not being admitted to the bar in the United States.

On the heel of those reports, Paul Lippe, founder and CEO of www.legalonramp.com wrote a compelling piece in the ABA Journal entitled “The Rise of the Non-Firm Firms.”

Paul posits, quite correctly I would say, that entities that he calls “Non Firm Firms”  (“NFF’s”),  namely the group of vendors that compete with traditional law firms for providing legal  ervices, have five distinct advantages over law firms, with which traditional law firms (“TF”S”) cannot compete.

First, Paul notes that the “non firm firms” “do a few things and only those things: typically e-discovery, due diligence, contract review and management, research, and other high-volume  ctivities.”  They are pointedly not full service law firms.  They recognize, as Jeff Carr the voluble distinguished general counsel at FMC has long noted, that legal services can be into four buckets: counseling, advocacy, process and content. Paul goes on to note, “Counseling and advocacy work is the true province of lawyers and requires specialized expertise and judgment; process and content work is generally repetitive, information processing work. Because the process and content work has been “bundled” with the TF’s bread-and-butter advocacy and counseling work, it has been delivered and charged as if it were high-value work. But it’s not. So clients will start to unbundle some of the process and content work to the NFFs, and it is likely that large companies will pick one NFF to work with directly, and then tell all their TFs (or at least their TFs who haven’t figured out how to work with NFFs) to work with that designated NFF.”

Next, Paul notes that the NFF’s are designed from the ground up, engineered with a view towards providing efficient services, not hidebound by any pre-existing norms, giving them enormous pricing advantages. Their owners are investors who seek out a profit from their investment, not from their labors, as is the case in the TF. Paul goes on to note that since these NFF’s are the new kids on the block, they are far more receptive to feedback from their clients. Then, assuming that the market for legal services is a total of $50,000,000,000 annually, Paul estimates that the NFF’s will grab 10% of that market by 2016 (current reports suggest that NFF’s will gross $2.5 Billion by next year, up from $500 Million only two years ago).  Paul suggests that for every dollar the NFF’s grab, TF’s will lose between $1.50 and $2.00.

Paul’s solid advice to TF’s who want to survive is:

A. Do a rigorous inventory of your process and content Work. Don’t just sit around and persuade yourself that everything you do is advocacy and counseling: Do a force-ranking of your time from five largest recent matters and characterize at least 25 percent as process and 15 percent as content. Then look at that work and ask yourself the Jack Welch question: If you were starting a new business to do that better, faster and cheaper, how would you do it?

B. Study the methods of the NFFs. Go to websites for Integreon, Axiom and NovusLaw and others and really understand what they’re saying. Don’t dismiss it as “jargon” or “buzzwords.”  (What do you think nonlawyers think of words like indemnification or disclosure? All specialized language sounds jargony to the nonspecialist.)

C. Develop an alliance with an NFF. Pick one and do a project with that firm.

D. Ask your clients for systematic feedback, and discuss with them how to do process work more efficiently.

Adding to this discourse, the eminent Sir Richard Susskind just announced that there is a five year expiration stamp on traditional law firms.  Sir Richard said that by 2016, both law firms and corporate general counsel  “will embrace legal process outsourcing, off-shoring, de-lawyering and agency lawyers.”   Susskind observed, “the endgame will not be about labour [he is British, you know] arbitrage: ‘I predict that the third phase, from 2016 onwards, will involve great uptake of information technology across the profession, such as automated production of documents and intelligent e-discovery systems – these are applications that will be staggeringly less costly than even the lowest-paid lawyers.”

There is truly not much air that separates Lippe’s and Susskind’s prognostications, views and recommendations.

Professor Susskind highlighted four main strategies GCs could embrace – driving down law firms’ prices, reshaping the in-house department, combining the two, or starting with a blank sheet of paper and undertaking a comprehensive legal needs analysis for the business. “Once these requirements have been identified, the task then is, dispassionately, to identify how best to resource the full set of needs, drawing not just on conventional lawyers but on the new legal providers too.”

Describing this last option as the most ambitious, he said it will “deliver the most cost-effective and responsive legal services for large businesses in the future”. It ties in with his vision of “legal process analysis” and multi-sourcing, where the legal requirements of an individual matter or a whole business are analysed to determine the most efficient way of sourcing each element of it.”

And that, as Sir Richard previously observed will be the end of traditional  law firms.

Few have the ability to start with the blank piece of paper and focus on “faster, better, cheaper,”  a daunting challenge for traditional law firms. Some, such as www.Clearspire.com and www.rimonlaw.com   have started on that path and their models seem to be gaining impressive traction.

The point is that the clock is ticking. It took over a century for the traditional law firm to evolve. Susskind and Lippe are warning us that we are five years away from extinction.

What will you be doing to avoid being the T-Rex in the museum display case?

© Jerome Kowalski, September, 2011.  All rights reserved.

What’s Sauce for the Goose is Sauce for the Gander: An Insider’s View of Electronic Document Discovery and the Emerging Demand for AFA’s in EDD and Enhanced Technologies


Compliance with electronic document discovery has now become the 8000 pound gorilla in the room. It is not uncommon for the cost of compliance with EDD to approach 40% of the budget for complex litigation.

EDD has also spawned an entire new industry, estimated to reach $1,500,000,000 by 2014, with law firms and independent vendors vying for a piece of the pie.  At the same time, with clients continuing to clamp down on the legal spend,  independent vendors are competing with law firms and are offering alternative fee arrangements, while simultaneously deploying enhanced technology in order to meet market demands.

Accordingly, we offer a guest post by Derek Shewmon of Campbell Solutions, an emerging leader in EDD.

  

The Future of eDD: A Vendor’s Perspective

 

Derek Shewmon

Campbell Solutions, LLC

August, 2011

 

America is currently in an interesting place.  The economy isn’t at its pre-recessionary level, our political system is beyond dysfunctional, global forces are legitimately challenging our competitive advantage and general public malaise is abundant.  However, one thing has remained constant despite all of the macroeconomic negativity: electronic discovery has not slowed down.  According to Clearwell’s “Gartner 2011 Magic Quadrant for E-Discovery Software” report that was released in May 2011, the ediscovery market is expected to maintain a compound annual growth rate (CAGR)
of 14% over the next five years.  That growth rate would bring the total market size to an impressive $1,500,000,000 by 2014.

$1.5 billion is a lot of cheddar.  The rapid growth rate experienced over the last decade has brought a whole new list of players into the field, some from the technological depths of Silicon Valley.
With venture capital-backed titans lined up to gorge on the growth of this maturing industry, you would think that the future would be happy times for all ediscovery and digital forensics vendors.  However,  the future for a lot of vendors isn’t so bright. There is a cold reality in the background of all of the mayhem that is primarily driven by the following factors:  fee pressure, consolidation and
technological innovation.

Fee Pressure:

eDiscovery and digital forensics vendors have a symbiotic relationship with law firms.  Thanks to the existence of Shark Week, we can confidently use the simile of ediscovery vendors being like remoras.  Ultimately, ediscovery vendors are only as healthy as our hosts (law firms), and our hosts have been under remarkable pressure over the past couple of years from a number of threats.  As Kowalski & Associates Blog has pointed out in prior posts, law firms are faced with threats from, among other things, Internet based legal providers, legal project outsourcing companies and alternative
fee arrangements
.

All of these factors, plus our current economic state, have placed considerable pressure on law firms to appease client cost demands.  These cost pressures naturally have a trickle-down effect on the vendors who serve the law firms.  Currently, the de facto pricing model for most ediscovery vendors is to charge by the data processed while digital forensics firms employ an hourly fee model.
There are defensible reasons for employing these models such as the unpredictable nature of ediscovery cases as well as maintaining an unbiased forensic expert.  However, unlike the go-go days of 2005, today’s marketplace is seeing increasing pressure from vendors to adapt to new pricing models with inherent transparency.  Our firm, Campbell Solutions, has discussed the increasing necessity of being open to alternative fee arrangements in numerous posts such as “Soapbox Out: Alternative Fee Arrangements” and “eDiscovery Paradigm Shift on the Horizon.”

The evolution of ediscovery has brought a lot of service providers out of the woodwork to capitalize on the explosive demand in the industry.  However, the laws of supply and demand are currently not indicative of a mature industry.  Costs have continued to escalate while more suppliers have rushed into the marketplace. Eventually, there will have to be a pricing correction that will result
in either lower hourly/data fees or a new pricing model.  Either scenario will surely create a massive ripple effect on the firms who have built an entire infrastructure around the concept of juicy hourly/data fees.  A solid overview of the proliferation of alternative fee arrangements is shown in a Christopher Guly article entitled, “Billable Hours Out, Alternative Fee Arrangements In.”  If and when a pricing correction occurs, the firms with bloated fixed cost structures will be forced to shut their doors or fall victim to the appetite of the behemoth competitors that are looking for the next kill.

 Consolidation:

As we stated above, the growth rate of the ediscovery marketplace was like a giant dinner bell to many corporations.  Some giants such as Iron Mountain and PWC carved out new divisions to  ompensate for the smorgasbord of ediscovery clients.  Other giants used the technological backbone of the ediscovery field to launch venture capital backed start-ups out of Silicon Valley.  The
large amount of resources that these companies possessed quickly helped launch its growth into the stratosphere of eDD.

The old adage goes, “a big dog’s gotta eat”.  This maxim held true for the world of ediscovery as these giants quickly turned their attention to growing quickly through inorganic acquisitions.  As we have stated in a post entitled, “Where Have All the Cowboys Gone?”, the ediscovery industry has felt like the wild west over the past couple of years.  Just like in the wild west, we had our California gold rush through a slew of favorable court decisions, an immature marketplace and a boom in ESI.  Like any gold rush, anyone with a pan showed up to cash in while the pickings were good.   The smaller shops who carved out a nice niche were soon overshadowed by larger competitors who were looking to grow.  Instead of solely relying on the costly strategy of organic growth, these giants also focused resources on inorganic growth, ie. acquisitions.  In the past couple of years, our industry has seen many big acquisitions such as HP/Autonomy, Symantec/Clearwell, AccessData/Summation
and Navigant/Ignited Discovery.

 Unlike other industries such as telecommunications and airlines, ediscovery doesn’t have high barriers to entry.  This means that consolidation within the industry isn’t necessarily a bad thing because there will always be room for nimble players who can effectively tweak the current business practices.  However, as you can imagine, consolidations that create superpowers could have an adverse impact on firms who cannot effectively cope.  Firms who rely on commoditized practices, broad focuses and are built around high hourly pricing models won’t be able to compete with the resources that these super-companies possess.  Much like how law firms are currently under attack from nimble competitors such as LegalZoom.com and Clearspire, ediscovery vendors are under attack from consolidation.  The firms who can effectively carve out a niche and demonstrate value should be able to survive.  Those who are set in the ways of the past will ultimately get smacked aside by the Invisible Hand.

 Technological Innovation:

Technological innovation has changed the landscape in electronic discovery over the past decade.  Now the industry is chock-full of lightning fast programs that have reduced the time and cost previously associated with electronic discovery and digital forensics.  The technological revolution that the ediscovery arena has seen over the past couple of years has been a godsend from a cost and efficiency perspective. However, there are two potential drawbacks that are developing from the rapid evolution of ediscovery software.  First, vendors are becoming over reliant on the software and entrusting complex litigation material to IT novices.  While this strategy may work fine 9 out of 10 times, the 10th time could be the one that leads to spoliation charges or other adverse sanctions.  The
bottom line is that a hammer is only as effective as the person wielding the tool.  In litigation scenarios, technology has not developed to a level that warrants human replacement.

Second, like all businesses, the technological evolution in ediscovery has left a handful of laggards milling around the industry.  These vendors haven’t embraced the efficiency of new technology and prefer to operate under the methods that worked in 2005.  From a forensics perspective, these are the vendors who will always advice on performing a forensic image (bit-by-bit copy) of a device under any circumstances.  While these vendors can be saluted for its resolve, the bottom line is that those vendors who do not adapt will be eliminated in the coming years.

Conclusion:

Overall, the electronic data discovery industry has seen a lot of changes over the past couple of years.  Despite the changes in the landscape, ediscovery will continue to grow for two primary reasons:  (i) litigation is a staple in this society and (ii) digital information will continue to experience exponential growth from new innovations.  However, the vendor landscape will inevitably start to mature along with the industry due to pricing pressure, consolidation and technology.  These perceived threats are not unique to the ediscovery industry, and every business has faced similar threats since Adam Smith put pen to paper.  Our gut tells us that the industry will eventually mature into a land of giants surrounded by sleeker, small competitors that excel in specific practices of functions along the EDRM model.

Survival among this maturing landscape follows the same prescription that any industry has followed, including law firms:  specialization and adaptability.  As a boutique digital forensics and  discovery shop, we are acutely aware of the landscape that is in front of us, and we would advise vendors who do not have the resources of a Kroll, Clearwell or AccessData to focus on the following competitive advantages: specialization and delivering value.  We are a specialized digital forensics and ediscovery firm that can deliver more value to our clients than programmable software run by amateur IT employees at a larger firm.  Furthermore, our vast experience in white-collar and securities litigation cases allows us to carve out a defensible niche among the “jack of all trade” vendors in the marketplace.

At the end of the day, the struggles that plague law firms are no different from those that ediscovery vendors face.  Our worlds are rapidly changing and are under pressure from new entrants, better technology and impatient clients.  We must recognize that it is up to us to always strive to deliver higher quality while being outrageously adaptable to our changing environment.  Then, and only then, will we be able to survive the ecological extinction that is facing our peers.

Derek Shewmon is a principal of Campbell Solutions, LLC (www.campbellsolutions.com ) and can be reached at  derek.shewmon@campbellsolutions.com .

The views expressed herein are solely those of the author.

Are Law Firms Going to be Replaced By Internet Based Providers of Legal Services?


Are Law Firms Going to be Replaced By Internet Based Providers of Legal Services?.

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