Can in house counsel herding behavior result in greater efficiency?

Looking at things from the other side of the aisle, clients are becoming more and more focused on keeping legal costs low and predictive, cost savings and the value of legal services from outside counsel.  They are utilizing reverse auctions, preferred vendor lists, frozen billing rate requirements, flat fee requests, LPOs, and other alternative ways of choosing their outside counsel.  This of course has law firms scrambling for how to fulfill these requirements and requests, and how to maintain their connections with their clients and ensure healthy revenue streams to sustain their business model.  However, could in house departments do more to control their legal costs and lessen the time burden of developing systems to choose outside counsel and evaluate responses to RFPs?  

Law firms rely on what other firms are doing to determine their own policies - whether it be the technology stipends, bonuses for associates, summer associate programs, part-time policies, professional development trainings or other components of their business.  There are organizations that facilitate this exchange of information, such as NALP, the Legal Marketing Association and the Legal Technology Association, as well as conferences for these groups and other groups.  Most firms are very risk adverse in their business choices, and tend to follow herding behavior when making decisions about key components of their business.  

Could in house legal departments learn from this type of behavior?  Consider an industry - for example financial services.  The companies within this industry are facing similar issues and challenges, and their need to keep legal costs low is vital to their business and a focus of not only senior management but of their shareholders and the public.  What if the legal departments in the financial services industry came together and determined a set of policies on how they handle outside counsel selection and management?  It could either be a formal group that would meet monthly or more of an informal gathering and exchange of information.  The departments could discuss the issues and challenges that each are facing, identify consistencies, and brainstorm solutions to the problems that would be beneficial to each?  For example, what if each department is having trouble determining what type of work they consider "commodity work" and how to select a law firm to handle this type of work?  As commodity work is relatively low risk and an area where there are opportunities for cost savings, developing a process to enable the department to select a firm quickly and for a specific range of pricing would add tremendous value to their management of outside counsel.  Each legal department of the financial services companies could agree upon (1) what they consider commodity work, (2) the process they would use to select a law firm(s), (3) the range of flat fee pricing or billing rates they would pay for this work - no matter which law firm selected, and (4) how they would evaluate the work completed and identify and implement changes to the process as a group.  This would not only institutionalize a specific process to handle this work type, but also would decrease the amount of time and energy the departments would need to spend on this low risk type of work engagement and give them greater leverage over the pricing of this type of work by having a consistent policy industry-wide.  This collaboration would also enable the departments to open lines of communication and learn from each other.  

But what type of problems could arise from this type of collaboration?  Financial services firms are notorious for not sharing information, so getting legal departments on board would be difficult.  How much information is ok to share?  How can the departments ensure they are being compliant with their firms' confidentiality policies, not to mention the legal issues? Obviously there would need to be firmly set guidelines and structure put in place to make sure that the discussions remain focused on outside counsel management policies and components, and not discuss specific legal or company issues.  But this would be a continuing issue that would be a barrier to communication and a reason why firms would not want to participate.  Another issue is whether it is ok to not only share these issues, but also in sharing the same business practices?  Would this be considered an antitrust violation?  If major financial services companies all began having the same requirements for how to handle outside counsel management, even if only for specific types of work, what effect would this have?  Would law firms stop bidding for this type of work?  Would it cause issues with the companies' relationships with their law firms?  Or would it be beneficial in that law firms would all know exactly what the client requirements were for this type of work, and it would enable firms to also spend less time and energy developing customized bids for this work for each client - they would be able to develop a template for the responses to these types of RFPs and a process for how to handle these requests.  This would result in greater efficiencies for both the in house counsel and the law firms.

Taking the intranet to the next level - law firm social networking sites?

I just read an article in the Wall Street Journal on high tech fixes for patients and it mentioned a new crowdfunding site, CrowdMed.com:

"Founded by technology entrepreneur Jared Heyman after his sister Carly went three years with an undiagnosed illness, CrowdMed lets users offer a cash reward that goes directly to the "medical detectives"—be they laypeople or physicians—who help solve their case.  CrowdMed, along with increasingly sophisticated online "symptom checker" programs for consumers, allow patients to use some of the same strategies that doctors are already turning to for help with difficult cases. Some doctors participate in private, online social networks to seek input from other physicians and use Web-based programs that analyze reams of data to suggest possible diagnoses."
http://online.wsj.com/news/articles/SB10001424052702303773704579270450565101982?mod=WSJ_business_IndustryNews_DHC

This got me thinking about how lawyers are similar to doctors in the way they solve problems - while doctors are looking for diagnoses and treatment for their patients, lawyers are looking for legal solutions for their clients.  Lawyers already consult with one another on matters and handling client issues, but what if law firms built a more formal communication and consultation system by implementing an internal social network?  This way, attorneys across offices and countries can use the system to post questions on various matters and quickly receive input from a various lawyers.  There could be individual pages for specific practices, so the questions can be posted on practice specific sites where lawyers from that practice area are registered and receive alerts when there is a new post.  This would allow for greater fluidity of communication between attorneys throughout the firm and encourage more collaboration.  There could even be a keyword search component, where attorneys can log in to a specific practice site and search for all posts related to a specific issue or question.

Taking this concept to the next level, the firm can add client specific sites, where only attorneys who work on that client are registered to the site and able to log in.  There would be an internal client site where firm attorneys can post issues or questions related to the client - thus furthering the client team concept to enable greater transparency regarding the client and what is current.  There could also be an attorney/client site where the client would be able to log in and post questions.  Similar to the internal social networking site, all lawyers working on that client would receive an alert when the client posted a new question or issue.  Thinking about how often in house counsel have questions that can be answered quickly but currently require a phone call to the relationship partner or firm contact, playing phone tag, and waiting for the firm attorney to call back with the answer, this would provide a quick, seamless solution.  By in house attorneys being able to log in to ask the question, the firm attorney who responds can take the time to come up with the answer and collaborate with colleagues to be sure of the answer, and post the response allows for more timely responses and greater client service.  Similar to the internal site, there could be a keyword search component which would allow the client to search  for any related posts to the question or issue at hand to see if this had already been covered previously by another person - thus saving them the trouble of asking again.  Eventually the posts could be categorized by matter and issue, so it would be easier to search for specifics.  However, a potential issue could be how the firm attorneys choose to respond to the client - if all the attorneys working on the client or matter receive the alert, who responds?  Perhaps the alert would need to include the actual post and who at the client posted it?  That way the attorneys working with that individual on that matter would know the post is related to them.  But narrowing it down by post and individual does not solve the issue of who responds?  There would need to be a process developed to ensure consistency of service to avoid multiple responses.  Perhaps the partner on the matter would forward the alert to the team members and assign it to someone?  Or would there be a designated attorney on each matter who would be responsible for answering all posts?  Perhaps the client site would be segmented into separate sites by matter, each of which would have their own login for only the related attorneys?  The logistics would need to be further fleshed out, but it is food for thought.

An additional tidbit that could be considered is how firms can monetize this service - perhaps it would be a yearly "subscription" fee for the client to be able to access the site and search for past posts and have this type of instant service?  Not all clients would be interested in utilizing this, so that may not be profitable or make sense - afterall, LinkedIn and Facebook do not charge their users.  But maybe firms could charge the client a fee for being able to access the internal networking site, or the portion of the site that is organized by practice area and formally categorized.  Thus the client would be able to obtain information that would not normally be at their disposal, and as it is attorney work product, the firm could feasibly charge a fee and the client would not question it?

These days, law firms are focused on improving client service and developing and maintaining connections with their clients to ensure their continued business.  With the level of competition mounting between not only firms, but between firms and LPOs, law firms need to think outside the box and use technology to their advantage, to not only generate business and increase their profit margins, but also to maintain their connection to their clients.  

Lessons to Learn from Bezos?

A recent article in the Wall Street Journal discussed Jeff Bezos’ strategy for Amazon to remain successful and continue to innovate and lead the charge in changing the online shopping landscape.  By offering Sunday delivery, Amazon is setting itself apart from its competitors and helping a declining US Post Office to remain competitive in the shipping market.  Ultimately, Amazon is hoping this strategy will force its competitors to adopt the same service, changing the market for online retailers. 

How can this strategy apply to law firms?  For several years now, there has been discussion over how clients are no longer willing to pay for the training of junior associates and law firms can no longer use the leverage model to absorb the costs of training new attorneys into client bills.  Clients have begun demanding flat fees, volume discounts, frozen billing rates, and other components to lower their legal costs.  What if law firms began not charging for first year associates?  What if firms absorbed the cost of each new class of associates each year in an effort to maneuver clients away from the volume discounts and other lower cost requirements and back to the traditional pricing of billable hours?  What effect would this have on the industry?

First, law firms would need to examine their hiring needs more closely, and alter their hiring strategy to be able to afford absorbing these new salaries.  Also involved would be a revamp of the summer associate program, making it less about lunches and events and more about substantial training and rigorous evaluation to identify the candidates who would bring the most value to the firm as a full time associate.  They would need to restructure the costs associated with hiring, such as recruiting events, travel, events, programs and summer associate salaries – if the firm would not be able to offset these costs by billing out first year associates at high rates, they would need to strictly adhere to a lower budget and evaluate the value generated from these costs.  Another possibility would be decreasing the number of summer associates hired, and looking at the utilization rates and determining how many associates would they need to manage the workload at close to 100% utilization. 

Second, firms would need to examine how they staff deals, their workforce requirements and salary structure for associates.  Would they maintain the same billing rates starting with second year associates or would changes need to be made?  Are deals being staffed efficiently or are there pockets of overutilization and underutilization?  How would the salary structure of associates change?  Would they maintain a lockstep progression, would they lower the salary increases, or would they change to a merit based promotion system?

Third, what effect would one or two firms changing their policy have on the legal market?  Would that be enough to cause other firms to follow suit?  Or would there need to be a larger contingent in order to cause change?  Or would it depend on the size of the firm making these billing changes? 

Another way this strategy can be applied is by law firms adopting residency or apprenticeship programs, for the first, second and/or third year associates.  Greenberg Traurig recently announced that they were adopting a secondary first year associate residency program for law graduates who may have not been chosen through the traditional on campus recruiting hiring.  This group would earn a lower salary than the regular first year associates, but would have the opportunity at the end of their first year to be promoted to the regular associate track.  This two tier system may be effective, but what if a firm eliminated the traditional first year associate program completely, in favor of a year-long residency training program for the law graduates they recruit through traditional on campus hiring?  These attorneys would not be billed out to clients, although they would be working on the matters, and would have a full program of work experience as well as extensive training for the entire first year.  This program would effectively have the firm be responsible for the costs of training junior attorneys while enabling clients to have only extremely well trained attorneys working on their matters.  What if the residency was a two or three year program, including a portion where each attorney would be seconded to a key client?  This way the training these attorneys would receive would be both in firm and in house, and can be used as a client service and marketing tool.  What effect could this trend have on the market?  When clients compare using the services of different firms, would the knowledge that one firm had this residency program and another didn't have an effect on which firm they would choose?  

Is this the Future Law Firm Landscape?

With the recent announcement of the LeClairRyan UnitedLex partnership, I wonder if this is the direction that law firms are going, if it will work, and how it will work.  If this becomes a trend, what will the legal market landscape look like?  Here are a few thoughts:

Segmentation of the market into four groups:

1. Mega firms whose revenues will be insulated through their breadth of services, diversification of geographical presence, and efficiency from economies of scale.
2. Full-service firms who either partner with existing LPOs or create their own in-house (which many firms have already done).  With LPOs resonating with clients and cornering a larger corner of the legal market, particularly in historically profitable work that traditional law firms not only handled but relied on to sustain their leverage model, law firms will see their yearly revenues steadily decrease and profitability become more and more at risk.  With falling profits comes lower profits per partner and ultimately, defections and economic instability.  Firms will have no choice but to change their model and adapt one that meets clients’ needs to prevent them from using other legal providers.
3. Boutique or specialized firms whose revenues are protected by charging a premium for cutting edge, complex, bet the company work.
4. The rest of the AMLaw100 who will either be forced to merge, be acquired by other firms or who will collapse as a result of partner defections caused by year over year falling revenues and decreased profits.

This segmentation will have effects in not just firm structures, but also how they operate:

Practice:  The first tier will need to maintain and even grow the breadth and depth of their practices in order to stave off competition for business from tiers 2 and 3.  The second tier, with the addition of the LPO component, will need to evaluate the profitability of their practices and eliminate those with lower profits in order to offset the cost of operating the LPO component and revenues lost to the 1^st tier and stand-alone LPOs and other third party vendors.  The third tier will need to maintain their excellence in their boutique areas, which will entail lateral hiring and possible increased partner salaries/guarantees to obtain and maintain top talent.

Technology:  All three tiers will need to ensure that they are taking full advantage of the technological advances, including e-billing, e-discovery, pricing software, and other key technologies that increase efficiencies and lower costs to the client.  This may include partnering with a third party vendor or establishing greater infrastructure in their in-house IT departments. 

Business Development/Marketing:  Firms in all three tiers will need to expand their marketing and business development departments to account for the greater competition in the market, alternative pricing needs and new requirements from clients.  Some may employ sales professionals to effectively sell services to potential clients to eliminate the lost revenue dollars of having partners with high billing rates making these pitches.

Recruiting:  With the segmentation of the market, firms in the three tiers will need to focus their recruiting strategy on specific practices, honing in on the value of each individual attorney candidate at both the entry level and lateral levels.  Firms in the first tier may still maintain their broad spectrum hiring, while firms in the second and third tiers may need to eradicate their wide net recruiting and develop a more tactical approach.  It may include only entry level hiring for certain practices, while others only require experienced hires, or only looking at candidates with specialty training, or having two tiers of recruiting for the traditional law firm division and the LPO division.

Finance/Accounting: Firms in the second tier may structure the LPO division as a separate legal entity with its own P&L, revenues and compensation system to delineate the difference between the services provided by the LPO and the traditional law firm practice.  Firms in all three tiers will need to develop further and better utilize big data such as key performance indicators, matter cost evaluation, profitability analysis and other key metrics.

The market has already become a buyers’ market which will continue as clients look for lower cost and efficient legal solutions.  However, once the legal industry alters its business model to operate as efficiently as possible as a result of this pressure from clients, companies may be able to handle their legal work at a lower cost by using outside counsel rather than handling in-house due to inefficiencies, redundancies, outdated technologies, and inflated salaries.  The market then may turn to back to a sellers’ market and the reconfigured law firms will once again be able to set their own rates and inflate the prices of their services until in-house counsel adapts their own internal legal department processes.