Northwestern Law School's "Accelerated JD" Program: It's Not About the Two Years

Late last week Northwestern University Law School in Chicago announced an "Accelerated JD" program, compressing the same 86 credit hours earned by traditional three-year JD students over the course of six semesters into five semesters over two years.  The compression of credits results from a combination of starting in the summer, taking extra courses each semester, and picking up credits through mini-courses between semesters.  (Students will start classes in May and graduate in May, two years on.)

But the real story has very little to do with compressing three years into two:  It has to do with a fundamental re-thinking of what a legal education entails.  The other components of the accelerated program include:

• A limit of 40 students in the first class, rising to 65 in subsequent years;
• A requirement that each individual applicant be interviewed;
• A requirement that they have at least two years of "substantive work experience" under their belts (sounds as though backpacking across Europe and Asia on your trust fund developing your "foreign language and cross-cultural sensitivity skills" wouldn't cut it); and
• Most importantly, the inclusion of two new and one existing course as new requirements.    As the NWU press release puts it:  "The two new courses would be devoted to quantitative analysis (accounting, finance and statistics) and the dynamics of legal services behavior (involving social networks, teamwork, leadership and project management); the other course focuses on strategic decision-making (improving students’ ability to understand the strategies pursued by their clients and organizations)."  The point of this, to paraphrase Northwestern Law's Dean, David Van Zandt, is to help prepare students for the way lawyers actually work today.

No sooner was it announced than it was denounced.  Perhaps this shouldn't be surprising, as Van Zandt noted with a slight air of resignation:

"Van Zandt said he expected some criticism. "Any time you innovate, you are always going to have people who pooh-pooh it or look down their nose," he said. "Law and legal education is tremendously conservative.""

What type of denunciation?

"University of Chicago professor and former dean Geoffrey Stone called the two-year program "irresponsible" and said it risked producing inferior lawyers who haven't had time to develop intellectual and analytical skills.

"My sense is that compressing the educational process is likely to seriously derogate from the quality," he said. "What is lost is likely to be much more than anything that is gained by hustling the students through more quickly."

And this:

"University of Illinois associate dean Lawrence Solum said students in a two-year program would have less time to explore career opportunities during the summer.

"Law school is already an extraordinarily intense experience and my gut instinct is that cramming it into fewer weeks and months is not likely to improve the quality of the education," he said. "If anything, law students already are doing too much in too few hours."

And—quelle surprise!—the commentariat on Above the Law and the WSJ Law Blog were, admittedly with exceptions, rambunctiously dismissive.  For example:

• Let's get this straight. The new two-year program would ...

  1. Cost the same;
  2. Allow no breathers between semesters; and
  3. Make it harder to find a full-time job at a big firm.

  If NW really wanted to be innovative, they'd make their third year optional.

• Wow. Just when I think I couldn't be any more ashamed of my Northwestern Law degree, they go and do something like this. Way to dilute whatever value a NW degree has and turn law school into a vocational school in the manner of any number of unaccredited California TTTs. Jesus.

• This is just another way for Northwestern to cheat on the US News rankings. Just like some law schools admit students into their night programs so they do not “count” in US News, NWU will admit students into the “short program” who will not get counted against NWU in the rankings. Free money from 50 below average students without the threat of sinking in the US News rankings or the faculty revolt from having an onerous night program. Great idea.

You get the idea. 

And the "exceptions?"  Those who had something positive to say.  They tended to be, excuse the phrase, adults.  For example:

• This is not a new idea. Back in the sixties, I came out of the Army and immediately began a 27 month law school curriculum at the University of Michigan, starting in June of one year and ending in an August 27 months later. Most of my colleagues in this program were a little older than the students in the regular, full 3 year program, having, like me, done a stint in the military or worked a few years after college in some sort of job. In fact, most of them were already married. [...] When I left law school, I joined one of the large first tier law firms, and I was a distinctly odd man out, because my peers at the firm finished the bar exam half a year before I did and had also enjoyed the work and bonding experiences of a summer together as interns. Still, I felt that the advantages accruing to me overall outweighed these disadvantages. For one thing, a space of several years between college and law school resulted in my being more mature when I started law school and, I think, made me a far better law student. (By my last year of college I was a real goof off, and might well have failed out of law school if I had gone there straight out of college. This is exactly what happened to a good college friend of mine.) And of course, as others have noted above, I basically gained back a year of time lost in military service and picked up an extra year to work and make the big bucks in my chosen profession.
• I totally agree with you. As an Iraq vet, it was beyond excruciating to watch another 3 years drain away sitting in a library - especially when I got little out of it. I don’t think the last year of credits is worth anything at all, intellectually. It would be better to implement a two year program, and then maybe add an optional third year that allows law students to do each semester as an externship somewhere - that way they at least get some practical experience.
• This is a visionary experiment, as is the experiment now going on at Washington & Lee. Bottom line: the three-year model is unnecessary and all the power behind it — the ABA and the AALS in particular — cannot stop the momentum behind a two-year law school curriculum. In two decades, it will be gone.

Clearly, Van Zandt intends to make Northwestern distinctive.  Referring particularly to the two new courses in quantitative analysis and in social and emotional skills, he says:

"For us to be successful, we have to be producing students that the rest of the world wants. Just producing people who are great at legal analysis, they are a dime a dozen out there now," Van Zandt said. "We are trying to differentiate our students in a way that is positive."

Earlier today I had a chance to talk with Dean Van Zandt and learned quite a bit more about the impetus for the program and its background.  Here's what I learned from him.

He's been in his post for over a decade and when he started he decided to undertake a comprehensive review of the law school's plans. The first step was to start looking for applicants with substantial post-college work experience, and a second step was to become the first major law school to conduct interviews as part of the admissions process. He reports that this past year they interviewed 75% of their 4,500 applicants, a substantial investment in manpower and time (although alumni can help with some of the off-campus interviewing). As for work experience, the incoming class stacks up as follows:

• 95% have worked at least one year after college;
• 82% have worked two years; and
• 58% have worked three years or more.

When they started this effort, the Dean assumed that they'd have to compromise on academic quality and be willing to suffer a small decline. But the opposite has turned out to be the case. From the time they started the "work experience" program until today the average LSAT has gone from 164 to 170, a greater increase than that of any other law school during the same period.

Another surprising benefit was to get more applicants coming from the East and West coasts. The Dean explained the dynamic this way: "Normally, aspiring law students will apply to Harvard, Yale, Stanford, and then some 'safe' schools nearer to home. In the Midwest, that often meant us, Chicago, maybe Iowa and Indiana, whereas in the East it would be Columbia, Penn, NYU, and in the West Berkeley, USC, UCLA. But by differentiating ourselves on the work experience parameter we find students outside our home territory are now applying to us."

A key part of the program, and the part of greatest interest to me, is the changed curriculum. It now focuses on six fundamental competencies that Northwestern has decided are of critical importance to its students (more on how these competencies were identified in a moment):

• project management and leadership;
• teamwork;
• strategic understanding of the client's business and organization, as well as how people in organizations make decisions and how they navigate organizations (in this the law school is greatly aided by having Kellogg Business School professors teach the basic strategy course);
• basic communication skills, including:
  • basic exposition;
  • training in formal legal writing and legal analysis;
  • contract drafting; and
  • business exposition, meaning how to take your recommendations and analysis to the client, be it orally, in a one-page memo, or in PowerPoint;
• quantitative analysis, including financial statements and statistics; and
• globalization: What skills do you need to be effective in a global business, how to work cross-culturally (not substantive legal expertise).

The Dean points out that when he graduated from law school technical excellence (along with many many long hours) was enough to make partner in a big New York firm, but no longer. Today, it's all about understanding the client's business.

Students often tell him that they aspire to being "international lawyers," and they start counting up the number of courses in the curriculum that have the word "international" in the title. He jokes that he'd like to sprinkle all the courses with the word just to make students feel better, but the actual advice he gives is different:

• become a very good Anglo-Saxon common law lawyer;
• go to work for a truly international US or UK firm;
• try to get on matters involving their transnational clients; and
• you will soon enough find yourself to be an "international lawyer."

Did he experience any pushback when trying to get the program started?

"Interestingly, much of it was from the existing students and faculty; very little of it was from the alumni, because they understand this is the way the world works."

And how exactly do the new required courses, the previous work experience, and the acceleration of the degree tie in together? "The idea was to put together one integrated package that--we hope!--will appeal to a slightly different cross-section of applicants, and a slightly different cross-section of employers. And limiting it to the small initial size means we don't have to up-end the law school! After all, it's been around for 150 years.," he says, with a smile in his voice.

The emphasis will clearly be on everything that the traditional law school admissions process overlooks:  The ability to lead teams, emotional maturity, interpersonal and communications skills, a degree of business understanding of the world that goes beyond what LSAT's select for, and (the ultimate goal) the ability to work with clients from the start, in an environment where business operates globally and law penetrates the operations of business in unprecedented ways.

Now let's step back a moment and ask how this might change the law school dynamic.

To begin with, what type of student is likely to self-select into the Northwestern program?  I strongly suspect they will be drawn from the ranks of the "adults"—and not just because of the prior "substantive work" requirement.  As we could infer from the "commentariat" I noted earlier, this program will appeal to people who are serious about getting on with their lives and getting to work.  (I would like to imagine it would have appealed to me.)

Then you take those students who already, by hypothesis, have a higher level of emotional maturity than your average shoot-the-lights-out LSAT overachiever, and immerse them for two years in a program emphasizing teamwork, quasi-real world experience, probably a dose of international exposure, and specific training in quantitative analysis including finance, accounting, and statistics, as well as training in group dynamics (teamwork, leadership, and project management).

If you ask me, putting on my metaphorical hiring partner's hat, the graduate coming out of that program is who I want to interview first, before those coming out of the conventional program.  The "accelerated JD's" will have:

• Real world work experience, and presumably a dose of the realism that comes with it about what it takes to earn a dollar;
• Impeccable academic credentials—this comes with the territory;
• A fighting chance to hit the ground running, with a grasp of business fundamentals both from the theoretical perspective and the hands-on perspective; and
• On average, a couple of more years on them than conventional JD's.

All it will take is a few high-profile AmLaw firms showing a revealed preference for those graduates for the next shoe in the marketplace dynamic to drop:  Given heightened demand, law schools will respond to the demand by increasing the supply of graduates with this type of profile.   Northwestern will surely be included:  Indeed, I have asked myself whether this program isn't the Trojan horse designed to take over the entire school in due course. 

In the meantime, in the market's recursive fashion, isn't it likely that more "adults" might find the accelerated JD attractive, and the post-graduation career prospects more promising?  Extend this thought experiment only a tad further to imagine that they would in fact be all-around better associates:  Higher-performing from the start, more realistic about work and therefore likely to stay longer, better suited and better skilled for what they actually have to do and therefore more likely to succeed (which feeds back into predicting lower attrition), etc., all in a virtuous loop.

And the problem of intellectually overqualified emotional dwarves, much discussed at the Georgetown Law conference on The Future of the Global Law Firm, will begin to be ameliorated.  Not through ABA or AALS regulation or accreditation, not through changing a single component of a single state's bar exam, not even through law school alumni pressuring their preferred Alma Mater to turn out people with at least a fighting chance to succeed, but through the market's invisible hand.  Then, how long indeed, before the classic three-year curriculum is gone?

On his cv, it says that Dean Van Zandt majored at Princeton as an undergrad in sociology, and that his Ph.D. from the London School of Economics was also in sociology.   But I'm betting he spent a fair amount of time slumming over in the economics department. 

A Modest Suggestion re Associate Layoffs

Three guesses what these numbers represent:

Blank Rome	20
Cadwalader	35
Clifford Chance	6
Hunton & Williams	?*
Paul Hastings	?*
Powell Goldstein	<10
Sonnenschein	37
Sutherland Asbill & Brennan	15*
Thacher Proffitt	24
Thelen Reid	26
Total	174**

*not verified

**assumes "?" = 0

Yes, obviously, the number of associate layoffs admitted to by the various firms (hat tip to Above the Law).   Obviously, I have not been able to include firms that have implemented stealth layoffs or, inhumanely, dismissed associates for "performance" reasons when that was actually not the case.  ("Inhumane" because of the enormous blot it leaves on the target's resume: Far better to call a spade a business downturn and leave the hapless associate to the mercies of the market—but at least an accurately informed market.) 

Of perhaps even greater materiality—but equivalent or greater uncertainty—is the number of associates yet to be, uh, excused.  As reported in The Lawyer, "another recruitment consultant, Larry Mulman of Major Lindsey & Africa, puts it [this way]: "To an extent, the downturn in structured finance has provided an excuse for firms to look at other practice areas and to cut dead wood. Within the boundaries of good taste, firms are going to try to get as lean as they can. We're going to see more.""

But this is not a column about layoffs.

It's about requiring arbitration of associate employment disputes.

Assuming arguendo mandatory arbitration clauses are enforceable (I'm not an employment lawyer and never will be), the benefits to the firm and for that matter to the associate seem compelling:

• Confidentiality.  Arbitration proceedings can be conducted essentially under seal, and all the inevitable and predictable nastiness kept off the record, clearly for the benefit of both the firm's and the associate's reputation.
• Finality.  Arbitration proceedings, absent drastic irregularities such as perjury or fraud, are all but impossible to appeal or overturn.
• Speed.  Although arbitration is getting more, not less, complex in terms of discovery and briefing, it remains quicker and more economical than full-dress court proceedings.
• No punitive damages.  Although arbitrators theoretically can award punitive damages (and agreements to waive them in advance may be deemed contrary to public policy), they hardly ever do.  And the professionals who typically make up the composition of arbitration panels are far less likely to have their passions inflamed than your average jury.

Is arbitration a panacea? Obviously not.  But the current environment has to start one thinking about minimizing repercussions to firms as we proceed through and eventually out of this weird and bitter economic stew composed of equal parts liquidity freeze, housing market slide, financial sector contraction, consumer confidence plunge, systemic over-leverage, commodity inflation worries, historically high oil prices,... (Do you want me to go on?  I thought not.)

That said, I'm not aware of any AmLaw firm that requires arbitration in associate employment agreements.  If I'm wrong, please let me know!

This brings us to the crux of the problem:  No one wants to be first.  Understandable, but not insoluble.

Firms have managed to reach magical and mysterious agreement parity on any number of other characteristics of associate employment, without running afoul of 15 USC §§ 1—27, and I'm about to suggest they could conceivably do the same with mandatory arbitration.

All you have to do is read this very column on "Adam Smith, Esq."  There:  How hard was that?

Far be it from me to tell you what to do on this score.  But we already have 174 reasons, and counting, to think about this.

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Update 26 June, 8:00 pm:

Helpful readers have pointed me to this story about Kirkland & Ellis' mandatory arbitration policy (apparently effective this past February), which also lends support to the notion that mandatory arbitration is enforceable ("continued employment in most states is adequate compensation [sic: consideration?] for an arbitration procedure")—unless you're in California. 

There, the Ninth Circuit struck down O'Melveny's arbitration agreement with its own employees, finding it "procedurally unconscionable" because presented on a take-it-or-leave-it basis.  Well, at least it wasn't substantively unconscionable.  (The O'Melveny case may be an outlier, as its stricken clause was evidently asymmetrical, allowing the firm to sue employees but not vice versa, as well as forbidding employees from filing discrimination or administrative claims with labor regulators.) 

I've also heard that Wilson Sonsini began signing new associates to mandatory arbitration after the dot-com meltdown, but I have no independent verification of that, and, given the O'Melveny decision, it may be moot whether they do or don't.

The Great Divide

Last week Eversheds sponsored a conference in New York, primarily targeted at senior inhouse counsel, to discuss the current and future state of relations between law firms and inhouse departments.  It was not pretty.

About 90% of the attendees were the chief legal officer of their companies or just a rung or two below, representing companies such as GE, Cisco, Tyco, Schering Plough, FMC, and other major companies you've heard of.  Jeffrey Carr, GC of FMC, delivered the keynote:  The first half was a thought experiment imagining the law department of 2020 where all the information he needed about case loads, new developments, assignments, deadlines,  etc., was delivered by an artificial intelligence engine with a voice mildly reminiscent of an English butler.  The second half was Jeff delivering a stemwinder about the out of control  costs of outside counsel, the relentless 6 to 10% annual growth in legal fees, the incongruity of those increases in the cost-constrained corporate world, the insanity of first year associate starting salaries, and the menace of $1,000/hour rates.

The conference  featured instant wireless audience "voting" devices, and a couple of dozen questions were scattered through the morning session, the responses  to which the event's organizer has been kind enough to provide me with. 

This was one of the initial questions asked, I might note, before Jeff's keynote:

What single factor has the biggest impact on your company’s legal function right now?
                - the economic downturn
                - involvement of procurement / purchasing function
                - the pace/scope of global growth in your business
                - recent corporate crisis or regulatory issue we had
                - rising costs of outside counsel

And here are the responses:

After the keynote, Peter Kalis, Chairman of K&L/Gates, the only law firm managing partner in the audience to my knowledge, posed the first question to Mr. Carr [paraphrasing]:  "How do you square  your emphasis on costs with the response to that question, which indicates that 4 out of 5 people here do not consider outside counsel cost their largest challenge?  In particular, about twice as many rank the complexities of global growth their key concern."

Another question dealt with the degree to which law firms understand the clients' key concerns [1= poorly, 5 = very well]:

Not an impressive grading, overall.  Yet the next question indicates the inhouse counsel believe they're  doing a fairly cogent job of explaining the "business  and constraints" of matters to their outside counsel:

It strikes me that these two responses are, shall we say, lacking alignment. 

A subsequent question recurred to globalization [1= not very; 5 = highly]:

Not to dwell on Pete Kalis' point, but with 90% of respondents rating their companies as quite global—and half selecting the strongest option available on that score—I would submit that their need for law firms with comparable global capability has never been greater.

Next came the related issues of project management and knowledge management, which many observers of this scene, myself most violently included, believe could do  more to rationalize how outside and inside lawyers handle litigations and transactions, than any other readily available tools.

Ready for our next disconnect?

So 60 out of 62 agree with me.

Yet they don't believe  their law firms are doing a remotely decent job on this score:

Yet when asked, by implication, whether their departments would be willing to collaborate with outside firms to improve knowledge sharing, about 3 out of 5 don't want to make the investment:

If the question is not mutually supportive investments (we'd prefer not to) but rather cost sharing for budget overruns, we  get a drastically different  story:

Predictably, law firms were also charged with being insufficiently concerned with costs—a charge evidently given heat and force by the pressure inside counsel feel on precisely that score.  Yet firms, in their defense, noted that:

• In this economic environment, they have never been more concerned with costs, especially as top-line growth is challenged; and more importantly:
• The three  primary costs for firms (in order) are:
  • Lawyers;
  • Rent and occupancy; and
  • Insurance.
• Essentially none of these three are negotiable or discretionary in the least. Firms cannot scrimp on talent (nor, I imagine, would their clients want them to), cannot move their offices to Jersey City, and in the insurance market are pure price-takers, not price-makers. All other costs amount, economically, to nickels and dimes.

As noted, one particular element in the bill of particulars indicting law firms' practices was the high level  of associate salaries.  Not only were they obnoxious, unjustified, and objectionable per se, but they forced inhouse departments to pay extravagant amounts to recruit their own staff attorneys. 

By now you perhaps won't be surprised to discover that this particular count of the indictment is not widely supported when push comes  to shove:

Of the following, what is the most challenging issue for your legal department in responding to global demands?

• finding and keeping in-house lawyers with skills for cross-border work
• managing the complexity and diversity of global demands
• dealing with regulatory compliance as we grow globally
• dealing with risks and disputes as we grow globally

In other words, only about 6% of respondents actually name "finding and keeping in-house lawyers with skills" their key concern.

Let me conclude with—I believe—one of the most illuminating results  of all.

We know that towering above all other objections to how law firms do business is resentment of the almighty billable hour.  So yes, yours truly suggested the following question to the organizer:

The billable hour will disappear during my career:

• Yes, because it’s a preposterous measure of “value.”
• Yes, because it sets up an inherent conflict between the law firm’s and the client’s best interests.
• No, because it’s simply too ingrained.
• No, because law firms would be tempted to overcharge.
• We already use “alternative billing” for the majority of our work.

And the results?

My reading? "Alternative billing" has an embarrassingly small "market share," and for all the bemoaning everything that's wrong with the billable hour, the vast majority are resigned to its continued reign. 

---

I won't go so far as to characterize these findings as a counsel of despair, but I was taken aback—briefly, shocked—by the apparent absence of engaged, constructive, creative, imaginative dialogue between firms  and senior inhouse counsel.  The complaints are  familiar—perhaps too familiar, as if we've become  exhausted by this conversation.  And yet the gulf shows  no signs  of narrowing, or (imagine!) being bridged.

David Wilkins of  Harvard Law School has described the evolution of corporate/law firm relations metaphorically as  moving from that of  a marriage to that of serial dating to that—he hopes—of joint venturing.  Joint venture partners each bring indispensable  capabilities to the mutual enterprise, both understand they can't achieve  their goals without the other, and both  show sincere deference to and interest in their  partner's economic and professional viability.   Is that too much to expect?

On the current evidence, it may well be.

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Update (Sunday 22 June, 5:00 pm)

Jeff Carr of FMC writes:

Bruce -- the Eversheds conference was an eye-opener for me not because of the depth of despair, but rather for the simple reason that a major international law firm hosted the event.  At least personally, I've grown tired of speaking about the problem -- because the true problem is on our side of the table -- that is in-side counsel.  Firms are indeed acting quite rationally and we are acting as if this is a highly inelastic market.  Indeed it is not -- we simply choose to believe it is. 

One of the slides I used at the conference compares our "depth of despair" to the coping cycle of a cancer patient -- you know, denial, anger, despair, acceptance, healing.  Most of my brethren are firmly ensconced somewhere between denial or despair -- but we cannot rest there and the happy little band in which I travel (Dupont, Cisco, CP Chem, Tyco and others) seem to be joined by more and more fellow travelers.  I believe we are near a tipping point and it is time to engage our firms in meaningful dialogue about how to get back to value -- the new ACC [Association of Corporate Counsel] project Fred Krebs talked about at the conference hopefully provides a context for those discussions.  We need our law firm partner/providers to be successful and profitable -- they need to change their business model to focus on profits as opposed to top line revenue growth in a cost-plus world.
 
 
All the best,
 
Jeff

Others?  Time for you to weigh in. As painful as this dialogue me be (cancer death?!), it is shockingly overdue.

You know where to reach me.

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Update:  25 June 2008.  E. Leigh Dance of ELD International, Inc. writes:

Dear Bruce,

You captured well what we saw and heard at the June 12 conference. As one of the conference “organizers” you mention in your June 21 posting, I have two observations:

In the last six to nine months I’m witnessing a leap in the global trends we’ve been seeing climb year to year. I’m about as internationally oriented as an American can get, and yet week to week I add to my list of fast-growth markets whose cities I can’t spell (without Google, how fast can you find Tallinn, Florianopolis or Chongqing ?) Every multinational corporate counsel I talk to these days is facing a huge increase of business investment and focus in emerging markets (read: higher complexity, risk and exposure), coupled with heavy pressure on legal costs in mature markets.

Generally these counsel just don’t see their law firms as allies to meet the challenge. The conference findings show clients don’t think many outside counsel really understand their issues or can organize themselves to help effectively. That’s not just a damn shame, it’s one very big opportunity. Lots of law firms are growing offices here and there and many are happy to grab high-margin multi-jurisdiction transactions, but precious few firms are offering clients deep, consistent and practical assistance to cope with this global tipping point.

It makes it easy for Eversheds (one of those few) to tell a good story, as it has done over the last year or two and did again in New York earlier this month.

Second observation: more than despair among these CLOs, you were seeing underlying anger. Some of their responses were unreasonable, and that’s a sign of their frustration. With global demands mushrooming, they see marginal help and rising costs from their law firms. Many in-house lawyers want to defend their outside advisers, but often they aren’t given much ammunition to fend off aggressive procurement functions. Meanwhile, the double-digit law firm profits that clients worldwide keep seeing in legal media have an effect similar to soaring gasoline prices. Market forces or not, it seems like others are getting fat off their backs, and it hurts. Law firms have been good at marketing expert advice—but advice is only a fraction of what companies need to successfully address their legal issues globally.

Best regards, Leigh

_____________________________________________

E. Leigh Dance, ELD International, Inc.

[Bruce again:]

Leigh makes some powerful points:  First of all, the disconnect is "not just a damn shame, it’s one very big opportunity."  BigLaw, take note.

Second, "more than despair among these CLOs, you were seeing underlying anger.  Some of their responses were unreasonable, and that’s a sign of their frustration." 

I would add only (as I've written before), that GC anger at starting associate salaries is profoundly irratiional, and I can only chalk it up to a toxic combination of envy and resentment.  Why is it irrational?  Because as a business person (or as an economist), you should care less about what your suppliers pay for each of their factors of production: You should care only about the final product or service delivered.   Perhaps an example disconnected from law-land will help.  We know that many parents (and students, with loans) bemoan the rising cost of Ivy League educations.  Fine, and GCs are entitled to bitch about law firm rates.  But the irrational component is to single out associate salaries for  invective.  People struggling under the weight of Ivy League tuitions don't frankly care whether the burden is attributable to professors' salaries, an "edifice complex" at the college, or the cost of cleaning dorm common areas of beer cans and peanuts Sunday mornings.

And as Leigh recognizes, when a reaction is irrational, it's really about something else.  People who aren't making sense are sending a signal that there's something else going on you're best advised to tune in to.

GC's May Be Complaining, But Do They Really Want Change?

Over at LegalOnRamp there's an interesting discussion underway about the extent to which GC's do—or don't—seek genuine innovation in the way BigLaw provides services.  I'm taking the liberty of republishing it here (with permission of Paul Lippe, the CEO of LegalOnRamp) because at the moment LegalOnRamp is invitation-only.

It was kicked off by Ron Friedmann:

General counsels complain about large law firms: too costly, bad service, and clueless about the clients’ businesses. After the failure of GC’s many attempts to fix the problem, regulation is surely the solution. 

This simple and easy idea struck me last week when I heard a panel of GCs address the Strategic Technology Forum in Lisbon, hosted by LegalWeek. Their anger at firms was palpable. CIOs have their own frustrations: few partners or clients use the innovative systems they create. The despair all around caused me to think about the market. Consider the many steps GCs have taken that have had no impact on outside counsel:

• Countless law departments have voted with their dollars, switching firms, and privately and publicly explaining their quest for better value. Yet large law firms refuse to budge.
• Rampant standardization has failed. The standard documents of ISDA (International Swaps and Derivatives Association, Inc.) is only one of hundreds of instances of clients coming together to simplify and standardize. Yet bills continue to mount.
• The Tyco arrangement with Eversheds, which introduces various metrics and carefully crafted payments to illicit [sic: elicit] particular law firm behavior (link to Legal Week article), is only one among many such agreements. No market impact.
• Law departments have invested heavily to create best practices, for example, how to manage outside counsel, checklists for transactions, empirical studies on reducing discovery costs, and regularly using risk analysis in litigation. Law firms ignore these well-document guidelines and every effort at enforcement.
• Law department frequent use of non-lawyers and lawyers in India has no affect.
• Large law firms have bid up the price of talent, shutting out the ability of law departments to hire.

Alarmed at large law firm recalcitrance, I consulted my economist friend Madam Smythe, who told me: “On first glance, the legal market looks competitive. The scores of large, global law firms with good reputations should not fool you. Once a company retains a firm, a mini-monopoly ensues; just one bite at the apple - then switching costs skyrocket. It’s diabolical. I’ve run the numbers: law firms are natural monopolies. They have too much market power, which they use artificially to raise rates and corner the market on talent.”

Out of my commiserations with the plight of the poor GC, suddenly, the solution emerged: regulation. Corporations should engage lobbyists to spur federal oversight of the monopolists. The lobbying cost is a small price to eliminate large law firm monopoly rents. Yes, GCs, who have tried every trick in the book, can finally rest - regulation will rescue them.

Now, Dear Reader, if you're inferring that the "modest proposal" title and Ron's reference to his mythical "economist friend Madam Smythe" mean the piece is tongue in cheek, I suggest you ask Ron.  But the substance of the GCs' anger, frustration, and resentment is something worth taking seriously, and the discussion that follows generally did just that.

David Johnson, a professor at New York Law School, chimed in next:

Ron Friedmann suggests in a recent blog post that large law firms should be regulated because they abuse some kind of "natural monopoly" power.

With all due respect to Ron, who often has interesting outside-the-box thoughts regarding the profession, and even though I'm not sure how serious he is, that's crazy talk.

It is not even good economics/antitrust analysis. Sure, switching costs may be high once a company gives a big chunk of business to a firm, but firms are always competing at the margins for new clients, so their practices are constrained by that competition. There is no way the government would be convinced that law firms gain whatever "power" they have other than through skill, foresight and industry. It is even unethical for a firm to leverage any power it has as a result of high switching costs into other markets.

Nonetheless, there may be a seed of an idea insofar as companies could come together to articulate some best practices compliance with which might be made a condition of entering into a new relationship with any firm. And there is no reason why every company has to bear the burden, alone, of "enforcing" such standards and monitoring compliance. So maybe there is a way for the client side of the market to collectively increase the costs to a law firm of "switching away" from adoption of some set of practices that companies generally agree should be followed.

That would be a different, and far more efficient, form of bringing some "regulation" to large law firm practices.

Paul Lippe then provides a schema around which to organize the discussion:

I understood Ron's post to be somewhat facetious in the spirit of Swift's essay http://en.wikipedia.org/wiki/A_Modest_Proposal, but it does raise an important point. I first became a GC in 1988, almost 20 years ago. There is little that was said in Portugal that is different from the critique offered in 1988. So, is it

A. The critique is invalid, the legal market works the way it should, and GCs should stop whining;
B. The critique is valid, things take a while, and now we'll see change;
C. The critique is valid, but the structure of the Legal market impedes change;
D. Regulation is the only answer; or
E Other.

Among others, I invite my friends Gillian Hadfield, Bruce MacEwan and Jordan Furlong to respond, and perhaps Gillian can share a little about her upcoming event(s)appropos of these issues.

Thanks Paul

Jordan Furlong, editor-in-chief of the Canadian Bar's chief publication, votes for Paul's option "C:"

Ron's Swiftian turn -- Bruce would appreciate the reference to "Madam Smythe" -- seems appropriate to the situation. Swift's satire was grounded in his very real outrage and frustration, and while the stakes aren't as high as in 18th-century London, I can appreciate that GCs must sometimes feel like giving up the fight in despair, powerless to make any progress towards more effective business relationships with their law firms.

But while hardly anyone would really endorse government intervention, that unlikely outcome might still prevail if firms don't watch themselves. Law firms are nowhere near as wealthy and influential as their biggest clients, and provoking or prolonging a fight with entities way above your weight class is foolish. Populist lawmakers + corporate campaign contributions + widespread anti-lawyer animus = a lethal combination. Lawyers receive a lot of protection from their status as unique, independent professionals who constitute a significant pillar of a free and democratic society. But if they operate less as professionals and more as complacent businesspeople in a rarefied marketplace, they court serious danger.

I think we're closest to position C on Paul's list, and fundamental structural obstacles invite equally fundamental intervention. But the legal profession still possesses, for now, the ability to reform itself and dictate more attractive terms for a new relationship with clients. I'm not terribly optimistic, though -- there's not much leadership on this point evident in the organized bar right now.

Gillian Hadfield, a professor of law and economics at USC, brings to bear the heavy artillery of competitive market analysis to argue that it's the very complexity of law—a condition created and maintained by lawyers—that is responsible for the "low level of competition:"

Several years ago I wrote an article that argued that the underlying structural feature that generates a low level of competition in law (both over price and product) is complexity. (This is in a Stanford law review article called The Price of Law available at my website https://works.bepress.com/ghadfield) Complexity creates specialization, ambiguity, difficulty judging and comparing legal quality etc. So the question becomes why does law stay so complex, indeed become increasingly complex over time?

Here I think the problem is the regulatory structure of legal markets--which are among the most heavily regulated in the economy. It's just that the regulation is supplied by lawyers themselves through bar associations and the judiciary. The complexity of law is attributable, I think, to the closed nature of the markets here: without the ability to form corporations, seek venture capital, attract innovators who have not been through the training process of lawyers, it is very hard for the market to spur the only real type of change that can reduce complexity and cost and that is innovation in the underlying dimensions of legal inputs.

Why do we need a rule to determine a contract dispute that takes 100 pages of appellate opinion to explain, for example? Why do we need millions of documents to resolve a patent dispute? Why do we need 400 page agreements to effect a transaction (to respond to the complexity of legal rulings real and anticipated?) These are the underlying dimensions of demand. The smart innovator in law, if they could exist, would figure out how to meet legal needs -- for assurance in a contract relationship or protection against risk re-allocation or assessment of liability exposure or ownership of a patent--with a more streamlined product. Until there's a return for innovation and pressure to innovate--because of the risk to established firms that their modus operandi is about to become obsolete--little is likely to change.

Next up is yours truly.  In an attempt to be even-handed, I decided to take a swipe both at the GCs (questioning the sincerity of their desire for innovation) and at the organized bar (which is such a target-rich environment that it was hardly any fun):

Taking Ron's "modest proposal" at face value, my reaction is that it's precisely regulation that's contributing to the problem: Regulation of lawyers by lawyers and for lawyers. What might shake things up is not Congress second-guessing how to protect the Fortune 500 and FTSE 100 corporations from themselves--with Congress' congenital and exquisite obliviousness to the law of unintended consequences--but removing the stranglehold of 51 state bar associations, bar examining authorities, and the ABA itself. Can anyone still say with a straight face that there is any remotely beneficial purpose to such requirements as ABA accreditation for law schools, transparent restraints on trade masquerading as "ethical" proscriptions (no sharing of profits with non-lawyers), and the medieval practice of determining which regulatory authority has jurisdiction over lawyers and firms based on brute force physical presence? Why can't law firms choose, as corporations can, to submit to Delaware or New York or California law and be done with it? What is the economic justification for the need to engage "local counsel?" Why aren't the ABA's Model Rules a per se antitrust violation? I could go on...

But I actually have a more subversive suggestion, which falls under "E. Other" in Paul's schema: I don't believe GC's really want things to change, for all their trashmouth game talk. GC's want their backsides protected by the imprimatur of the Magic Circle, the New York Elite, or the Skadden/Latham brand name. GC's don't want "good enough" quality; they want top-drawer quality.

And I submit this is not irrational. Legal fees as a percent of deal value (unless you're smaller than the attendees at the Portugal event) are typically not material compared to the i-bankers' fees or the opportunity and other costs of corporate personnel assigned to the deal. Do I think Gillian is wrong that 100 pages of appellate opinion interpreting a garden variety contract clause is idiotic? No, of course it is. But the answer is to eliminate regulation of the bar by the bar and watch a thousand flowers bloom.

Paul rejoins the conversation and introduces the new, and entirely pertinent and fitting, concepts of "quality" and "value:"

My learned friend Bruce makes some very compelling points about the consequences of lawyer self-regulation.

His argument about why GCs don't insist on change, while in many respects descriptively accurate, is rooted in a common fallacy: that spending more on legal services is the same as getting better quality.

Dollars spent on legal work is to quality as LSATs are to intelligence - a somewhat self-referential indicator, but largely of a limited type of the feature measured, and problematic in that it crowds out other definitions and metrics. So for sure if the primary good purchased from a law firm if the firm's reputation to shift accountability, then Bruce's argument is correct. But I'd be curious if anyone can come forth with any data to show that in fact (as opposed to in repute) more expensive law firms produce better results, e.g. can it be shown that the investment banks who had the largest losses on their mortgage portfolios were served by lower reputation law firms?

Once this conversation settles down, I will start a separate string (and perhaps a wiki to really pull something together)on what I consider the core issue: how can we develop a definition of VALUE in legal services that is meaningful and useful, and not simply measuring inputs like hours spent, diligence of lawyers, law school attended or reputation of the firm. With such a definition of value, I think we could expect that some lawyers' reputation and income would go up, but some would not.

b/t/w, I think Bruce's point about regulation is 100% correct, but his point about marginal pricing theory is not - no one pays the price for electricity or medical care or food or seatbelts or anything else equal to what the detriment would be if they didn't have it.

Barend Blonde, a legal consultant from Belgium, introduces the European perspective and casts a vote for "B" in Paul's schema::

From my purely European perspective, I find that you a are a bit quick in abandoning option B from Paul's list: Yes, things take a while.

The arguments I read are valid and exciting, but I think we shouldn't be blinded by the seminars we attend and the forums we visit. The GCs that visit the Lisbon Technology Forum are not your average GCs or and the GCs 'cruising the Ramp' are not 'standard'.

I admire GC of companies like Tyco and Cisco for what they are doing and their value can hardly be underestimated. But the truth is they are the scouts of a Mexican army that is still figuring out what to do. The average GC is still a conservative guardian of the hourly rate. The average GC is not thinking about how to use technology to put pressure on law firm services. The average GC is struggling with the implementation of a decent matter management system.

We just finished a poll among European inhouse counsel. We asked them to rank 10 priorities. 'Improving efficiency in outsourcing work to law firms' came out 7th, 'reducing costs' came out 8th. What keeps them awake? The professionalisation of their departments (internal brand, role, skills, IT) and compliance.

The legal market is a free market. Markets change when there is an urge to change. If the legal market doesn't change rapidly, it just means the sense of urgency is not there yet. Tyco, Cisco and you guys are slowly building it up. Keep up the good work!

Finally, I elaborate a bit on the thinking behind my suspicion that "GC's don't really want to change," by analogy to shopping at Tiffany's:

Paul's thoughts about quality and value are, as usual with Paul, intriguing, as well as a bit of a departure from where I was headed, so a small dose of clarification may be in order.

I violently agree that we lack sensible or compelling measures of the "quality" and the "value" of high-end legal services today. If the shocking durability of the billable hour teaches nothing else, it teaches that we are by and large at a loss to determine value (a/k/a price), since we are throwing up our hands at valuing the output and resorting to the blunt instrument of summing the costs of the inputs (with a profit margin built in, to be sure).

My point about the imprimatur of a brand name, or "quality," as Paul nicely puts it, may be a bit more subtle or at least a bit different than the implication that GC's will pay a price equal to the "detriment...if they didn't have it." My point was that having a Magic Circle or a New York Elite firm's name on your acquisition agreement or your IPO registration or your massive IP licensing deal has an in terrorem effect against challengers. It's like buying your diamond engagement ring at Tiffany's instead of on 47th Street. It may not actually be better quality, but it's perceived that way, and at some (I would suggest fairly self-aware) level that's precisely the bargain the buyer is striking.

That's what I meant by "GC's don't really want things to change." They want Tiffany to stay in business, and more importantly, to stay in business on the Tiffany business model--not the 47th Street business model.

Finally, although no one asked me, as an erstwhile student of industry structure and antitrust law, the high-end legal industry doesn't remotely resemble an industry susceptible to oligopolistic or cartel-like behavior. Even the Chambers league tables show pretty consistent turnover in who's up and who's down in M&A, debt and equity offerings, etc. Sure, many or all of the players are the usual suspects, but their individual market shares change rapidly and continually.

---

The floor is now yours:  Email me (bruce at adamsmithesq.com) with your observations.  And, if there are any GC's in the audience, it's high time to stop lurking and start speaking up. 

---

Over at my friend Malcolm Ryder's "Archestra" site he just published a wonderful follow-up to this discussion which posits that you can break down "value" into the three-dimensional intersection of:

• law firm competency
• client satisfaction, and
• alignment of the firm's performance with the client's culture.

Take a look.

The CIO Challenge: It's Not About Server Up-Time

Did you know that the venerable Booz Allen & Hamilton has truncated its name to "booz&co."?  Not only abandoning a name with tremendous recognition and brand equity but, in a "what were they thinking!?" blunder, shining a spotlight on the unfortunate bibulous associations of the name "Booz."  Did they engage a management consultant before pulling off this stunt?   They're not talking.

But that's not what today's column is about.

It's about their article, The Practical Visionary, which covers one of the great unsung heros of 21st Century business:  The CIO.   Although I've written some about IT and its separated-at-birth sibling, Knowledge Management, the importance of it cannot be overestimated and it's worth recurring to some of the key learnings we now have about IT and the CIO function in general. 

Doubt the importance of technology?  Earlier this week I had the opportunity to ask the Chairman of an AmLaw 30 firm what had surprised him most during his 20 years of practicing and his answer was:  Technology, and how it had transformed the practice to an unrecognizable and unimaginable degree.

Shall we jump to the conclusion?

"The strategic CIO has never been more important to the future of the organization. As operations and markets become more fragmented, there is an ever-greater need for IT to bind together a company and augment its collective intellect (to paraphrase computer interface pioneer Douglas Engelbart). IT can be used to address problems of mounting complexity and to help an organization move into new products, new processes, and new markets, at home and around the world."

What precisely does this mean?

In May 2003, Harvard Business Review editor at large Nicholas Carr "ignited a firestorm" with an article titled, "Why IT Doesn't Matter."  This prompted a rejoinder in August 2003 , and led Carr to turn his article into the 2004 book, Does IT Matter?, which, incidentally, was a core assignment to the class when I taught "Strategic Technology & Innovation" at SUNY/Stony Brook's executive MBA program for law school leaders last year.

Carr's argument is not precisely that IT doesn't matter; it's that IT has become a commodity, available to all, and therefore incapable of providing lasting, meaningful competitive advantage.  “What makes a resource truly strategic,” wrote Carr, “is not ubiquity but scarcity.” He employs the analogies of the railroads and electricity as earlier technologies that seemed revolutionary at the time but became utterly commonplace utilities. 

Many have been the critiques of Carr's argument, but two strike me as particular bulls-eye strikes:

• Previous technological revolutions were rooted in the physical world.  Trains may have speeded up from 20 mph to 80 mph over 40 years, and the continent-wide build-out of the track network may have been accomplished, but Moore's Law shows no sign of abating.  Over a comparable 40 year period, the computational power per $1.00 spent on IT has not quadrupled but has increased by a factor of 10 to the 7th power, or 10-million times.    Your BlackBerry has more processing power than the Apollo lunar landing craft (and your BlackBerry will be obsolete in 18 months or less).
• Far more important, but also stemming from the rootedness of prior revolutions in the physical world:  The only limits to the IT revolution are limits of the human imagination.  Which is to say, no limits at all.   Who, 15 years ago, would have envisioned the Internet?  And once the Internet arrived, who could envision eBay, YouTube, Google, Facebook, wikis—or for that matter and keeping it within the family, the global readership community of "Adam Smith, Esq."?

Swimming in the water of IT, as it were, we may become forgetful of how profoundly it has changed our lives and our careers, but every once in awhile you realize the power of its achievements so far.  I experienced one of those micro-epiphanies two weeks ago standing in the checkout line in a store on the Upper West Side where I downloaded on my BlackBerry near real-time pictures being returned by the Phoenix Mars Lander of the Arctic Plain of  Mars.  Think of the enormous chain of interlocking and coordinating IT assets, hardware and software, involved in bringing me those 2" square images—and until I took a moment to reflect on it, I took it utterly for granted, as unremarkable as expecting my watch to actually keep time.

But back to CIO's.

There's a baseline requirement you need to meet, and after that there's a strategic opportunity.  The baseline is the obvious:  To keep the proverbial trains running on time.  Depending on the infrastructure you have to work with, that may be a challenge requiring months or years to meet.  The story is recounted of Michael Gliedman arriving at the headquarters of the NBA in 1999 as the brand-new CIO, finding a silo'd IT environment with "isolated pockets everywhere."  It took him 18 months to bring everything together and ensuring the core technology requirements worked reliably and efficiently. 

Only then could he embark on his real job:  Making a strategic difference to the NBA.  “There’s no way anybody in the business is going to take you seriously if it’s taking your guys 20 minutes to answer the help-desk phone,” he says.   But now he:

"... is the model 21st-century CIO. These days he is training his focus on the demand side of the IT business equation, where the needs of the business are paramount, rather than spending most of his time on such typical supply-side concerns as cutting IT costs — although these responsibilities are still very important. He has become a serious contributor to the league’s business results by harnessing powerful new technologies that make real-time information attractive and accessible both internally and to the NBA’s constituents and fans around the world. That’s why he — like any other truly strategic CIO — needs to be among the inner circle of senior leadership."

Gliedman—and his fellow senior leaders of the NBA—now views his job as deploying technologies that will support the League's three key strategic goals:  Boosting international interest, building the female fan base, and increasing the audience overall.  As markets and operations become more global and fragmented, the role of IT in binding a firm together has never been more important.  And in a way this is "back to the future:"

"In [supporting the strategic direction of their firms, CIO's] will bring back one of the almost-forgotten aspects of the personal computer revolution of the 1980s: It made work more engaging by making people more powerful. That shift turned out to have enormous strategic value. Word processors allowed people to pull their thoughts together, revise, and bring in new ideas iteratively, without having to retype each time. Electronic spreadsheets spawned thousands of “what if” scenarios that made business options clearer and eliminated the need for painstaking calculations conducted on paper by roomfuls of clerical staff. Databases provided the means to store and analyze huge amounts of data, providing insight into the supply chain, customers, and more at an unprecedented level of detail. E-mail made it possible to connect with many more people quickly. And the presentation program, though much derided, has been a vital tool for helping people convene teams and organize ideas. The resulting boom in productivity in the developed world has yet to slacken. Another result was an increase in scope: Organizations could do much more, with much less, than they could in the past. Without IT, as it soon came to be called, globalization would not be possible.

"But by the mid-1990s, that sense of liberation had turned to a sense of being shackled by the tools themselves. E-mail became a source of spam and irrelevancies, and took more and more time to tend. Word-processing software led to unnecessary revisions and overwritten documents. PowerPoint was actually banned at some companies."

So today the goal is not to be guided by the vision of the desktop PC but to embrace the range of Web 2.0 technologies—social networking software in general, which enables people to collaborate at a distance.  Because, after all, what do lawyers do?  They collaborate.  And in today's economy, they are almost surely collaborating "at a distance"—in space or in time or both. 

Don't underestimate the challenge:

"Given the degree to which IT has infiltrated every aspect of large enterprises, strategic CIOs must be able to speak a wide variety of corporate languages — operations, finance, manufacturing, marketing, sales — and to work with top executives, including the CEO, COO, and CFO; the heads of procurement and HR; and the leaders of individual business units. That demands an unusually broad set of business and communi­cation skills, a combination not often associated with “techies.”"

Gratefully, there are some guidelines:

• Start fast.  Don't be an "order taker," but give people tools you know will help them without waiting for them to ask.
• Be a capable executive in your own right.  Easier said than done, perhaps, but realize that decisiveness and effectiveness in project management will go a long way towards earning your peers' respect.  Make sure your staff understands your vision of what IT is all about.
• Once you have management's respect, don't ask for permission.  Move forward freely on initiatives you've earned the right to handle.
• Keep looking ahead.  No one else in the firm is responsible for peering out five or ten years to envision what new technology coming down the pike might—when it "grows up"—fit into your firm's strategic direction.

What do I mean by "keep looking ahead," probably the most important part of your job? 

I mean this:  Brainstorm out loud with your lawyers about what they could use to do their work better.  They don't know what's possible and you don't know what they need, but together, all of you can, if you're candid and imaginative, come up with applications that are truly useful.

One of my favorite examples is what I call "caller ID on steroids."    Now, caller ID is an antique and timeworn technology, and one well-understood by the most Paleolithic among us.  But imagine putting it to new and inventive purposes.  One firm I know of is working on a project that would do this:

• Instantly examine the "caller ID" info when a lawyer's phone rings;
• Match it against the known phone numbers of the firm's clients;
• If there's a match, "grab" the lawyer's computer screen to display not just the name, title, and company of the person who's calling, but also pull up a list of most active matters for that client, responsible attorneys on each matter, and Reuters newsfeeds about the company (all with hot clickable links, of course).

Think there's nothing new under the IT sun?  Think again.  It is not, with apologies to Nicholas Carr, a commodity.  It is limited only by your imaginations.

And good luck, because the challenges of deploying IT to support and turbocharge your firm's strategic direction are only going to become more intense, and accelerate.  Just imagine what a BlackBerry from 2018 will be able to do.

A Conversation with Ray Bayley of NovusLaw

In the course of two hour-plus long interviews over the past couple of weeks with Ray Bayley, co-founder of NovusLaw, I learned that everything I thought I knew about outsourcing was wrong. Or rather, that I hadn't thought about outsourcing, really, at all. Read on.

NovusLaw cruises under the radar online (barebones overstates the depth of their website), but Ray has an impressive background. He was the managing partner of business process outsourcing at PriceWaterhouseCoopers when it was the #1 business process outsourcing ("BPO") organization in the world, and he was also a member of the firm's US management committee, consisting of 15 people overseeing $9-billion in revenue in the US (PwC at the time had 170,000 employees including 9,000 partners, almost half of whom were in the US).

If you're not familiar with BPO, in its simplest form it's hiring another company to perform business activities for you. More fully, BPO is something you should consider when a necessary, but not "core," activity could perhaps be performed externally by a more focused and efficient organization. We don't think of hiring temps through an agency or making travel reservations as outsourcing, but that's what they are. And it's unimaginable that we'd generate electricity for our offices or write word-processing software, but once upon a time those were candidates for BPO as well. For that matter, when any Fortune 500 hires your law firm, they're engaging in BPO right then and there--and your firm is the fortunate target.

In 1999, as Ray reports, Arthur Levitt began to break up the professional service firms--Accenture came out of Andersen, BearingPoint out of KPMG, and so forth. Meanwhile, the BPO business of PwC was sold to IBM and when Ray chose not to follow, he asked himself the question: "Where can we apply our knowledge of the global best practices learned at the largest professional services firm in the world to provide value in some other professional services industry?" (I report on Ray's background not to impress--which I suspect would estrange him from anyone automatically impressed--but to provide context for what follows. He's not a newbie at this stuff.)

He embarked on two years of market research, meeting over 200 people in the legal industry in the US and the UK, including General Counsel's, AmLaw 100 and UK 50 partners, and law school deans, trying to assess the market need. And the findings were that there were three market failures:

• On the demand side, "cost is the biggest issue on GCs' minds when considering outside counsel." Consider these survey results: When asked "are law firms doing their best to reduce costs?," 84% of AmLaw partners agree, but only 6% of GC's. The marketplace failure is in this disconnection: Law firms can be better off by being more innovative, and GCs can benefit by getting lower costs. Out of 45 GCs asked the question, 44 reported that they'd give a larger share of "wallet" to a law firm that could offer NovusLaw type services.
  
  
• On the supply side, new graduates from top law schools are being offered enormous amounts of money to do work that they hate. Many studies, including some by Professor William Henderson of Indiana University Law School/Bloomington, and other work by NALP, consistently show a statistically significant negative correlation between associate income and job satisfaction. (The correlation doesn't mean more money makes people unhappy. It means that the conditions that come with high associate income--high expectations for billable hours, a low level of communication from partners about career prospects, low communication about the state of the firm overall, no pretense of "work/life balance"--make associates unhappy.) Also on the supply side, the changing demographics in the US and the UK over the next ten to fifteen years will further decrease the pool of available top-notch law school grads.
  
  
• The third "market failure" is what Ray calls "legal work that's not lawyer work." Compare the healthcare industry, where about 4% of all workers are doctors: In the legal industry, more than half of all workers are lawyers. "How much of the work done in the US legal industry is legal work but not lawyer work?," Ray asks rhetorically. The best estimates, he reports, are on the order of 70-80% according to the two years of market research that he did, and he goes on to describe a study done at the Institute of International Economics in which two economists concluded that 77% of the US legal industry is susceptible to globalization.

So what does NovusLaw intend to do to address these failures?

First of all, let's clarify some terminology. What everyone calls "outsourcing" is nothing other than the familiar "make vs. buy" decision. All law firms are already intimately familiar with this decision point, because corporate clients are already "outsourcing" complex legal work to their firms rather than doing it inhouse in the law department.

Ray also provided a brief history lesson in reminding us that the word "offshoring" was invented by John Kerry when he was running for President; before that, the conversation was simply about globalization, or the familiar notions of importing and exporting.

Where NovusLaw fits in this constellation is as a truly global company, and Ray gave me the example of a current engagement knitting together a global supply chain of legal ideas and legal work, where they're providing services to a GC in London, touching upon legal issues in Eastern Europe, based on a contract written in Singapore, overseen by lawyers in Chicago, and where the actual routine legal work is performed by people in India.

It doesn't get much more global than that, and Ray offered this engagement up as an example of truly "boundary-less" work, where people on the project have no particular awareness of geopolitical, border, or time-zone issues. (As has been said, "it's always daytime somewhere.")

What marketplace resistance have they encountered?

"A few years ago, we would hear things about 'the unauthorized practice of law,' various unspecified 'unethical' concerns, and the objection that 'we can't benefit from BPO--law is more an art than a science.' Today we've stopped hearing those things."

So what do you hear instead?

"Who's done this before" is the big one. "In my mind," says Ray, " the key to resistance now is simply resistance to change. Nobody ever gets up in the morning deciding to change," as the Harvard Business School professor Rosabeth Moss Kantor has discussed.

But ultimately, what matters to NovusLaw is that there are leaders, laggards, and the vast group in the middle waiting to see what's going to happen. "Maybe fewer than 10% of all the institutions we work with are true early adopters, but that's all you need at this early point. Others are truly in denial about the immutable forces of economics--maybe 20-30% are in this category. They'll say 'It's unethical, the ABA will never let it happen, it's the unauthorized practice of law, no no no.' But the vast middle isn't hostile and isn't adopting it; they're waiting to see."

OK, I say, but what does NovusLaw actually do?

In two words: Document review.

They:

• collect
• filter
• process
• prepare for review
• review, and
• produce

documents. For example? "Well, litigation, obviously, but also M&A transactions, Hart-Scott-Rodino second requests, contracts, regulatory documents, and so forth, all in an effort to extract meaning to be able to tell lawyers what the documents really mean without them having to spend excessive time and money going through volumes of documents themselves."

And nothing else?

"Actually, no, nothing else. If you look at our offering memo, it says that we plan to offer IP work such as patent applications and patent prosecutions, but as we started exploring what that would require, we realized that they were far different processes than document review, requiring different technology, different processes, different personnel, and so forth, so we decided to keep it simple and focus only on document review.  If you read the management and business literature on strategy, it's a mainstay that if you try to do too many things well you'll confuse your clients and your own people; we're not going there.  Michael Porter said 'Being all things to all people is a recipe for strategic mediocrity,' and I believe he's right."

He continues:  "Too many people who say they're our competition claim to do lots and lots of things; I just have to believe that's an inadvisable way to go."  And who is your competition?  "While there are new companies coming into the industry every day with a lot of different business models, I don't want to sound corny, but I really believe our biggest competition is the status quo—the resistance to change.  But you know what?  That's fine.  We don't necessarily need 100 or 200 clients; what we really want is half a dozen, or 10 great clients."

How do you size the market?

"Well, if you assume that 70% of the typical Fortune 500 GC's budget goes to litigation, and that only 2% of cases go to trial, you know immediately that discovery is an enormous slice of the pie.  We also know that, slicing up 'discovery' into interrogatories, depositions, and document review, document review is by far the most labor-intensive and time-consuming.  We think it's a reasonable guess that around 40% of the Fortune 500's outside legal spend goes to document review."

Let's talk about quality:  How do you measure it, how do you ensure your clients it's top-notch?  Because I imagine one of the towering reservations people have about operations like NovusLaw is that things won't be done to the exacting standards of BigLaw.

"Obviously it starts with who we hire: with recruitment.  The average lawyer at  NovusLaw has approximately eight years of experience, and we believe we've been able to attract talent on a par of those in AmLaw 100 firms with comparable experience.  Everyone interviews with me and each of my partners, as well as going through nearly a half dozen other interviews to ensure cultural compatibility.  NovusLaw is not for everyone.  If you can work independently, have a strong work ethic, and if you're smart about BPO—and if you have a sense of adventure—then you're a good candidate for us.  And I think our attrition statistics bear this out:  Only 3-4%/year.  It's a tough process to get in, but once you're in, you're in."

Skeptics would say that brings you to parity with the AmLaw.  What else are you doing?

"Quality is one of our 'cornerstone' initiatives, along with ethics, security, and business continuity planning—all of which report directly to me.   In fact, we started our quality program before we even started the company.  But now our 'lean six Sigma' processes and quality control programs are certified by Underwriters' Labs, with full-time six sigma black belts on board that do nothing else but focus on quality.  'Lean,' which is a term that comes from the Toyota Production System, stands for the methodology used to eliminate non-value-added time and activity, a/k/a waste.  'Waste,' in turn, has a very simple definition:  Anything the client wouldn't want pay for if they were given a choice.

"Six Sigma is what we use to eliminate defects as we measure and analyze our work processes.  Typically, undocumented processes will yield 20,000—60,000 defects per million opportunities.  Six Sigma is designed to get that down to fewer than 4/million.  On our most recent document review we performed at Five Sigma, or approximately 200 defects per million.  By the way, that's about 200 times better than the average in the legal industry today."

Ray is on a roll.

"Every other portion of corporate America has been re-engineered, 'Six Sigma'd,' and so forth—just look at finance, IT, HR, marketing, supply chains, R&D, you  name it.  The only function that's been immune is the legal function.  I think part of the reason is that lawyers don't think in terms of BPO and often don't understand it.  That leads them to believe that legal processes cannot be systematized or statistically measured, which isn't the case. 

"I'll give you an example.  One of the things we need to be able to do very very well is forecast what the costs of a document review engagement will be, because we price our services on a fixed-fee basis.  We want people to pay for our work, not for our time, so we detest the billable hour.  But this means that in calculating our price we can't afford to be wrong. 

"So we've built a model using multiple regression analyses and have determined there are 17 independent variables influencing the cost of a document review project.  You can imagine what some of them are—number of documents/pages, turnaround time, what shape the documents are in when they're delivered, etc.—and when we tell people this they're usually at some stage of disbelief.  An AmLaw 100 partner said, 'The document review process is an oral tradition; there are no checklists or ways to measure it,' but we're finding that there are actually several ways to measure quality and predict costs."

Tell me more about cost and pricing, then.   Where do you stack up against doing the same work in the US or the UK under the conventional model?

"We're typically 50—80% less, but the important point is that it's not just about having people on the other side of the world.  That's why words like 'outsourcing' or 'offshoring' don't describe what NovusLaw is:  A truly global, 'boundary-less' organization.  Of course people are cheaper in some jurisdictions than others, but only about half our overall cost savings come from personnel; the other half, and the interesting and important half, come from process optimization, quality management and technology, the things we put into place at PricewaterhouseCoopers. 

"We're not in the business of 'lifting & shifting:' Taking what's done here and moving it to a cheaper jurisdiction in order to do it the same way.  That's a brute force approach that adds nothing to the quality, reliability, and repeatability of the work.  It's fundamentally an unsustainable business model."

I ask Ray if this doesn't mean he foresees a future of disaggregation in the delivery of legal services.  And of course he absolutely does.  I have written about how Hollywood movie production relies on bringing together "just in time" teams to create a movie:  A director, producers, actors, scene, lighting and costume designers, scriptwriters, as well as everything from location scouts to cameramen, grips, and catering crews, and Ray mentions the same analogy:  Imagine assembling an on-the-spot team to staff a case or a transaction.  Of course, to a large extent this is already what happens inside law firms when a new matter comes in.  But imagine extending it outside the firm to include other individuals and firms with specific expertise that you couldn't get inside.

According to Michael Hammer (Harvard Business School professor and expert on operational efficiency), the adoption curve of BPO follows this trajectory:

• You get it;
• You adopt it internally across your firm; and finally
• You integrate it across suppliers and clients.

Another industry, Ray notes, that has "in its gene pool" a facility for assembling ad hoc just-in-time teams is the construction industry.  The combination of developers, architects, designers, general and sub-contractors that comes together to build any building of reasonable size or scope never existed before and will never exist again. 

This leads me to venture the following thought experiment:

"You said that you could go into virtually any AmLaw 100 firm today and reduce the cost of the document review process 25% to 40% using process optimization, quality management, and technology.  That gives me an idea.  The first reaction of any partner to that type of discontinuous disruption will be to resist, but I wonder if there isn't an opportunity here.  We know the cost—economic and human—of associate attrition seems never to have been higher, and one of the reasons all those departing will cite is the mind-numbing nature of much of what junior associates do, which is document review. 

"What if a firm could get  NovusLaw to do 95% of the document review, leaving just enough for the associates to have the exposure to it that they need so that they understand what's truly involved—but not such an overdose that these Ivy League thoroughbreds revolt at the repetitiveness of it all?  Wouldn't that address both clients' increasingly vocal concerns about fees and, at least to some measurable extent, the shocking level of associate attrition?"

Ray elaborates on the thought:

"We've thought of offering our clients the opportunity to 'second' associates to us for a period of months so that we could teach them  a new way to manage e-discovery from start to finish and learn how to manage a global team.  Wouldn't that be a terrifically exciting career opportunity?  But so far, no one has taken us up on it."

Why, I wonder, stop there?  If Michael Hammer is right that BPO can extend outside the walls of the firm to suppliers and vendors, it shouldn't be seen as an exercise in throwing something over the transom and hoping it comes back nicely wrapped up with a bow on top.  (This is the blunt instrument model where the law firm pushes document review out to NovusLaw, who performs their magic and returns the results on time and on budget but without much if any interaction.)

Why not envision a reciprocal, embedded relationship—a busy two-way street, if you will—where the law firm and NovusLaw collaborate on defining the strategic and client-oriented goals of the document review?  The goal would be to ensure not just the document review is done professionally, on time and on budget, and so forth, but to achieve a joint consensus on why these documents are being reviewed to begin with:  What are we attempting to demonstrate?  Is that the most valuable/compelling use of this set of documents for our client?  What are we missing?  What is the other side going to attempt to demonstrate from this same set of documents?  What should we be on the lookout for that we're not expecting (for better or worse)?  And so forth.

This brings us back to Ray's initial resistance to the term "outsourcing," and what he derides as the "lift & shift" model.  If that's all there is to it, intellectually you have accomplished little more than cutting your personnel costs, and you have taken the first step towards positioning your firm as one that competes on price alone.  Once you have one foot on that down escalator, it's hard to keep the other planted in the land of elite quality.  Ray reminds us that John Ruskin once said, "There's hardly anything in the world that someone cannot make a little worse and sell a little cheaper."

Again, why not envision something completely different:

• An intimate strategic alliance;
• Permitting you to do things better, with less waste, and with greater reliability by orders of magnitude; and
• With the potential to liberate your expensive, highly-tuned, high-performance associates from being sentenced to years of repetitive clerk-work?

Now that actually sounds like "business process optimization" with a vengeance.

A Conversation with Allen Fagin

Last week I had the opportunity to sit down with Allen Fagin, Chairman of Proskauer Rose. Allen is Columbia BA summa cum laude, and Harvard Law JD cum laude at the same time he earned an MPP from Harvard's JFK School of Government. He's worked at Proskauer for his entire career, and comes from the Labor and Employment Law Department where he was co-Chair.

With Allen, I wanted to hear about the state of Proskauer, his views on the recent past and potential near-term future of the industry, and to explore what he thinks are important changes in our industry.

I started by noting that both he and his immediate predecessor as Chairman, Alan Jaffe, came from the employment department and that to many people Proskauer has a reputation first and foremost as an outstanding labor law firm.

"Our labor and employment practice is extraordinary," he responded, "with a truly world-class brand.  But that practice accounts for less than 20% of our lawyers and revenues.  What the market is now recognizing is all the other things we do equally well."

Allen made clear that a strategic priority for the firm is the growth of its corporate practice, which has seen its revenues increase by $100-million over the past three years. He also reminded me that only three firms in the recently released AmLaw 100 increased their Revenue per Lawyer (a favorite statistic of Allen's, as it is of mine) by more than 15%: Wachtell, Debevoise, and Proskauer (+16%). That increase was almost entirely accounted for by the corporate practice.

Allen said it point-blank: "The whole thrust of our growth has been to build out the corporate practice."

Does that explain your recent opening of a London office?

Yes, that was "following our clients." It's following the practice areas we have in some measure of strength here in New York that can be bolstered by a presence in London:

• private equity, hedge funds, and alternative investments in general;
• finance; and
• mid-market M&A.

What, I asked, was "mid-market" M&A? He replied with bemused candor that it's whatever people say it is, but roughly from deals valued at $100-million to $1-billion or more. Very much in the eye of the beholder.

Is M&A being driven more "strategically," by corporations interested in acquiring capability and integrating, today, as opposed to six months to a year ago when it was more about financial engineering? "Absolutely; and those who can pay cash are the ones where you know the deals will happen."

Proskauer recently opened an office in Sao Paolo, Brazil, I observe; what's that about?

"It's about our Latin America corporate practice; it's almost exclusively outbound work. We don't practice Brazilian law. At the moment it's a small office, and it will remain small, but we find it valuable to have boots on the ground down there." So there's money in Latin America? "Absolutely."

Switching gears a bit, I ask Allen to describe in his own words the "State of the Firm."

"It's healthy, strong, and growing. But don't take my word for it: We just reported our 16th year in a row of higher PPP, and last year [2007] our year-over-year increase in total revenue was +22% and our increase in PPP was +18%: RPL was +16%" [as noted].

Without prompting, Allen continued: "The real question is the same question that any firm that intends to stay in the serious group of 20 to 40 firms (maybe 40 is too high) that will be left standing when the dust settles: How do we ensure we're one of that group?"

And here's where Allen really began to warm to the topic of our conversation.

"There's a critical tension between balancing growth and development, on the one hand, as against stability and the maintenance of values, on the other. That might be my single biggest challenge as Chairman."

What are you proudest of, then, in your tenure as Chairman to date?

"I'm most proud of being able to see the firm grow without sacrificing our values." How do you do that? "It's a constant effort to communicate, of course, talking to everyone in the firm about what we're trying to accomplish in terms of marrying the past and the future."

"You know, you can read any number of articles in the legal press about law firms adopting a more corporate business model. But I'm old-fashioned. I believe law firms need to be partnerships. We need to be partnerships, but we need to do so without sacrificing efficiency, nimbleness, competitiveness, and a sense of collective destiny. This is part of the challenge."

I ask about a topic on which an enormous amount of ink has been spilled: The intertwined issues of associate attrition, the "war for talent," and the much bruited new expectations of Gen Y. "Is this really different," I ask, "than when you were an associate?"

"Yes, it's different; Gen Y is different. It's real." Allen observes that the number of law school graduates have increased perhaps 8% over the past decade, and that the number of top students from the top schools who want to go to the top firms has decreased. This double whammy explains, to him, in Econ 101 supply and demand terms, why associate salaries are as high as they are. [Editor's note: I thoroughly concur.]

Compounding this problem is that the cost of attrition--whatever it actually is, he says, implying healthy skepticism about the often quoted and glib numbers of two years worth of salary, $500,000, etc.--has most assuredly gone up. The only way to deal with it, he said, is through scrupulous attention: "It's a much more difficult retention problem, the issues are more nuanced, and it has made us all think more critically about this."

I ask if he thinks the classic recruiting model of hiring the top X% of students from the top Y law schools still makes sense, and he proceeds to outline Proskauer's and his own vision of what I have called "Associate Moneyball," wherein firms would attempt to determine what characteristics of law students, aside from class rank and name-brand of school, actually correlate with successful and enduring careers. He related the experiment of attempting to always hire the student who was first in the graduating class at Brooklyn Law School's night program: "Now that person, I have to believe, has fire in the belly. And after all, it's all to do with:

• intensity of effort;
• dedication to the quality of the work product;
• and caring for the client."

I cannot disagree.

Proskauer, I note, has a long history of contributing leaders to New York bar associations, and of pro bono work. Where, I ask, did that come from? (Here, Allen became especially animated and fervent.)

"History; it's imbued in our culture." The firm has a long tradition of public service, and it tends in a way to feed on itself. Someone who's chairman of a committee will recommend a colleague to be a member, and soon that colleague will become a more senior member, and so on and so on. But in terms of our pro bono program, we've really tried to formalize and institutionalize it in important ways:

• We have more meaningful partnerships with designated organizations in the community that we therefore get to know better.
• We've coordinated our firm-wide charitable giving program with the pro bono commitments we've made and with the targeted organizations; and
• We've expanded beyond the traditional bastion of pro bono work--litigation--to more transactional and corporate type work including, specifically, counseling on corporate governance.

What all this adds up to is that we get more associates involved, and involved at a higher level of intensity. We can, as it were, "adopt" community organizations and this gives lawyers across all our practice groups the opportunity to serve.

Finally, at an organizational/executional level, we have converted "pro bono" into a practice group in its own right, just like any other, which means that it comes with all the operational and institutional procedures of any other practice group--things like the assignments system, looking to fill holes in experience, and so forth.

As I said, Allen is fervent on this topic.

Also noteworthy is that prominently displayed on their reception area coffee tables are copies of their report on pro bono work, "Break/Through: 2007 Pro Bono Review," a handsome and high-quality brochure with a foreword by Allen that opens with the words, "For many people who face complex legal challenges, it's difficult even to get a break..." Interestingly, the typical self-congratulatory firm annual reports were nowhere to be seen.

Have you policed your reception area lately?

But I digress.

What would your advice be to new associates, I asked.

"It's too late!" (laughing out loud).

Well, then, to college grads contemplating law school?

"Obviously, friends ask me to talk to their kids all the time, and what I say is to talk to as many young associates as you can, so that you really, deeply, understand what you're getting into."

My final question has to do with the unexpected.

What, looking back over the past 10 or 15 years, has been the biggest surprise to you?

Allen thinks, visibly, and there is a long silence. Finally he says:

"The resilience of the billable hour. Ten years ago I would have told you it would be dead, today I will tell you it should be dead, and ten years from now I imagine I'll be telling you it should be dead. It's inexplicable."

"But second [and this is entirely unprompted], equating the compensation of attorneys with their year of graduation from law school." Do you mean '"associate lockstep?" Hasn't Howrey experimented with changing that? "Yes, I do mean 'associate lockstep,' but it's so hard to get away from it." He elaborates that it makes no sense to clients, it doesn't resemble what's done in any other remotely modern industry, and it's intrinsically at odds with the meritocracy that elite law firms hold themselves out to be.

And with that we adjourned.

---

Broadly speaking (gross generalization coming up), managing partners are selected for the force of their personality or the force of their intellect. True, there are the extraordinarily gifted few who combine both, but they're as rare as Lincolns among American Presidents.

Allen is understated, low-key, speaks very softly, and is one of the most truly thoughtful people I've recently met. Lawyers, we of all people, should appreciate the supreme value of analytic rigor and acuity. In fact, the intensity of his thoughtfulness borders on the shocking. We long ago got used to not expecting thoughtfulness in public discourse, and that expectation may, alas, be infiltrating our expectations in private discourse. A few minutes with Allen would disabuse you of your cynicism.